Loan forgiveness enables more of the same mistakes

My mother was a Certified Financial Planner™. Her career included working for a company that provided financial counseling to members of the military, and she would occasionally host seminars for National Guard soldiers and reservists. Prior to the start of one seminar, she told me, she noticed a junky-looking pickup truck in the parking lot and later asked the attendees who owned it.

“Is it paid for?” she asked the soldier who raised his hand.

“Yes, ma’am,” he replied.

“Does it get you where you need to go?”

“Yes, ma’am.”

The soldier was awarded that afternoon’s door prize of a gift card in recognition of his frugality, part of my mom’s strategy of educating her advisees about simple yet consequential mistakes that prevent people from enjoying financial security. The top two on her shortlist: “Buying house you can’t afford and buying a car you can’t afford.”

How do we obtain things we can’t afford if we don’t have the cash to pay for them outright? We receive them in exchange for the promise of paying for them over time, called “financing.” Being eligible for financing doesn’t necessarily mean that a person can afford what they’re buying, even if they can make the payments on time. Affordability is based on the big picture: Do repayment obligations consume a person’s monthly budget? Does that budget leave any room for saving or investing? Would even a brief emergency threaten one’s ability to make those payments? Are other financial decisions dictated by those payment obligations?

Nothing deters our ability to be financially independent like committing ourselves to long terms of paying for things we could never afford in the first place. Nothing exemplifies that like the student loan crisis, which has seen millions of Americans borrowing vast sums for their college education with no understanding or expectation of how to pay it back — to the tune of 1.6 trillion dollars. That crisis will continue as long as leaders like President Joe Biden and his administration employ crude fixes that threaten to make the long-term problem worse.

Biden announced on Wednesday is that his Department of Education will forgive $10,000 of every student loan for individual borrowers earning up to $125,000 per year or married couples earning $250,000. The $10,000 amount forgiven doubles to $20,000 for recipients of Pell Grants, a form of federal student aid that does not require repayment and is typically awarded to students from lower-income households.

I have no doubt that the disappearance of up to $20,000 in debt is welcome news to recipients who still have a five-figure balance remaining on their loans. That’s a lot of people, too — according to President Biden, 43 million Americans will benefit from this particular stroke of his pen, however legally murky its justification under a post-9/11 law. 20 million could see their loans completely canceled. Those who live on Planet How Life Actually Works aren’t as enthused, for many reasons.

To start, the debt being waived with Biden’s metaphorical magic wand doesn’t actually disappear. It’s transferred to the people who involuntarily fund the treasury from which those loans originate — taxpayers — many of whom stretched to make ends meet while paying off their own student loans. Others didn’t take loans at all. They scrimped and saved and sacrificed to pay for their children’s education and are now questioning the fairness of forgiving loans for those whose families weren’t as diligent. Many avoided college altogether, opting for technical training. The loans they took out to invest in their careers were for things like machinery and tools with costs totaling in the tens of thousands of dollars. Nobody’s issuing an executive order to forgive those loans.

Then there’s the fact that with a surprisingly high cap on qualifying incomes, much of the loan forgiveness is going to recipients who aren’t exactly living on a pittance of an income, especially depending on their local cost of living. In Iowa, the $125,000 eligibility limit means that a single borrower can make more than twice the median household income — hardly reflective of a low or even middle-income earner — and still qualify to have up to $20,000 of their debt shouldered by someone else.

But for all the myriad reasons why Americans are rightfully cynical of blanket loan forgiveness, which the Penn Wharton Budget Model found would cost taxpayers a mind-boggling $330 billion — wiping out the supposed deficit reduction touted in the Inflation Reduction Act only weeks ago — what has me most cynical is the fact that virtually nothing in the President’s executive order does anything to change the system that caused collegiate students to go sometimes six figures into debt earning degrees that will never yield the income to pay it off.

Instead, the President’s order offers only anemic language about holding colleges “accountable” for rising tuition costs while continuing to ignore the link that federal aid itself plays in tuition increases, as shown in studies such as one in 2015 from the Federal Reserve Bank of New York. And it makes no changes to the overall federal student lending process, meaning that future collegians are still vulnerable to taking on odious quantities of debt without regard to their ability to pay it off through future earning capacity.

We’ve made a lot of mistakes over the decades that federally guaranteed loans have been available to American students. Some would argue that the creation of the program altogether was the first. This one, which the Washington Post Editorial Board describes as a “regressive, expensive mistake,” may be the worst. It allows college tuition to continue to rise. It rewards financial decision-making that is at best naive and at worst flat-out unwise, and it will entice a whole new generation of Americans to make the same simple and consequential mistake as borrowers before them: buying an education they cannot afford.

As easy as it seems, one should think twice before directing their resentment toward beneficiaries of the no-strings-attached loan forgiveness. In a way, they’ve been used twice: Once by a system that made it so easy for them to go deep into crippling debt,, and now as pawns by an administration that is buying their goodwill in the obvious hope that it equates to a vote for Democrats in November.

But regardless of what you feel about the loan recipients who stand to benefit in ways others will not, three things are clear: What’s right isn’t always fair; what’s fair isn’t always right; and the actions taken by the President and his Department of Education are neither fair nor right.

Comments: 319-398-8266; althea.cole@thegazette.com

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