It’s clear we have a student loan debt crisis on our hands, but that doesn’t mean all experts agree on how to turn things around. Where some believe student borrowers should pull up their bootstraps and pay off their loans the hard way, other experts believe existing student loan forgiveness plans like Public Service Loan Forgiveness (PSLF) are a better solution to the problem.
On top of that, some are quick to remind everyone that we already have income-driven repayment plans that let low earners pay a percentage of their discretionary for 20-25 years before having their remaining balances wiped away. And most people don’t realize there are over 80 ways to get student loan forgiveness today!
Unfortunately, those of us who have been around for a while know just how “expensive” free stuff can be. Even Elizabeth Warren admits her plans would cost $1.2 trillion over ten years — a tab taxpayers are expected to handle on top of everything else.
Of course, there’s a plan to tax “those other folks” to pay for all of this — a “2% annual tax on the 75,000 families with $50 million or more in wealth,” according to Warren’s own details.
Those who have been paying attention already know how that’s going to work out. The original plan is to tax other people for giant entitlement programs and new initiatives, but everything costs more than people think, and those costs trickle down to hit everyone if you give them enough time.
But costs and rising tax bills are only two problems that will plague student loan forgiveness on such a broad scale. There are much more egregious moral hazards to be aware of — hazards that could lead to a whirlwind of consequences for pretty much everyone involved, and especially taxpayers.
With Warren’s plan, households with an income under $100,000 would have up to $50,000 in student loan debt forgiven, but forgiveness would be phased out for households who earn between $100,000 and $250,000. Finally, households with incomes higher than $250,000 will have no loans forgiven.
Due to the way this plan is set up, a family with two doctors and top tier earnings would be left to fend for themselves. This is despite the fact they probably spent 8+ years in school so they could learn to save people’s lives.
On the flip side, someone who borrowed $150,000 for a bachelor’s degree in general studies and works only part-time would likely see some of their loans forgiven. How fair is that?
According to financial attorney Leslie Tayne of Tayne Law, it really boils down to the fact that you’re asking taxpayers to cover individual decisions regardless of how good or bad they are. And the fact the plan only involves additional taxes for “the rich” right now is a sign of higher costs for all of us down the road.
As we’ve seen, the rich have a way of working to minimize tax consequences, and the middle class is often hit the worst, said Tayne.
“So many fell through the cracks, and things were often made worse for the mortgagee,” says Tayne. “The banks and government-backed loans had options to manage, so the debts were not written off.”
Another problem — student loans are held by consumers who hopefully got a college degree out of the deal. This means they have a better shot at finding higher-paying employment than someone with only a high school diploma. If we’re going to help someone with our tax dollars, shouldn’t it be the people who need it the most?
“Those who are pursuing higher education are already generally better off financially,” says Tayne. “Therefore, forgiving student loan debt could be considered already helping a privileged group rather than spending government funding to help those in poverty.”
Assistant Professor of Finance and financial planner Brandon Renfro points out another glaring problem — pretty much nobody is on the hook for the growing costs of higher education in a post-forgiveness and free college world.
“Blanket student loan forgiveness could create moral hazard on the part of schools,” he says. “Knowing that the students they take in have easy access to money that they will likely not have to repay could motivate schools to accept more students, or offer more programs, even in the absence of value.”
“A point here is that schools aren’t strictly accountable for the debts of their students,” he says. “If students also aren’t responsible for their debt, then neither party to the transaction is responsible for the cost.”
While schools are currently motivated by competitive forces to offer quality programs and admit students who can succeed, Renfro suggests this may be somewhat mitigated by broad-stroke debt forgiveness. This is because, like it or not, students are less likely to hold schools accountable to provide a quality education if they don’t have to repay the money.
According to Senior Financial Analyst Riley Adams, who also blogs at Young and the Invested, moving ahead with full loan forgiveness solely as a means for resolving the growing student loan debt crisis will lead to unintended consequences with perverse incentives for students and society.
By awarding blanket student loan forgiveness, students may have no incentive to head into desired majors or fields of study which would be more in line with the ne of our economy, he says. Plus, without appropriate cost controls in place, many will try to go to college “just because,” even if they’re not a good candidate for college to begin with.
While we do need bold action to help those who are struggling with student loan debt, total student loan forgiveness is not the solution and will only create a moral hazard problem for current borrowers and future students.
Alternatives like reforming public service loan forgiveness, student loan borrowing caps, addressing “return on investment” of educational costs, and helping borrowers who may have been victims of unscrupulous schools are likely better solutions to the situation.