By Dr. James M. Dahle, WCI Founder
[Update after publication: Student loan holiday extended to January 31, 2022, described as “the final extension.”] I'm more aware than most of the severity of the student loan problem in this country. Recently, Senate Majority Leader Chuck Schumer reiterated his recommendation that President Biden erase up to $50K in student loans as an executive order. I first heard Schumer talk about that plan back in the Fall of 2020 and thought it sounded pretty awesome until I started thinking about it. Then I realized that sort of a policy, at least by itself, would be a terrible idea for many reasons.
11 Reasons $50,000 in Loan Forgiveness Is a Bad Idea
I actually think it is such a bad idea that it is unlikely to ever be implemented by executive order, much less get through Congress. This is despite knowing tens of thousands of my readers could potentially benefit from it (depending on how means-tested it ends up being). Let me explain why. Naturally, I assume my readers know the basics of economics, the tax code, and the realities of mathematics.
#1 Doesn't Address the Root Problem
The biggest issue is that higher education simply costs too much.
Now to be fair, part of the problem is the consumers (students) of the product (education) are making stupid decisions. Borrowing $200K to get an English or Art History degree is not very smart. Nor is it smart to go to an out-of-state public college most of the time. Nor is it smart to go to a particularly expensive school when less expensive and similar quality educations are available elsewhere. The fault does not all rely on the students, however. Their guidance counselors in high school and their parents often give bad advice (“Study what you love where you want to study it, you'll qualify for aid!”). The education industry itself can make schooling dramatically cheaper. If nothing else, spending a year learning on Zoom has taught most of us that you could have one Biology 100 teacher teaching the entire country. Put the lectures on Youtube, the exams online, and boom, you could charge $100 for this class instead of $5K.
#2 Hoses the Next Generation
Another issue with a random broad loan jubilee is what happens to the person who starts their education next year? Sure, you got yours, but what about them? Or are we going to do this every 4 years? Or are we just going to nationalize all universities? What comes next? Without an answer for that, it is just irresponsible to wipe out current debt.
#3 Nothing Is Free
Lots of people advocating for this sort of policy simply don't understand economics, tax policy, and sometimes even how debt works. I had somebody try to argue with me that “the Feds” were somebody besides you and me. It's like they missed the whole high school US Government class or something. Basically, in order to provide a government benefit, somebody else must pay for that in their taxes. That's fine, we redistribute income through the tax code all the time. But it isn't free. That money that goes toward paying for student loans can't pay for food stamps, aircraft carriers, third world aid, Social Security, Medicare, National Parks, new highways, or whatever your favorite government program is.
“But the government can just print the money, that's what they did with the COVID stimulus!” Sure, you can do that for a while…until inflation rears its ugly head. But even there, you're still choosing to print money for that purpose instead of some other good cause.
You really want to forgive the student loans of the educated instead of working on COVID vaccines or buying school lunches? This is not something like PSLF we're talking about. With PSLF, the government/taxpayers are getting something for their dollars—they're getting people willing to work for non-profits and government entities. That's not the case with broad forgiveness.
#4 A Regressive Tax on Borrowers
Need another reason? Interestingly, most of those who favor forgiveness find themselves on the left end of the political spectrum. Those same folks are usually against regressive taxes. But this is a regressive benefit by definition. If you only owe $5K in student loans, you get $5K. If you're a doctor who owes $200K, you get $50K. Few would argue that is fair.
#5 A Regressive Tax on the Less Educated
But wait, it gets worse. What about the people who chose not to go to school because it was expensive and took a job, started a business, or worked their way through an inexpensive apprenticeship? You think they're going to be happy when they see all these “college folks” getting government handouts? I wouldn't count on it. They're going to see their hard-earned tax money going to those earning more than they are.
#6 Encourages Schools to Raise Tuition
A well-known principle of economics is that what you subsidize goes up in cost. This is one reason tuition and health care have outpaced inflation over the last few decades–government subsidizes both of them heavily. Schools charge more because they can. If the students can't afford it, they can get student loans to cover it, so long as they can get admitted to the school and have a pulse. Many new schools are even for-profit institutions. Anytime government offers more grants, more loans, more IDR programs, and more forgiveness programs, the schools see it as an opportunity to raise tuition. It's kind of like prescribing narcotics to someone with chronic pain. Yes, you're helping them in the short-term, but in the long-term you're making the problem worse. Even if they avoid the constipation and addiction, they still get the hyperalgesic effects.
#7 Keeps Borrowers from Refinancing
When borrowers see programs like this (or even just hear about the possibility), it causes them to change their behavior. For example, instead of refinancing their loans (and thus paying back the taxpayer who can now loan the money to another student), they sit on them, staying in the federal system and hoping a knight on a white stallion rides in and saves them from their student loans.
