During the past week, President Joe Biden announced a highly controversial new law, canceling student loan debt up to $20,000.
This debt is money that students have borrowed from American taxpayers to attend post-high school educational institutions. The University of Pennsylvania’s Wharton School of Business estimates the cost to taxpayers over 10 years will be $554 billion.
One of the main reasons people seek graduate degrees is for the opportunity to earn more income for life. According to figures from the Social Security Administration, men with bachelor’s degrees earn about $900,000 more in median lifetime earnings than high school graduates. Women earn $630,000 more. With graduate degrees, both genders earn an average of $1 million more over their lifetime. Although not all graduates earn these totals, it can be a major benefit for many.
Unlike most loan programs, student loans are available to almost anyone, regardless of their credit score. The idea was that it would benefit society if more people were educated. This means that the default rate is likely to be higher due to greater credit risk. Usually, borrowers with lower credit scores have to pay a higher interest rate because of this risk. Student loan debt generally does not charge these higher interest rates.
The bankruptcy code has made it difficult to withdraw student loan debt through bankruptcy. This was because of fears that medical professionals and other graduate students could rack up huge student loan debt and before starting a well-paying career, declare bankruptcy and get out of debt.
The first federal student loan program began in 1958. During this time, millions of taxpayers borrowed and paid off their credit obligations. That’s six decades of taxpayers. There is no doubt that balances due are very important in our country. There are several reasons for this, and several different parties have a hand in the dilemma.
First, the government itself. The cost of a college education has risen at twice the overall inflation rate for many decades. This was possible because anyone could borrow money, so there was no reason for educational institutions to control costs. If Washington, DC lawmakers had addressed these issues many years ago, we wouldn’t have a crisis today.
The other main reason why sales are so high often falls on students. The cost to college and universities varies greatly. Many diplomas are available in several schools. Sometimes you have to attend a specific school, but often there are choices that can help minimize costs. For example, attending a university in the state in which you reside is usually less expensive than going to an out-of-state university. And students who attend community college for the first two years and then transfer to a larger university often save up big debts. The degree they receive will always bear the name of the most prestigious university.
Students who change majors, drop courses, or schedule fewer credit courses often end up with higher amounts owed. Students who choose schools where they can live at home, instead of dormitories, often have less student debt.
When the pandemic started, students were told they didn’t need to repay their loans and they wouldn’t have to pay interest. Last week, the president extended that until the end of this year. Why should this delay, which is costing taxpayers a lot of money, continue? There are job vacancies everywhere and the unemployment rate is at record highs.
Many people think this loan forgiveness is unfair to the millions of people who have borrowed from the government and repaid their loans. Also, what about the millions who have never borrowed. Of course, people in debt love to see their balance reduced or wiped out. The questions, is this fair to all people who have taken care of their own obligations?
Your Financial Future is authored by Certified Financial Planner Gary W. Boatman, MBA and CFP, who also wrote the book Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility. If there is an area you would like to see covered in the column, send your suggestions to [email protected]