Student loan forgiveness is the wrong way to help people pay off debt
Forgetting student debt to help the economy is a tough sell. And how do you decide who to loan to? Complex fairness issues have to be weighed up.
College Failure: Student Loan Debts Are Exploding
Bernie Sanders and Elizabeth Warren already vow to do something about student loan debt. Because of this, the $ 1.6 trillion spending could play a huge role in the 2020 election.
Just the FAQs, USA TODAY
What should be done with America’s $ 1.6 trillion outstanding student debt? There is more student debt than credit card debt or any other type of debt other than mortgage debt.
Nearly 45 million Americans have student debts and the number is rising. Seven out of ten seniors in the 2019 class took out student loans.
With so much debt and comparatively low wage increases, there are even more debts behind. About 11% of student loans are overdue or in arrears. With such high levels of debt, the graduates cannot fully participate in the economy. Home purchases, marriage and the desire to have children are often delayed and consumer purchases postponed. The US economy is largely consumer buying, and as the newer workforce is burdened with heavy debt, national economic growth will suffer, resulting in fewer jobs and fewer business opportunities.
Almost everyone admits the country has a big problem, but there is little agreement on what to do. Some, like Vermont Senator Bernie Sanders and Minnesota MP Ilhan Omar, would cancel all outstanding debts.
Massachusetts Senator Elizabeth Warren would cancel up to $ 50,000 for borrowers earning less than $ 250,000. President Joe Biden has proposed canceling up to $ 10,000 per borrower.
Canceling all debts is a tough argument
Others believe that student borrowers willingly borrowed the money and are obliged to repay it. They support proposals to streamline forms and processes, and provide information, but oppose debt relief.
To argue that it is fair to cancel student debt because it helps the economy is a difficult argument. If the government canceled all about $ 1 trillion in credit card debt, it would help the economy too. But is it fair to give benefits to those who use their credit cards more often than others?
There are other concerns about student debt elimination. Should taxpayers cancel the debts of those who earn high incomes? Should borrowers from families with millions in assets be forgiven their student debts? Details are important in deciding whose debt to forgive.
The issue of fairness also becomes apparent when speaking to graduates and parents who made sacrifices while in school and struggled to avoid or minimize debt. Is it fair not to give a discount on spending to a student who has worked in school and during vacation and whose parents have stopped taking vacation and other expenses to avoid debt if the government does not give a discount to students who have not taken the same measures, granted a discount?
Students who attended medicine, law, or graduate school tend to have the highest debts. If a doctor has $ 200,000 in student debt but has very high earning potential, should he be given taxpayers’ money to pay off debt early?
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There are many “fairness” arguments against giving money to graduates in debt and differently treating graduates who have avoided or paid off their debts, but that does not solve the problem. What about students at school who are still in debt? Do graduates get a free ride, but those who have not yet graduated?
One could argue that student debt is different from other types of debt and that reducing student debt is fair. The students who borrowed the money were typically 18 or 19 years old. They were often so happy to go to college, didn’t know what they were enrolling for, and their financial intelligence was limited by a lack of experience in dealing with such subjects. Yes, they signed the papers agreeing to debt obligations, but too often the schools took advantage of the opportunity to enroll young students and allow them to pay the necessary tuition and fees that the college needed.
A middle way solution
There is a middle ground solution to the problem of over-indebtedness, taking into account fairness considerations. A student borrower of a government loan who is not in default or in default with these loans would be entitled to debt relief of $ 1 for every dollar of loan principal paid during the year, up to a maximum of $ 6,000 per year.
For example, if the student repays their national debt by $ 500 in a year, their loan balance would decrease by $ 1,000. Such a proposal, if adopted, would reduce outstanding student debt, lower the likely default rates of government loans, incentivize borrowers to save and pay off debts as quickly as possible, avoid random payments to borrowers rather than non-borrowers, Spread federal loan write-offs over time and eliminate most student debt in five years.
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Such a plan would also respect the victims of those who have avoided debt or have already paid off their debts. These earlier students likely attended school when tuition fees were lower and required fewer loans. And current borrowers would have to keep making payments.
The average student debt is about $ 30,000. If a borrower paid $ 250 a month in principal or $ 3,000 a year and this was settled, their $ 30,000 would be paid off in five years. If they managed to pay $ 500 a month, the debt would be paid off in 2 1/2 years. If a borrower paid the maximum of $ 6,000 per year for five years and was matched, then $ 60,000 in debt would be repaid. If every borrower did this, about 85% of borrowers would be out of college debt in five years.
Scott MacDonald is the founder of the MacDonald Community Scholarship Program. In January his new book “Education Without Debt: Giving Back and Paying On” was published. Follow him on Twitter: @scottmacnotes