#8 Keeps Borrowers from Paying Off Loans
You know what else borrowers don't do besides refinance? They don't pay off their loans, either. Policies, especially rapidly changing policies, basically punish those who do the right thing. It's a bit like the 2020 COVID-associated moratorium on federal student loan interest and payments. Those who “did the right thing” and refinanced their loans and paid them off rapidly were punished for doing so. The first law of economics is that people respond to incentives. Is this really the behavior you want to incentivize?
Canyons are full of hazards, but not moral hazard.
#9 Encourages Excessive Borrowing
One of the biggest problems of any forgiveness program is that it brings on moral hazard (note this is an economic term, not an ethics one). We already see this with IDR and PSLF forgiveness programs. If you're going to get the loans forgiven anyway, why not borrow as much as you can and drag them out as long as possible and pay as little as possible? I mean, look at the strategies out there to maximize PSLF. There are people hiring student loan advisors, deliberately paying more in taxes, earning less, and saving in the “wrong” retirement accounts because it will increase the amount forgiven via PSLF and they will come out ahead in the end. The more forgivenesses that are implemented, the more that sort of behavior will be incentivized.
#10 Encourages Dependent Behavior
Finally, the larger government becomes, the more we tend to rely on it. We even become dependent on it. We start expecting the cavalry to ride in and save us rather than being self-reliant and careful stewards of what we have and purchase. I think people are far more likely to be successful when they realize that the cavalry isn't coming, and they'll need to make some sacrifices and fix their problems themselves. That isn't necessarily an argument against giving a hand up to those who need it. But we all know that too much help can do more harm than good.
#11 Better to Owe the Department of Education than the Department of the Treasury
An executive order to forgive student loans would not change tax laws. What do the tax laws say about forgiven debt? They say it is fully taxable at ordinary income tax rates in the year forgiven. It basically is the same as with Income-Driven Repayment forgiveness programs (not PSLF). So if you get $50K in forgiveness, you now have $50K more taxable income that year. Maybe it is taxed at 22% federal and 5% state. You now owe $13,500 to the IRS.
Unlike the Department of Education, the IRS is serious about getting paid. They will seize your bank accounts. They will garnish your paychecks. They will put a lien on your property. They will charge you interest, too, just like your student loans do. Maybe penalties, as well.
If someone can't pay off their student loans over decades, what makes you think they can pay off a quarter or a third of them all in one year? Student loans go away at death, too, even if you have an estate. That's not the case for taxes. The bottom line is that it is far better to owe money to the Department of Education than the Department of the Treasury.
A Better Solution
It is relatively easy to complain about someone else's ideas. Complaining without providing a better solution is just whining, though. So here is what I think is a better solution. It has three parts:
- Get the government out of the student loan game
- Underwrite student loans
- Ensure appropriate regulation
Let's take them step by step.
#1 Get the Government Out of the Student Loan Game
There are some things that really do have to be done by the government for various reasons. Most fall into the “tragedy of the commons” type of scenarios. Military and police protection. Interstate highways. Disaster relief. These are natural roles of government. But student loans? I mean, we don't get our car loans, mortgages, or credit cards from the government. Why would we go there for student loans?
Look at the terrible job they are currently doing with them. You can get a 30-year mortgage at less than 3% but you can't borrow for medical school at anything less than 6%? And the service you get from the government student loan servicing companies compared to the folks on my recommended student loan refinancing company list? It's night and day. You have a problem with Splash or SoFI or whoever and you email me and it is fixed in 3 hours. They actually want your business. The folks at FedLoans can't even count to 120. Get the government out of the lending game. Private industry can handle this and (with appropriate levels of regulation) will likely do it better. PSLF type programs can just be used to pay off private loans, no biggie.
#2 Underwrite Student Loans
This one will require a radical sea change in thinking about student loans. You can't just walk into a bank and get a mortgage because you have a pulse. You have to have a job and a reasonable credit history, and that's for a loan that is backed by a hard asset that can be foreclosed on and sold. But you can go to the Department of Education and get a loan for whatever some for-profit college says their cost of attendance is. Nobody looks at your grades or ACT score. Nobody asks about your career plans or even what major you plan to get. Nobody looks at how much you currently owe or your current assets. Maybe we should stop lending $200K to people who want to get a degree like these which have the lowest median earnings for people between the ages of 25 and 59:
- Early Childhood Education: $39,000
- Human Services and Community Organization: $41,000
- Studio Arts: $42,000
- Social Work: $42,000
- Teacher Education: Multiple Levels: $42,000
- Visual and Performing Arts: $42,000
- Theology and Religious Vocations: $43,000
- Elementary Education: $43,000
- Drama and Theater Arts: $45,000
- Family and Consumer Sciences: $45,000
- Language and Drama Education: $45,000
- Special Needs Education: $45,000
A recent WSJ article about Columbia pointed out that half of those with a master's degree in film were making < $30,000 two years later.
