Ryan Petris

Student Loan Debt Forgiveness and Government Interference in the Economy

Joe Biden has brought up student loan debt forgiveness again, likely in an attempt to raise his approval rating. Lets take a look at the morality of the situation along with government intereference in the economy in general.

Situation

Lets take a look at a simple situation; John and Wayne have a student loan that totals $10,000, has a repayment period of 5 years, and an interest rate of 7.5%. This works out to a payment of about $200 per month. Lets also say that both John and Wayne, after paying all of their bills (other than their student loan), rent, etc. for the month, have a total of $500 left over. What do they do with that money?

Wayne, for the next 5 years, diligently pays his $200 per month student loan bill, and doing everything he can to otherwise improve his situation. He regularly eats cheap homemade meals instead of eating out, works odd jobs to make a little extra money, and potentially even getting rid of some "extras" (non-essentials such as Netflix) to save a bit of extra money.

John, in contrast to Wayne, doesn't want to make any sacrifices to pay his $200 per month student loan. Instead, he maintains his loan and just pays interest, totaling $62.50 per month. This is enough to cover the interest for the month but does not actually lower the principal. After 5 years, John still owes $10,000, but was able to spend or save a total of $8,250. That's $8,250 over 5 years that Wayne couldn't spend as he was using that money to pay his student loans.

We can all agree that Wayne has done the right thing; he's being financially responsible and paying off his student loan even if it means he has to make a few sacrifices.

Now, at the end of the 5 years, the government decides to come in an cancel up to $10,000 of student loans. John gets his loan paid off, so he no longer has to worry about making maintenance payments. What does Wayne get for being financially responsible? Nothing, absolutely nothing.

So, what's the incentive for paying off a loan, any loan, if the government is just going to swoop in and forgive them in a "crisis"?

Government Interference

Forgiving student loans in this manner is basically equivalent to giving a subsidy. Lets say that in addition to paying off $10,000 of everyone's student loans, the government also decides to cover the first $10,000 of everyone's education, what would happen? If you said that, on average, tuition would go up by $10,000 for a bachelors degree, you're probably right!

Shortly after it was announced that the government was going to give a $7,500 EV tax credit, Ford announced that the price of its 2023 model Mustang Mach-E would increase between $3,000 to $8,100. They claim that this is not related to the tax credit, however I think we're all capable of reading between the lines here.

Similarly, if the government were to announce a $50,000 tax credit to all home buyers, housing demand would skyrocket in the same manner as lowering interest rates. This would inevitably increase housing prices above and beyond the $50,000 tax credit, putting everyone that didn't get in early in a worse situation. If you don't believe me, look at the housing market for the last couple years; it's been absolutely insane. You could say that this was caused by COVID, however in reality it was caused by lower interest rates allowing people to be able to buy more than they normally would be able to. Now, house prices are higher than ever and interest rates are going up, so again unless you got in early you're in a worse situation than you were previously.

Case in point, I purchased a home, contracted in 2019 and finished in the third quarter of 2020. While I budgeted at a higher interest rate of around 3.75%, I ultimately was able to snag a 2.5% interest rate due to the rate being lowered during the pandemic. As of today, the national average interest rate for a 30-year fixed mortgage is 5.9%. If I were to sell my house now and buy a similarly-priced house, my payment would nearly double. Lastly, for some icing on the cake, the value of my house is now around 25% higher than what I purchased it for; in just 2021, my house appreciated in value more than I made in the same year at my regular job.

To recap: the start of the pandemic coincided with the start of a recession in Febrary 2020. The government then tried to correct the issue by lowering interest rates. This caused a housing boom where those that got in early were able to get a low interest rate and relatively low housing price. Then, to correct the out of control housing market, the government raised rates to higher than what they were pre-pandemic. Now we have a situation where not only is the interest rate higher, but the cost of houses are higher too.

Am I lucky for have "gotten in early"? Yes. Would I buy a house now, or would I consider selling my house? Absolutely not.

There are also currently tons of subsidies on solar panels and the installation of them. Do you think that might have an affect on the actual cost of the panels and installation? I'll leave you to decide that one.

Solutions

Specifically for the student loan debt "crisis", there are a few things that we can do.

First, get rid of bankruptcy protections on student loans. The fact that someone can rack up hundreds of thousands of dollars in loans that they can never get rid of despite the situation they might be in is akin to slavery. Bankruptcy allows someone in a bad situation to start over, fresh, without any existing obligations. I get that we don't want people racking up student loan debt, graduating, immediately filing Chapter 7 since they likely don't have any of their own assets yet, then reaping the rewards of the degree, but there has to be a better way.

Second, get rid of useless college degrees, or at least consider the degree the student is seeking when issuing loans. Degrees that go into a career field that ultimately pays more should be allowed a higher limit in loans, while those that ultimately pay less, have a lower chance of success, or that are in a sparse field, should be allowed less.

Third, get rid of federal guarantees of student loans. Banks should consider giving out student loans using similar criteria as any other loan. The qualifications will likely be different given that borrowers are likely to not have credit history, however they should still be doing their due diligence.

Fourth, stop pushing top-tier private schools as the "best" or "only" option for students. Most/all states already subsidize college for their residents, and there's no shame in attending a community college. In fact, there's no shame in not attending college at all; if you want to go into a career field that's better served by a technical school or apprenticeship, then by all means do it! You don't need a Bachelor of Automotive Engineering Technology to be an auto mechanic, nor do you need an Electrical Engineering degree to be an electrician, you just need the appropriate training and certifications.

Lastly, before acquiring any student loans, students should be taught about the financial implications of them. $200,000 of student loans doesn't sound like much if you're potentially going to be making $100,000 per year, however once you factor in everything else you need to pay for as an adult, that's a large chunk of cash, especially once you factor in how much you're going to pay in interest before it's paid off.

Just throwing money at people that have student loans doesn't solve the problem; it's merely a bandaid, and an immoral one at that.