Why Student Loan Forgiveness May Not Be as Helpful as You Think

Why Student Loan Forgiveness May Not Be as Helpful as You Think

People have a lot of opinions about money.   

In our “Money Mic” series, we hand over the podium to someone with a strong opinion on a financial topic. These are their views, not ours, but we welcome your responses.

Today, SimpleTuition.com's Ian Bass  takes on the current debate about forgiving student loan debt ... and why that may not be such a good idea. 

Let’s hit the sad facts first: Student debt is finally a bigger financial burden than credit card debt. That’s worrisome considering we’re in a recession and unemployment is stuck near 9%, meaning both students and graduates have few ways of tackling what they owe. The problem is compounded by the fact that lawmakers on both sides of the party divide aren’t doing much to address the problem. Take Obama’s student loan forgiveness plan as an example, which feels like a Band-Aid on a bullet wound.

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Movements like Occupy Wall Street have sought to bridge the gap between the problem and the solution by pitching tents and waving signs about a myriad of financial reforms, and one of them is forgiving all student loan debt, both private and federal. They picked up on propositions like the one by U.S. Congressman Hansen Clarke, who pitched the idea of capping and forgiving student loan debt all the way back in July, and ones by Robert Applebaum, founder of forgivestudentloandebt.com, who says eliminating student loan debt would be the best economic stimulus plan for the people. As opposed to the banks.

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Applebaum clarified the reasons he thinks it’d work for both the people and the economy in an essay he wrote for Salon, saying, “As someone who has student loan debt myself, it occurred to me that if I were suddenly relieved of my obligation to repay the approximately $500 in student loan payments that I dutifully make each and every month without fail, I’d have an extra $500 per month, every month, to spend on ailing sectors of the economy. Think of it as a trickle-up approach to economic stimulus.”


Sure, that makes sense. And so do his other points:

  • Student loans as a concept are flawed. Designed to give people of meager means the opportunity to get a higher education, they’re well intentioned but have turned education into a commodity. The economics of supply and demand say when more people want said commodity, the price of it increases. Hence the never-ending tuition hikes.
  • The burden of paying for education has shifted from taxpayers to the general public, in essence moving the financial burden down what he calls the “socioeconomic ladder.”
  • Student loans are one of the only forms of debt that can’t be discharged in bankruptcy, meaning economically vulnerable students are glued to their debt for life.


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So doesn’t loan forgiveness seem like the natural solution? Justin Wolfers, a contributor at Freakonomics.com, says it wouldn’t be as beneficial as people think. Wolfers in his own words: “If you want stimulus, you get more bang-for-your-buck if you give extra dollars to folks who are most likely to spend each dollar. Imagine what would happen if you forgave $50,000 in debt. How much of that would get spent in the next month or year? Probably just a couple of grand (if that). Much of it would go into the bank. But give $1,000 to each of 50 poor people, and nearly all of it will get spent, yielding a larger stimulus.”

Wolfers goes further and suggests student loan forgiveness is the treatment of a symptom as opposed to a cure for a larger disease. It may alleviate debt for those who already have an education, but new students will just go to school next year and the year after that, endlessly taking on massive debt to pay for it, which just recreates the same problem over again.

The question has to be asked, then: is student loan forgiveness really a solution to the problem or is it just delaying an economic meltdown that’ll come a few years later?

The problem with both arguments is that they appeal to the fringe nature of American politics. Wolfers and Applebaum, then, are simply writing for an audience that is predisposed to believe them. In doing so, they’ve completely disregarded a third option.

In light of that, here’s a thought on compromise: forgiving student loans is a good solution for “now”, but doesn’t address the source of student debt, meaning all future graduates will inhabit the same economic no-man’s-land everyone is shouting about right now. So why not split the stimulus and help both people who are struggling currently while simultaneously preventing a recurrence of the same problem?

Here’s how:

  • Instead of forgiving student loans, use federal stimulus to subsidize all current student loan debt,both federal and private, making it interest-free. This encourages payback while saving people literally thousands of dollars. It’s debt that’s manageable.
  • Increase education funding. Instead of spending a trillion dollars eliminating all private student debt that will just pop up again in a few years, address the source by dumping the federal stimulus that isn’t used on loan subsidies into the higher education system so that universities can lower their tuition and increase their financial aid. It’s not socialism, it’s education equality. If higher education was actually affordable, or free from the get-go, there’d be no need for a bailout now or ever.
  • The best part? It addresses the economy as a whole, not just a single industry or sector: By ensuring future generations come out of school ready to work and spend their money, we’ve created a self-perpetuating stimulus plan. New grads earn money and are capable of actually spending it instead of making endless loan payments. That funnels money outward: to retail, real estate, tourism and ultimately back to the government through sales and income taxes. More earners and more spenders equal more taxes while simultaneously creating a financial class that doesn’t have to protest paying them since they can finally afford it.

Have a better idea? Or a list of reasons why the above won’t work? Drop it in the comments below.

This post originally appeared on SimpleTuition.


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