Should We Cancel Student Debt
By: Mitch Massman
Tags: Life Lessons, Politics, Money, Student Loans, Finance

Photo by Ehud Neuhaus on Unsplash

Student Loan forgiveness is once again a major topic in the political landscape today. This should not be a surprise to anyone as the debt has reached a staggering $1.5 trillion and is burdening millions of Americans. The burden was heavy before the pandemic and is now an enormous weight that many have no clue how to get out from underneath.

The current administration has been active in allowing forbearance and 0% interest on these loans, at least through the end of the year. This is obviously helpful, but many Democrats are wondering if this is enough. They are questioning if we should just forgive some debt completely.

The argument to forgive student loan debt is not baseless. Some economists believe that forgiving debt would result in a net positive revenue stream for the federal government as those with debt forgiveness would turn around and spend that money elsewhere.

The real question is, how much debt should be forgiven, and is that the best approach?

Who Benefits The Most

If we are going to discuss forgiving debt, whether that be $10,000, $50,000, or all of the debt per borrower, we need to find out who benefits and if they truly need the benefit.

For instance, one article suggests that forgiving just $20,000 of debt would wipe the plate clean for 55% of borrowers. This would obviously benefit those who are on the lower end of the earning structure. $50,000 of forgiveness would wipe the slate clean of nearly all those who completed an undergraduate degree — depending on the college they attended of course — and would greatly reduce the amount owed for those that attended graduate school.

On the other hand, if we were to wipe the slate completely clean the people who would receive the most benefit would be the highest-earning professionals (doctors and lawyers). Do these high earning, one-percenters need this type of assistance? I would say no, but I am sure there are a few who are struggling. How would you determine if they are struggling due to their own bad choices or through bad luck? I don’t know the answer to that.

Does it Fix the Problem?

Does forgiving any or all debt really fix the problem? What is the problem?

I would argue that the main problem with student loan debt is that it is all backed by the federal government. When the federal government guarantees loans, the loans begin to go up in the amounts allowed and become riskier loans. This over the last few decades has resulted in Universities jacking up the price of tuition. I promise this isn’t purely from inflation.

When the government sits back and says “we want everyone to attend college”, you better believe the boards of universities begin to lick their chops at how much money they can make. More and more of us are attending college, a lot of times to obtain degrees that could easily just be taught in the field. The government gives kids — yes kids — enormous burdens of debt all so that politicians can sit back and say “look how many people attend and graduate college in the United States”.

If we were to forgive all student loan debt, we would simultaneously need the federal government to stop guaranteeing student loans. Over time market forces would lead to fewer people attending college, fewer businesses requiring a college education, and ultimately the decline in the cost of attending college.

Photo by Nikita Kachanovsky on Unsplash

Alternative Approaches

There are many other approaches that the federal government could take to lessen the burden of individuals who were persuaded by the system to attend college, to obtain a degree that is not required or valued in the real world.

Reduce the interest rate on loans

Reduction of interest rates allows borrowers to pay back larger chunks of the principal balance of the loan. It is also easy to do. For instance, you could structure interests rates as:

Tech/Vocational/Associates = 1% interest

Undergraduate = 2% interest

Graduate = 2.5% interest

Doctoral = 3% interest

This type of structure would help to equalize the value that the market views each of these educational tier values. More often than not, the higher the education you obtain the more money you will make.

2. Forgive partial debt on federal loans

Forgiving partial debt for those that already have debt would be a simple and quick approach — depending on if the President can forgive debt with an EO or if it would have to go with Congress. This would also provide aid to those that need it right now.

While this may not be the best option, refer back to the federal government-guaranteed loans, it would help many of those who are burdened with debt and help boost consumer spending.

3. Structure loans and tuition in publicly funded universities to coincide with the average salary of the career

Structuring the tuition of a particular degree to coincide with the salary that the degree would allow an individual to make is a cool idea, in a utopian world. The concept would work something like this, a particular career has an average salary of $50,000. The University would cap the cost of tuition at 40% of the average salary. Therefore, the total cost of tuition would be $20,000.

You could argue that this strategy would allow market forces to dictate the cost of education based on the value that the market believes that a particular career provides to society.

This alternative is probably the most complex and least likely to be implemented, but it seems like an idea that would allow those who wish to attend college to do so and keep tuitions at reasonable costs.

What Will Really Happen

At the end of the day, it's impossible to say what the federal government will do in terms of stimulus and student loan debt. Although most people could agree that the debt is a problem and something should be done about it. The only question remaining is, what will they do about it?