Is it okay to borrow $20K to get a degree in social work or film? Probably. Is it okay to borrow $200K? No way. We are not helping people by doing that. We are hurting them. We should stop it. If colleges no longer have an unlimited number of students waiting to borrow six figures to get these sorts of degrees, they will either figure out a way to offer these degrees for less or they will go out of business.
Now, there is a counterargument to this approach. That argument is that now only the children of the rich will be able to get drama degrees from colleges that charge $50,000 a year in tuition. That is a fair point. However, since you are not helping the poor by letting them do this, I would argue you are doing them a favor by not lending them this money. They'll either find a cheaper place to attend or they will do something else with their lives. In the end, either will be a better option than attaching a six-figure ball and chain to their ankle for the next 50 years.
Now if you are a smart kid going to a cheap school and majoring in engineering, you can borrow $80K at 3%. If you struggled in high school and want to go to an expensive liberal arts college and major in theology, you'll only be able to borrow $20K at 7%. Underwriting. It should also apply to student loans.
#3 Ensure Appropriate Regulation
The downside of turning something over to the private sector is there are a lot of smart people in the private sector who figure out ways to make a profit off of their customers. Sometimes they do things that hurt the borrowers even more than the government does. Take a look at the credit card industry, for example. So a certain amount of common sense regulation would need to take place. Obviously, you need rules to prevent inappropriate discrimination. Perhaps also limits on how much can be borrowed for a certain degree or a maximum interest rate on the loans. If they don't think 8% is enough to compensate them for the risk of loaning to you, maybe they should not be able to loan to you at all. Maybe schools have to pay off a third of your loans if you can't get a job in your field within 24 months of graduation so they have skin in the game, too.
Another big problem with student loans is that you cannot get rid of them in bankruptcy. Since there is no collateral to be seized on a student loan, what is to keep someone from coming out of school and declaring bankruptcy? However, this aspect of student loans keeps people who have terrible things happen to them from ever fixing their financial life. A business owner whose business goes south can file bankruptcy. Why can't you do that if your planned “business in Dentistry” doesn't work out? You should be able to. Maybe not when you first walk out of college, of course. Perhaps there should be a 10-year moratorium from the time you leave school on eliminating student loans in bankruptcy. But if people can get out of mortgages and auto loans and business debt and credit cards with nothing worse than losing all their assets and being unable to borrow money for 2-7 years, why can't it be done with student loans?
Now, if you want to couple some sort of mass student loan forgiveness with a bipartisan reform of the system like what I have proposed, I can get behind that. But just a blanket debt jubilee? No, I think that's bad policy and bad precedent. That doesn't necessarily mean it won't occur, but I don't think it should. I don't think it is likely to happen either. The Republicans are mostly against it, and it is likely that in a year and a half they will control at least one house of Congress, as the president's party traditionally loses seats in the mid-term elections. Some of the more liberal Democrats are for it, but there does not seem to be any sort of broad consensus about it within the party. If it doesn't pass while the Democrats control the House, the Senate, and the White House, it seems unlikely to pass at all while current borrowers are managing their student loans. Besides, if you owe $200-400,000 in student loans like many doctors, having $10-50,000 forgiven should not change your student loan plan much. $50,000 barely moves the needle and $10,000 doesn't move it at all. Unlike PSLF (and even that may have been unintentional) these forgiveness programs really are not for high earners.
What do you think? Do you think broad student loan forgiveness is wise policy? How would you modify it to address these concerns? Do you think it will happen anyway? Comment below!
These are really well thought out and valid arguments. The only one I will challenge is the “what happens to those who borrowed before and paid off.” I understand the argument but those who paid off before did a great job, they followed and important financial principle and benefitted from it. They are better off. So no need to look back with disdain at future generations who received an additional perk. The med school where I did residency transitioned while I was there to a tuition free model. This was a much more difficult pill to swallow for students who matriculated just the year before!
Many good points but the root cause is not addressed in your proposals. Why can other Western countries afford to furnish free college education to anyone qualified ? How can we train social workers, teachers and others in needed professions if their college loans are multiples of their annual salary. This certainly disincentivizes anyone from going into those needed fields.
I agree the root cause is “the rent (i.e. tuition) is too damn high” and I did propose solutions to that. But there is another problem in that people are deliberately choosing to go to more expensive schools than they should and paying too much for what they get out of the education.
People are already disincentivized from going into low paying fields by the low pay. Our society finds more value in watching the best 200 people in the world shoot free throws than in getting their kids a top notch education and certainly than in making sure the most disadvantaged in society can navigate their way through the system. I have no idea how to solve that problem. But I don’t think student loan forgiveness somehow does so.
