During the recent presidential campaign an idea arose that it would be a good idea to do something about student loan debt. I read recently that Congressman Clarke from Michigan has introduced HR4170, which would forgive student loan debt under certain conditions which I will get to presently. I would like to present a case that this would be a hugely bad idea.
First, let me say that I am completely horrified at the mountain of debt that students graduate from college with. I remember having student loan debt, but that was 20 years ago and it wasn’t even close to the levels we are talking about now. Some students can have well over $100,000 dollars in debt if they get a graduate degree. It is a fact of life that if you pay someone else to use their money, they will profit. If you have someone else pay you to use yours you will profit. This new generation will not be able to afford houses, cars, families and all the other things you want when starting off in life. In turn, this will diminish the country as a whole. Even so, you can’t just forgive $1 trillion dollars in debt. Here’s why.
- Our society is based on the rule of law. What this means is the law applies fairly to everyone. If you take out a loan, you are expected to pay it back. The lenders don’t expect the rules to be changed in mid game.
- A few years ago, the government took over the student loan business. I was really surprised that nobody really seemed to care about this. I suppose it didn’t change things too much as Sallie Mae, a government backed entity, was underwriting most loans anyway. This take over just cut out the middle men. This matters though as you will see.
- Under the terms of HR 4170 students with existing loans would see them forgiven if they have paid 10% of their salary per year, for 10 years. The most obvious result of this is not a single student will pay a cent more than this. I mean, why would you?
- Therefore the cost of a college degree would be variable depending on what kind of job you land. If you get a good job, you will pay more for your degree than somebody who gets a poor job even if you were in the exact same classes.
- Now this next part is critical; colleges will still get all their money in full. How can this be? Because students don’t pay directly for their education. They get the government to give a loan to the college. Since the students will never pay for all of it, they really won’t care about the overall cost. Heck they barely think about it now, that’s why you get public school teachers with Ph.D’s in education and $100,000 in loans. This by the way is the same situation as in healthcare. Anytime the customer doesn’t pay directly for services, they have no incentive to shop around. Colleges will raise tuitions even faster than they do now. Why wouldn’t they?
So here is the grand finish. What does it mean to “forgive” a loan? The bill doesn’t actually say. I can assume it means the student doesn’t have to pay it back in full but what happens to the rest of the loan? Confused? I find this part of the argument doesn’t really get much play so it’s ok to be confused. When the government gives the money to the university, they give the whole thing. Then it gets spent but where did the money come from in the first place? Well, right now the government is borrowing 46% of all government spending so it’s almost even odds that the student loan was actually borrowed in the form of treasury bonds. These can be of various terms but eventually they need to be paid back, with interest to the lenders. Even if you forgive the loan to the student, the money still needs to be paid back at some point and becomes part of the national debt. So who pays for this? The taxpayers will eventually. Maybe. If they can. Right now the debt is over 16 trillion dollars and that doesn’t even count unfunded liabilities such as Medicare. These students might not have student loan debt but they will have a broke country.
I understand this issue is a big problem but you can’t just “forgive” the loans. Eventually the bill needs to be paid. That isn’t forgiveness, it’s a bailout. What needs to happen is to make college much cheaper. The other thing that needs to happen is to have colleges partially responsible for the payment of the loans. If they were on the hook for some of the loan it would give them an incentive to keep costs lower. While I don’t have the full solution, I do know you have to address the whole issue, not just the part designed to get you the youth vote.
As always, I am very interested in your point of view! Feel free to comment below if you have something to add to my thinking!
In other thinking here’s a good recent article about it. Bankruptcy, Not Forgiveness, for Student Loans