Student loan forgiveness does not solve the problem; it creates more problems down the road.
First, loan forgiveness rewards bad university behavior. Good data and a number of studies have shown that many universities match tuition rate hikes with the amount of federal student loans given. The more loan money offered, the more tuition is raised, resulting in more student debt. A big part of this are the Parent PLUS loans, which have been left out of almost all discussions of student loan forgiveness. Parent PLUS loans allow parents to borrow almost any amount, thereby creating a perverse incentive for colleges to increase tuition. More than 1 in 8 of these borrowers’ default on the loan, burying their families into perpetual debt. The current policies allow students and families to take out staggering loans, where students can leave with a bachelor’s degree in classic Greek philosophy, or a degree from DeVry with $80,000+ in debt. This is not to lessen any degree but some pragmatism must be had when taking on debt. It would be akin to taking out a $80,000 loan to buy a 1971 International Scout pickup. The ’71 Scout is a classic, but no loan officer in their right mind would do this. There is simply no return on investment there. Likewise, some degrees lead straight to good paying jobs, others, far less or not at all. If we want to fix this problem, a major overhaul of the entire loan process is needed. Loan amounts should be set to reasonable tuitions and be based upon the major (i.e., expected return on investment), allowing students a realistic chance to repay those loans. The government reports that the average student debt for those who just graduated is under $30,000, some 20% of borrowers owe $50,000 or more, while 10% owe $80,000 or more. But again, this does not include Parent PLUS loans, which are currently more than $100 billion, making those numbers reported wildly underestimated.
Good policies are built on incentives, not penalties. Incentivizing students to major in fields that translate to high-skilled, high-demand, high-paying jobs, such as food science, engineering, statistics, computer science, biology, chemistry, physics, the hard sciences, etc. and to go to schools with a competitive tuition, makes sense. A $100,000 student loan for a degree in social studies or humanities, is simply unethical and we cannot expect students to pay those back.
Second, current proposals for loan forgiveness only work for federal loans. A substantial number of borrowers consolidated their loans, doing what they could to reduce their monthly payments. Some of these were by predatory lenders, or resulted in higher interest rates and hurt the borrowers more than helped them. Once the loan is out of the feds hands, and owned by a private company, it means no federal policy, unless it pays off private loan holders, will help these people. That means any direct loan forgiveness will disadvantage this group for no other reason than they were trying to reduce their debt. And this appears to be disproportionately happening to black and minority borrowers.
Third, student loan forgiveness is a slap in the face to those who paid their debts and may even result in a class-action lawsuit. While some people do not pay their loans, most do, and many sacrificed everything to pay their loans. They drove a car older than themselves, lived in a trailer or cheap apartment, didn’t have nice things or clothes, and sent half their paycheck to pay their loans; they did this for decades. Penalizing them is not only immoral and unethical, it’s plain mean.
Fourth, a forgiveness policy teaches all the wrong lessons and does not solve the problem for tomorrow. It exacerbates it. Teaching people not to pay their loans will make borrowing harder in the future for everyone and creates the expectation that if you wait long enough, the fed will bail you out. What happens when they don’t? It will be a disaster for the borrower of tomorrow. And a one-time payout will do nothing to solve all loans taken the very second afterward.
Fifth, there is no magic pool of federal money. It comes from taxes. So, in effect, student loan forgiveness is asking those who did not go to college to pay for those that did or for those that sacrificed and paid their loans to now also pay for someone else’s loans. Yes, there are those fortunate wealthy people that might be happy to do this, but considering the majority of Americans do not have $400 in savings or a college degree, asking them to subsidize someone else’s success is offensive.
Changing loan amounts fixes the problem for the future, but what about today? How do we solve the current crisis of predatory loans and high debt, while not penalizing those who paid their loans? Consider the following outline:
1. The feds offer to buy back all student loans: a one-time deal where all borrowers can switch their student loan back to a federally held loan.
2. Feds zero-out the interest on all student loans; it is the interest that kills borrowers.
3. If people already paid as much or more than the original principle in interest payments, then call that loan paid-in-full. They did pay their loan. Let’s give them credit for it. For everyone else take all they have paid in interest and principle and apply it against the principle. Whatever is left, becomes the new principle.
4. Make all future student loans zero-interest for 30 years; we can’t make higher education free, but we can make it attainable for everyone.
These things solve today’s and tomorrow’s problem. They respect those who paid their loans and help those who are struggling. Americans don’t need handouts or Band-Aids for today — we need sensible solutions for the future that incentivize and reward good behavior.
Standard Disclaimer: The analyses, thoughts, suggestions, or experiences here reflect my own and not those of the US government, Penn State, or any organization I currently work for, have in the past, or will in the future.