Other Western countries can provide “free” college tuition to everybody due to incredibly high taxes which help decrease the incentive to work and earn more. I’m dis incentivized to work significantly more than 40 hours a week since my marginal tax rate is ~40%. Most people share the same opinion. You’ll find somebody who is happy working 60 hours a week at a 45% marginal tax rate in NYC or CA but most don’t want to work themselves to the bone for a lower and lower percentage of take home money.
I don’t have the stats in front of me but anecdotally I know a lot of European students who study one major for 2-3 years then switch to another one. They have little “skin in the game” so they can spend many more years in college figuring out what they want to do without incurring significant debt. However, many are 25 and still not done with their college education.
That’s not how marginal tax rates work. The Laffer curve, which knowingly or otherwise, you’re referencing, has been generally found to be an inaccurate descriptor of behavior mostly because of said marginal tax rates.
“Free” tuition actually does fix the problem to some degree. If you accept the drawbacks it’s not the devil a lot of people make it out to be. You have to be ok with the fact that the government now will set the funding for public colleges. This will decrease the spending on frivolous things at universities (like the lazy river down the road at UCF). They won’t have endless student loans to waste on stuff like that. They will no longer be incentivized to spend money on unnecessary things to attract students they can then fleece with high tuition. Universities will complain they are underfunded of course (and they likely will be), but it will control costs unlike our current system. If you focus on actual education instead of the college lifestyle, college costs come way down. If you limit their funding, colleges will have to shift their focus.
It also allows limits on who gets in. There are only so many seats at the public schools. If you don’t get the grades too bad. You won’t have this everyone has to go to college mentality which is a good thing. Lots of jobs that dont need college degrees now are requiring them, because they can. That needs to stop. It’s a waste of resources. For those who don’t get into public schools, you can go to a private school and pay for it, but there will be no more government funded loans because public school is free. This will bring down tuition.
As far as the high taxes, its actually mostly a regressive tax. Higher taxes to decrease borrowing by the educated (read wealthier) populace. It’s too late to help us, but for the future its still true. The benefits go to (future) wealthy people.
I know you’re a current debtor, so I suspect you’re looking at this through your particular lens and it’s a little harder to see it through the lens of someone that just got done skipping vacations, driving a beater, and eating rice and beans for two years to pay off $50K in student loans. But it’s exactly like what happened at your medical school. The MS1s got free tuition. The MS2s paid full tuition. Difficult pill is an understatement.
“Free” tuition actually does fix the problem to some degree. If you accept the drawbacks it’s not the devil a lot of people make it out to be. You have to be ok with the fact that the government now will set the funding for public colleges. This will decrease the spending on frivolous things at universities (like the lazy river down the road at UCF). They won’t have endless student loans to waste on stuff like that. They will no longer be incentivized to spend money on unnecessary things to attract students they can then fleece with high tuition. Universities will complain they are underfunded of course (and they likely will be), but it will control costs unlike our current system. If you focus on actual education instead of the college lifestyle, college costs come way down. If you limit their funding, colleges will have to shift their focus.
It also allows limits on who gets in. There are only so many seats at the public schools. If you don’t get the grades too bad. You won’t have this everyone has to go to college mentality which is a good thing. Lots of jobs that dont need college degrees now are requiring them, because they can. That needs to stop. It’s a waste of resources. For those who don’t get into public schools, you can go to a private school and pay for it, but there will be no more government funded loans because public school is free. This will bring down tuition.
As far as the high taxes, its actually mostly a regressive tax. Higher taxes to decrease borrowing by the educated (read wealthier) populace. It’s too late to help us, but for the future its still true. The benefits go to (future) wealthy people.
Awesome article. I’m picking up what you’re putting down.
I’m also gonna grab some popcorn for the ensuing comments section.
These are definitely good points but something needs to be done to curb the costs of education. The one area I do think forgiveness should be considered (and may have already been done) were the predatory “schools” that basically offered fake educations.
You are correct that forgiveness absolutely is occurring for those folks.
Good piece. Something needs to be done to rein in the costs of education. You mentioned the poor choices on the parts of the students, but it’s all interlinked – Many of these colleges with a high tuition send out recruiters who inundate guidance counselors with propaganda, which then trickles down to the high school students. The root cause of the problem is the increases in tuition across-the-board. I agree forgiveness is not really the answer, but more of a political campaign promise.
