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Student loan forgiveness is one of those topics that you’d hope would be fairly straightforward and uncontroversial, but as with anything to do with US politics, nothing is ever straightforward and uncontroversial.
When President Biden announced that he was going to cancel up to $10,000 of federal student loans ($20,000 for Pell Grant recipients) at the beginning of the year, that was already a massive compromise. He had campaigned on eliminating all student debt for people earning less than $125,000. But then the 50/50 split of the Senate he ended up with meant that he couldn’t fulfill this promise without Republican support (which they weren’t going to give), so he had to do this in a much more limited form through executive action.
So I kind of figured he would get push-back from the more liberal wing of the Democratic party upset that he couldn’t fulfill his campaign promise of cancelling all student debt. What I wasn’t expecting was the borderline-psychotic rage from Republicans and even moderates over this, with talking-head news pundits comparing it to everything from a Communist ploy to a Satanic plot.
Which…sure. OK, people. Glad we haven’t gone nuts or anything.
But I thought it would be interesting to examine some of the arguments against forgiving student loans floating around the media right now and see if any of them hold water.
It Only Helps Rich People
The idea that forgiving student loans is somehow an immoral giveaway to rich people is the most prevalent and baffling argument against this program.
Quick show of hands from anyone who currently has a student loan balance: Are you rich?
For the vast majority of people out there, the answer is a resounding no. Because of course they aren’t. If they were rich, they would have paid off their loan balance already.
People who get into 6 figures of student debt, but then land a top notch job on Wall Street aren’t the people who this program targets. In fact, this program imposes income limits for applicants, meaning if you earn enough to pay off your debt, you aren’t eligible. According to White House figures, the program is structured so that 90% of debt relief goes towards people earning less than $75,000.
The people who are most drowning in student debt are those that took on huge loans for either useless degrees that didn’t translate into high-paying jobs, or people who didn’t finish their programs and as a result are stuck with the debt but not the benefit of going to college. These are the people who are trapped in the vise of student debt, watching their balances rise every month because they can’t keep up with the interest charges, and will never be able to retire if they can’t find a way out.
These people desperately need a lifeline, because unlike every other loan, you can’t even declare bankruptcy to get rid of student debt. And while $10,000 may not be enough to completely fix the problem, it helps.
It’s a Slap in the Face to Responsible Borrowers
This one actually makes more sense to me. While this program helps people currently in debt, it excludes those that have been diligently making payments. Essentially, by forgiving people’s student debt, you are punishing those who either never went into debt in the first place, or who have successfully paid their balances off.
And I get why that seems unfair. Nobody wants to be punished for doing the right thing.
That being said, if everyone had the attitude of “It was hard for me so it’s not fair that others get a break,” then no progress would be made on literally any issue. The student loan crisis in the US is an unsustainable mess that keeps getting worse every year, and for those people who managed to avoid or escape it relatively unscathed, great. The system worked for you.
But there are thousands of people who get trapped in that same system every year through no fault of their own, and the consequences of being trapped in that system mean they are going to be stuck in a cycle of debt for most of their adult lives unless they get help.
The system needs to be fixed, and while we might disagree on exactly how to fix it, if we don’t all agree that the system needs to be fixed, then it never will be and future generations will be doomed to repeat the mistakes of the past.
It Doesn’t Reduce the Cost of College
The crux of the student loan crisis, some argue, is that college costs just too damned much. If college didn’t cost six figures for a crappy arts degree, then student loans wouldn’t be such a huge intractable problem. And forgiving $10,000 does absolutely nothing to fix that.
To that, I respond: Amen, brother!
They are absolutely right.
College costs in the US are already astronomical, and getting worse. According to EducationData.org, the average cost of college has more-than doubled in the 21st century, with an annual growth rate of 6.8%. And that was during the years when inflation was at 2%. God only knows how much tuition is going to jump in today’s high-inflation environment.
However, the solution to this problem is not less loan forgiveness. Quite the opposite.
Let me explain.
Right now, the student loan program in the US is structured so that it’s easy to get into debt, but almost impossible to get out of it. This means that the most profitable users of this program are not the ones that are able to get a high-paying job right away and pay it off over the next few years. Instead, it’s the people who got into an insane amount of debt getting either a useless degree, or not finishing at all.
Those people are stuck with the debt, no high-paying job, and no easy way to discharge the debt (unless they work for a non-profit via the PSLF program). These people are going to be stuck perpetually paying off the minimum allowable amounts on their debt, which may not even be enough to cover the interest (especially if they’re on an Income-Based Repayment plan), which means that their debt just keeps growing and growing forever. Over the course of their working lives, these people will end up paying many times more than the original loan amount.
