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

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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.

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.

  • terrilynnmerritts

    Other countries (the ones who aren’t busy blowing trillons on war mongering and attacking other defenseless countries then staying there for a decade or more) provide free or cheap college education and allow students to start life debt free. Why don’t we? 

    • maesaysdoit

      Please name those countries. Your information is lacking in facts as to what actually occurs in “other countries”.

      • Regina Sayles

        It looks like Sarah, an Australian citizen, might have just answered your question. ;)  

    • Barb1015

      Yep,my husband works with many nurses/physicians who went to schooling in their country of India cheap and making 3 figures here with no loans or debt.

  • Sharissa

    What I wouldn’t give to have interest free student loans! I’m not opposed to paying back the money I took out, I’m not looking for a handout or even suggesting that approach would work, but it’s really disheartening to look at a loan for school that you know is likely going to double by the time you’re able to pay it all the way back. Looking at having to take 25 years to pay for an overpriced education really doesn’t get a person excited to enter repayment. 

  • sarah

    i live in australia. if you are an australian citizen and get high enough marks at school to be accepted into the course you want to do you can get a commonwealth supported place at uni which means that the government pays about 70% of your fees, and they give you a loan for the rest. this loan is interest free although i think it is indexed each year against inflation. i don’t have to start paying this back until my taxable income is above $47000 a year, this amount also increases each year to account for inflation. once my income is over the threshold the amount i have pay back varies from 4-8% of the debt depending on how much i’ve earnt in the past year, and they usually just deduct this compulsory payment from your tax return.

    this means that if you graduate and are unable to find a job you aren’t required to pay hundreds of dollars a month in student loan repayments.

    • Sharynlawler

      If only we had interest-free loans for our students in the U.S.!  Instead we have compounding, capitalized interest and that combined with high consolidation fees leads to having to pay double to quadruple the amount actually borrowed.  It’s horrendous and immoral.

    • Sharyn

      If only we had interest-free loans for our students in the U.S.!  Instead we have compounding, capitalized interest and that combined with high consolidation fees leads to having to pay double to quadruple the amount actually borrowed.  It’s horrendous and immoral.

  • Kayla O’Brien

    I would absolutely benefit from this and selfishly I wish it would happen. I fear that similar to the housing balloon crisis, the same will happen with education and it will impact multiple industries. What happens to our economy when people can’t afford both their mortgages and their student loans? I know I could have gone to a state school or community college and had the national “average” student loan debt as they publicize in many articles. But the reality is that I did go away to a private college, and am grateful for the opportunity, but look at how many others do as well? I think it’s important to share my story as I feel like I cannot be alone in this…

    I eagerly took on my student loan debt after college, agreeing to pay interest first for the first few years. Well, now the reality hits and six years have gone by, and as of December, my student loan will jump from paying $525/month to close to $900/month. In an ideal situation, this graduated repayment option is great for the new graduate. It allows you to not pay as much when you first start out, assuming you’ll be making much more money as the years go on and you climb the corporate ladder. Well…reality check. Employers rarely give more than what, a 3% annual increase, if that? And, in today’s economy especially, promotions are harder to come by to get up to that next level of income. As someone who took out loans to finance both undergrad and grad studies, if my loans were forgiven, do you know where I’d put the almost $900 extra a month I’d be saving? Into a house! (helping the housing industry) Or a new car, as I’ve paid off my current car. And yes, I would also save for the future, and while I know that’s not immediately into the economy, let’s put it this way…I’d also be more likely to spend a little more, if I know in the back of my mind that I have the cushion to save more and continue to get ahead, while also spending more than I would with a $900/month Sallie Mae check being written each month,  having nothing in the bank for the future and living paycheck to paycheck (working one full-time and one part-time job) and potentially racking up credit card debt when times get tight, in the meantime. I work hard and will never complain about having to work. I take pride in what I do, but it’s very hard to sit back when the reality of this crisis is not what I’m reading in the newspaper articles, but what I’m living each month when I send the majority of a paycheck to Sallie Mae. 

  • Topazmoon11

    The unfortunate reality is that student loans are instruments that  have been designed by the federal government and private lenders to generate vast profits from interest, and they will never, ever, agree to give this cash cow up, in the form of making interest free loans,  without a big fight and a complete overhaul of student loan laws and regulations. In the private sector, entire industries are based on student loan profit, and our  federal government completely subsidizes Pell grants and other education spending on  the revenue brought in by student loans. The new bill HR 4170 is just such legislation, and it urgently needs our public support in order to be debated in Congress. 

    In the past, the way that interest is capitalized and compounded at a much greater rate than any other consumer loan was  justified by the fact that the loans are very easy to obtain, and there is no collateral for the lender to take back if the borrower should default.  For the same reasons, lobbyists convinced Congress to strip student loans of bankruptcy protection and other consumer relief.  Without much public input, interest rates on student loans were being set at high rates much greater than the prime rate, with the borrower being locked in for life, with no opportunity to refinance.  Many of us are paying upwards of 8.5% interest for 20 years +. 

    The repercussions of saddling people with this type of debt had gone by relatively unnoticed until the past couple of years in which the economy tanked and tuitions have become unmanageable.  

    That is why it is so exciting now to have Rep. Hansen Clarke introduce HR 4170, the Student Loan Forgiveness Bill, which is not about totally forgiving student loan debts, but presents a fair and reasonable path to repayment according to income. Basically, we would be paying 10% of income over 10 years.    Please  research HR 4170, join the over one million of us who have signed a petition in support of the bill, and urge your   
    lawmakers to get on board as co-sponsors of the bill.  For more information, check out Forgive Student Loan Debt on Facebook.

  • Guest

    re. your first idea to make current student loan debt interest free  

    The problem is the current principal for many debtors is largely made up of interest compounding over past years and added to  the actual amount borrowed.  (many now owing triple and more than the original loan) To truly have an interest-free debt, you would have to subtract all that compounded interest from the current principal.  Let people pay back what they really borrowed.  I would suggest the following:  1.  Make compounding interest illegal.  2.  Eliminate consolidation and rehabilitation fees.  3.  Make garnishing of social security income (for student loans) illegal.