This response is apprehensible. Most of student loan reform would go to our MAs, LPNs, paramedics that help us in our offices, nursing homes, parent’s homes, and the like. It would help the person you do pseudotherapy with when you get your hair cut. That is why even $10K will help. It will also help disporptionate children of poor, people of color, who are descendants of lopsided ways and those who perpetuate(d) them. These are community college loans, public school loans that are a struggle to finish. I graduated public university in 2003 – at that time costs were $7k-$13K depending on the program per year, I’m sure they’re higher now – very easy to get to a number beyond $10K. I’m not sure if it’s best but leading on about the guilt trip. Just stop, please.
Paramedics, MAs, LPNs, janitors, mechanics, enlisted soldiers etc generally don’t go to college and get student loans. But they do make money and pay taxes. Student loan forgiveness, especially large amounts, is disproportionately given to the most educated rather than the least educated who perhaps need the most help! It’s a regressive government program, taking from those with the least ability to earn and giving to those with the most ability to earn.
The POC/racial justice aspect is an interesting one to look at. Educationdata.org has lots of interesting statistics in this regard.
https://educationdata.org/student-loan-debt-by-race
To summarize, black people make up 13% of the population but take out 20% of student loans. White people make up 60% of the population and take out 51% of the student loans. So yes, you could argue that forgiving student loans is of more benefit to POC, especially since they are also more likely to have federal loans and less likely to have private loans.
But I’m not sure that student loans is the place to try to make up that disparity. If you just want to redistribute money to POC, it’s a whole lot simpler to do reparations or give them their own set of lower tax brackets rather than trying to be sneaky and do it through the student loan system. And besides, that ignores everything else I discussed in the post, such as what about the POC who paid off their loans 5 years ago or the ones who will take out loans 5 years from now? Forgiveness does nothing for them, it’s just a handout to a certain subset who currently have student loans.
While in a fair world of lending practices where there are rainbows and four leaf clovers, this sounds reasonable. But historically and reality wise, the reason that the government had to get into the “loan business” is because lending institutions were not lending to POC. So let’s expound upon that with the ever-widening income disparity between not only POC but also women, and you will have a monolithic, highly educated block, to the exclusion of others. I, for one, don’t advocate going back to those “good old days”. And with obtaining an education as one of the consistent ways of changing one’s socioeconomic status in this country, I would rethink your “solution”.
That does have potential to be a problem. What do you propose as a solution aside from current laws against discrimination?
It kind of brings up the real dilemma here though, which is do you have a paternalistic system which limits how much people can borrow, or do you put the responsibility all on the borrower and loan money to anyone with a pulse and an acceptance letter, and let the chips fall where they may. Mass one-time forgiveness seems to be trying to do both at once–let people borrow whatever they want and then paternalistically sweep in and fix the problem when people make a bad investment.
If the solution was easy, ideally it’d be done now. Having discrimination laws and enforcing them are two different things. And while it appears you are trying to gloss over this issue, it is very real and there is reason for Feds to be involved, much like the integration of schools in the 50s and 60s. History often show when left up to the private sector to “do the right thing”, they often do not, as there is often a lack of diversity in those decision makers who decide whose credit worthiness they value. To ignore that reality is a bit tone deaf at best.
Your argument, of course, also assumes the Feds/government are somehow colorblind. You know, the same people that put into their constitution that Black people not only don’t get to vote, but only count as 3/5ths of a person here for some purposes and property for other purposes. Not exactly the best track record either as far as past discrimination.
I am acutely aware that the Feds/government is FAR from colorblind. But I can push for change and accountability with them much more than a private entity. But again, without addressing root causes and the obvious inequalities that continue to exist, your argument sounds more like sour grapes than addressing getting more people opportunities to change their socioeconomic status. And this narrative that most incoming students are choosing pricey private universities and that has somehow exacerbated the student loan crisis doesn’t pan out. The cost of state schools for in-state tuition has also increased dramatically, causing students to question what is the point of staying at the state school if the difference in cost is a few hundred dollars? Having gone through this process with my own son this year, I can attest that the costs aren’t that much different. Again, without accountability on controlling costs, it’s just a bandaid on a bigger problem. I would rather my tax dollars be invested in preparing the next generation of productive citizens than some other things.
What’s your solution?
Actually controlling college tuition costs with caps on costs. Incentivizing colleges for colleges for having a truly diverse student body, expanding programs like PSLF to incentivize students to pursue those fields lacking quality applicants. Increasing work study opportunities. Not asking for handouts, but opportunity.
Not sure how well a cap would work. The first thing schools would do is cap tuition and start tacking on fees. Second would be cutting services and increasing class sizes. Gotta worry about the unintended consequences.
As any solution wouldn’t have unintended consequences? Such as the disenfranchisement of whole populations?
I don’t think cutting services is a bad thing. You can’t cut costs without cutting some service. There is a lot of fluff at universities now. Don’t get me wrong, I liked the fluff when I was there, but honestly a ton of things could have been cut without effecting my education. Without caps in some form or another they just keep raising prices with most of the extra cost going to stuff that doesn’t really add to actual education.