In other words, these people are cash cows.
And the thing about capitalism is that whenever a certain type of behaviour turns out to be very, very profitable, guess what? The system reconfigures itself to encourage more of that type of behaviour.
In this case, the extremely profitable behaviour is to trick young, gullible
idiots students into overpaying for a useless degree. Both the lender (in this case, the government) and the college mutually benefit, so this creates a positive feedback loop where the college can keep hiking prices and the lender gets to profit from saddling that poor sap with ever-growing amounts of debt.
The solution to breaking this feedback loop is to create a way for students in this situation to discharge their debt either through bankruptcy or an automatic loan forgiveness program.
The reason why this works has nothing to do with empathy or compassion. It’s just cold hard economics.
Basically, the system has to be set up so that either the lender or the college lose money when a student gets saddled with debt that they can never repay. If the lender lost tens of thousands of dollars whenever a student defaulted on their debt, they would become a lot more careful about who they lent money to, and towards what degree.
Six figures for a medical degree? Sure, that makes sense because that student is probably going to be able to repay their loan. Six figures for a Masters of Fine Arts? Whoa whoa whoa, pump the brakes there buck-o. No way would a lender write a check that big if they’re worried about that student defaulting on their loan because they can’t find a job that pays enough.
That refusal to underwrite loans for useless degrees would create downward pressure on tuition prices. If students can’t afford the sticker price, and lenders aren’t willing to fork over loans to cover it, then colleges would be forced to charge less, and that would stop the cycle of infinitely rising tuitions that the US finds themselves in.
That’s why countries that have more robust student loan forgiveness programs like the UK, Canada, or Australia don’t suffer the same sky-high tuition problems that the US faces. The current student loan system encourages colleges and lenders to hike prices into the stratosphere regardless of the usefulness of the degree the student is getting.
Does It Help Our Readers?
This $10,000 loan forgiveness program is a one-off band-aid solution. It was never meant to solve the much larger problem of student debt reform. That will require a legislative solution, and given the numbers that exist in Congress right now, that would require either a bipartisan effort or a future administration.
For me, the question of whether a policy is a good idea or not basically boils down to: Does it help our readers get closer to Financial Independence?
In this case, it’s a resounding yes, and for that reason alone I’m all for it. As an example, I recently got this email from a reader the other day…
Hi guys! I just wanted to email you about this post I vividly recall reading in the middle of the night back in October 2021.
I had approximately $42000 in federal student loans that were on pause with the covid situation.
After reading this post I recalled thinking to myself, well why not? Despite my loans not even applying to my current profession as well as the bulk of my work history working at non-profit hospital, I felt it was still worth a shot. Two of my three other employers were more clear when it came to qualifying for public interest (Ie state employer and federal employer).
I sought out HR departments and ran down needed signatures verifying and certifying my work history and then waited. And waited. And waited. Actually I really kind of gave up on hearing about it only until the recent Biden announcement about 10K loan forgiveness. And so based on that I came around to checking my original MyFedLoan servicer messages and sure enough, there was a letter, dated back in June 2022, congratulating me on having my work history certified and having the entire loan balance of $42000 completely forgiven based on public interest loan forgiveness. I didn’t need to be concerned with the 10K announcement as I had originally thought.
I couldn’t believe it, but it was indeed true as I’ve since confirmed with my credit reports, showing a zero balance.
And so I just want to thank you all for this post. No one really encouraged me to follow up on this or guided me through the process, but it was your post I read at 3AM that started it all for me. It’s a life changing result because it allows me to focus on continuing to aggressively save for retirement as well as contribute to my son’s future educational expenses.
Thank you for being there for all of your readers and contributing all that you do.
Please see below for my loan forgiveness letter. Hope more of your readers can have similar results like I did!
It’s amazing and humbling whenever one of you reads this site, goes home, and actually changes their financial lives as a result. That’s the reason we keep writing this blog!
So if you’re reading this, and you have more than $10,000 in student debt ($20,000 if you’re received Pell Grants), please apply for the program by clicking here. As of the time of this writing, the program is still paused due to the ongoing lawsuits being filed by Republican states, but if you apply now they can start processing your application as soon as the court cases wrap up.
What do you think? Do you think the $10,000 student loan forgiveness program is a good idea? Let’s hear it in the comments below!
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