Excellent article. I have a major problem with blanket forgiveness. We know a couple that have purposely held on to loans for the last year and a half waiting for loans to be forgiven all the while having enough in a slush fund to pay both off today. I don’t agree with forgiving everyone and forgetting about the people in the last 5-10 years who have diligently paid and refinanced. I also have another friend who went to community college for seven years, dropping classes left and right who was awarded an associates in interdisciplinary studies. They are waiting for their $50k check as well.
Here’s my fun idea (and not completely thought out, feel free to critique or expand).
Plan A: if you have outstanding loans, forgive up to $50k
Plan B: if you have completed a bachelors degree or higher in the last 15 years and paid off the high interest loan, you are eligible for a retroactive 50% reduction in the cost of that loan that caps at $40k. PER DEGREE
That way the people that want the handout get it, but the people like my wife and I and other readers who have worked hard, and diligently studied and paid off their loans get their degrees “reimbursed”
I’m not convinced our friends and relatives would be excited about reimbursement for my undergrad and med school and my spouses undergraduate and masters.
Again, feel free to ruin/critique. I’m not bitter, just don’t agree with handing out $ for people that I don’t feel were fiscally responsible.
That addresses the past issue (with yet another “stimmy” check) but doesn’t address the future issue. What about those who follow?
Perfect is the enemy of good!
I think another root problem that needs addressing is that a large number of people in college have no business being there, and these likely make up a big portion of people who run into financial problems.
This isn’t anything new. I knew people in high school back in the 90s who could barely do math or write a coherent paragraph, and every single one of them got accepted to a college somewhere. You can guess how that worked out for the ones who barely graduated from high school. Since anyone can be accepted, a college degree has unfortunately become devalued over the years to the point where it’s borderline useless.
Again, paternalism vs freedom. Not sure where the right balance lies. If you get too paternalistic, people will complain (and some of them rightly) that they’re being denied opportunities.
Just an FYI to Dr. Dahle: as opposed to when WCI started however many years ago, it’s impossible to read your articles on student loans now without noticing the ads for student loan refinancing companies (just to the right side on my browser). Sure, you may argue that your interests may align with your advertisers’ and your readers’, but it’s impossible to wonder whether part of the impetus for writing this article is that the student loan refinancing industry has taken a hit in business over the past year and a half.
# 1 WCI has been a for-profit business from the first week. Those ads have always been there.
# 2 My first student loan refinancing partner came on in 2013, long before the 2020 student loan holiday. So those ads have been there for at least 8 years. Not sure when you started reading, but it’s very unlikely it was before then. If so, perhaps you have a legitimate complaint; not sure why you took 8 years to make it though.
# 3 I’m not going to work for free and I have a dozen families relying on those ads to put food on their table, put roofs over their heads, and to put their kids through college. I’m not going to apologize for that. But it does mean that there are going to be conflicts of interest. The best I can do is clearly disclose those, which I do quite clearly each year in the State of the Blog post. The most recent one can be found here:
https://www.whitecoatinvestor.com/state-of-the-blog-2021/
I’ll recreate that section here:
At any rate, I definitely write more articles about student loan refinancing because of that conflict (wait until we approach January 31, 2022), but I wouldn’t really see this particular article as a big “go refinance your student loans” article. Do you?
1. I’ve been reading since the blog’s very early days when I was in med school, through residency, through my attending years, and through some major professional/financial milestones, so it’s been a while! Maybe I’m just more bored as an attending some days!
2. I understand you have to keep everyone happy, and your readers are just one part of that. Just making a comment on what came to my mind when I got to points #7/#8.
Thanks for the post!
Excellent article. I’m sure the majority of people who support student loan forgiveness are coming from a place of empathy and compassion but sadly they often do not understand economics and incentives. Forgiving $50k in student loans would be in effect further subsiding loans (and they are already heavily subsidized) and lead to schools increasing tuition even more as well as infuse even more moral hazard into the actions of the borrowers. Your article laid this out well. Sadly this “cancel student loans” movement works much better as political slogan or brief soundbite to attract votes than it does in economical reality.
I agree that you have to dive in a bit to see the problems with it.
Worth noting that student loan forgiveness is tax free until 2025, so your taxed point is currently moot in the current setting. Agree with most of this though. Need better incentives.
https://www.google.com/amp/s/www.bankrate.com/loans/student-loans/stimulus-package-student-loan-forgiveness/amp/
Agree, but anyone paying down student loans right now is crazy. My son has loans under $50,000 and has not had to pay anything for months. I’ve told him not to pay anything except the minimum for now because of this likelihood. Those who pay their loans will get nothing so it makes sense to wait.
A great example of the moral hazard running the student loan program like this causes.
Jim,
Great post! I too believe that blanket forgiveness will have serious negative unintended consequences in the future. I do think that the PSLF program allows for public institutions to retain individuals.
What are your thoughts on income share agreements? Mitch Daniels of Purdue university is pitching this idea as a potential solution.
Regards,
Psy-FI MD
I’ve written about them in the past.
https://www.whitecoatinvestor.com/income-share-agreements/
I really don’t like swapping my life equity for debt though. I would prefer to maintain ownership of my earnings.
I don’t always agree with you, especially when it comes to early bail out without consequence following taxpayer subsidized residency, but your credibility just skyrocketed. So many in the FI/Personal Finance space cower at substantive discussions about the foundational policy and moral decisions that allow for FI to exist and for FI to spread widely to everyone. It appears that some of the critical commenters may not have read the whole post. You are also to be applauded for providing a solution for discussion, the underwriting of college lending would have the potential to lead to significantly lower college costs and better programs with less room for students to make truly stupid long term decisions and a better likelihood that training/education met economic/societal needs. In today’s climate your otherwise routine post took courage. Good job!
Thanks for your kind words. Glad you enjoyed the post. You’re right that many people never get past the title of a post (see my April Fools Tesla post for details) but I don’t know that applies to any of the commenters above.
Hi Jim,
Regarding solution point #1, I think you’ve lost sight of the fact that the government actually is in the mortgage game. (Fannie, freddie, etc.)
While it probably causes all sorts of market distortions (not the point of my comment), it is a result of the mortgage loan market often suffering market failures and “tragedy of the commons” events where failure of one bank led to liquidity problems for banks that were perfectly fine.
In fact, here’s a list of previous government bailout of the private sector failures in the mortgage market:
https://www.investopedia.com/articles/economics/08/government-financial-bailout.asp
I figured someone would call me out on that one. I thought about putting in a “(mostly)” after “mortgages” in that sentence. But the government has far less involvement in mortgages than student loans.
I’m not sure the fact that bailouts have happened means that government should take over that industry. I mean, look at the 2008 bailouts. Government isn’t doing all the banking now.
To your point, the federal government is in the mortgage business, and it could be argued that purchases of mortgages by Fannie and Freddie allowed bankers to lend more and more feely to non-qualified borrowers. This perception of the “safety” of mortgages lead to them being repackaged into the traunches of mortgage backed securities we became so familiar with in 2008-2009. Again, what is subsided by the government is more likely to proliferate. One could make the argument more poignantly, I believe, that the government should get out of the mortgage game as opposed to using that unsteady foundation as the argument for further intervention. I agree that bailouts of businesses “too big to fail” is a travesty as well. The bright point in capitalism isn’t that it allows companies to succeed. It’s that capitalism allows companies to fail.
I had the standard 200k medical school loan debt even with some family help.
After 3 years as a lower paid attending I’m down to about 50k and that’s even after investing more into my taxable and tax advantaged investing accounts than the vast majority of high paid (300k+) doctors.
It’s been tough but it teaches you to take responsibility for your debt and not “live it up” like a lot of people.
Nobody forced us to take out debt and I agree that it’s terrible precedent to just forgive a bunch of debt without having a viable solution. 50k (or 10k, or whatever) in loan forgiveness is throwing tylenol at the fever and not getting at the root cause.
Very interesting article. I’m generally politically progressive, and student loan forgiveness tends to be a progressive cause, but I have to say I have had similar misgivings about simple “loan cancellation” proposals. While well-intentioned, they can have unintended consequences. Your proposal is very interesting and I like the ideas. I agree that we need a well thought-out solution that offers the benefits we want in the short AND long terms. I don’t see a problem with the government subsidizing student loans by offering below-market or 0 interest rates (either directly, if the government loan process can be reformed, or through private lenders). It may increase costs of education slightly, but not enough to make up the interest savings, and presumably at least some of the cost increase should improve education quality. If the government can give interest-free loans to millionaires TLH’ing their brokerage accounts and depreciating their rental properties, they should do the same to at least some would-be students I think.
A big-picture point that often gets missed is that high-quality education (post-secondary and otherwise) has well-established positive externalities to society. People with more education earn more money, pay more taxes, utilize less public assistance, commit less crime, etc. Even the most staunch libertarian economic theorists agree that one function of the government should be to move externalities inside private transactions, perhaps by taxing negative externalities (eg. pollution) and subsidizing positive externalities (eg. education). So, everyone across the political spectrum should agree that promoting education in some ways *should* be a function of the government. (I would say, in practice, one particular party has realized that the more education people have, the less likely they are to vote for their candidates advocating let’s say “non-reality-based” ideas, and so try to discourage education, but that’s another topic.) Improving public pre-college education, and adding subjects to better prepare students for the modern world, like personal finance, media literacy, and critical thinking, seems like an enormous payback to society, likely much bigger than anything the government could do at the college level.
Just because something is a “good thing” and “benefits society” doesn’t mean government should be in charge of it. Groceries and cell phones are good things too, but we don’t rely on government to directly provide them.
How much education taxpayers provide is a big picture issue that reasonable people will always disagree on.
To be clear, I’m not saying the government should be “in charge of” all good things. There are things the government should basically stay completely out of (maybe private activities between consenting adults), there are things that are best handled by private industry but the government should reasonably regulate (eg. cell phones, restaurants), and there are things that are best run directly by the government (eg. military, diplomacy). Exactly where those lines should be drawn, we can have reasonable disagreements. But I was making a more economic point.
The more economically conservative someone is, the more they tend to prefer the free market as opposed to the government. Libertarians tend to be the most extreme, one step below anarchists. But one problem with free-market transactions is that not all effects of the transaction are actually captured inside of it. If I buy land next to your house, build a factory and produce widgets with a process that causes toxic and noxious fumes to waft over your house, you wouldn’t be happy about that. That pollution has negative economic value- depending on how bad it is, there’s probably some price you would be willing to be paid to tolerate it. If I produce and sell widgets at a profit while paying no cost for that pollution, not only is that “unfair” ethically (most would say), but it’s also economically inefficient. If there were scrubbers or a different process I could use that would dramatically reduce the pollution for a small extra cost, I have no incentive to take those steps, even if the net cost (cost minus change in economic value of reduced pollution) were hugely positive. Economists are in basically universal agreement that the solution is to somehow move the cost of the pollution inside my financial decision-making. Most will say that the government should require me to pay some kind of pollution tax, which it then gives to you and anyone else affected by it. The more rabid libertarian types say that rather than a government tax, you and the other pollution-breathers should form a cartel, and then negotiate a price directly with me. I would say the latter is a much less efficient way to do the exact same thing, building a mini-government from the ground up for each separate issue (and you still need a government to enforce that contract), but that’s another debate.
A super-simple application of this idea to education would be to figure out the net economic benefit to society of an education (higher taxes, lower crime, less public assistance, etc.) for one person, and pay that value, or some percentage of it, to anyone who chooses to get a degree on the education market. In reality there is a lot of complexity about how best to do this, but the point is government promotion/subsidy of education can actually have a positive financial impact for society as a whole. I am not saying, nor would agree, that every teacher/professor in the country should be a government employee.
Unfortunately, especially in a post-Citizens United world, politicians don’t always act, or even try to act, in the public good. It’s like a variation of the Upton Sinclair quote: “It is difficult to get a man to understand something, when his [campaign donations] depend on his not understanding it.” By legalizing bribery in the form of campaign donations, that ruling exploded the “economic inefficiencies” in the “politician market”, and in my judgment is thwarting real progress on a huge variety of issues, including education.
This concludes my daily politics rant.
In some ways state universities already do this.
Jim , fantastic post- I agree with all your points and your remedies -the student loan debt issue has become a major issue all related to the federalization that occurred some years ago- the resultant huge runup in tuition costs is just a response to the incentive provided. Keep up the good work!
Via email:
I’m disappointed that you published this screed. So often your posts are full of actionable advice for individuals. This one sounds like sour grapes that the amount is not $500K — if the policy were forgiving doctor-sized debt would he complain so vocally and would anyone in this list care what he said?
Please apologize for pushing this tirade in front of your readership and go back to the high quality of investment related advice and news you’re known for.
Thanks for the (usually) great work!
I think I’d probably still be against it (maybe even more so) even if it were $500K, but at least that would cover the debts of most of my readers!
Via email:
This is the best article from WCI on this issue! Seeing as I have paid off over 300k in my student loans using your principles, I certainly agree with your sentiments written here!
Well said!
Thanks for your kind words.
Via email:
I think you should make a clearer disclosure that you get money from Student loan financing companies and that you benefit financially from the continuation of status quo. I myself am not a fan of loan forgiveness but if you aim for scientific/scholarly discussions, you should make your financial COI more clear to the readers.
How much more clear can I make it than I do every year in the State of the Blog post? What more would you suggest? In case you missed that post, here’s the COI section reproduced again:
Conflicts of Interest
Every year we remind ourselves and you that, as a for-profit business, we have serious conflicts of interest. The first law of economics is that people respond to incentives, and although many doctors don’t think drug reps influence their prescribing habits, the data would suggest otherwise. As you enjoy our content during the next year, keep our conflicts of interest in mind. They haven’t changed significantly since last year.
We are incentivized to run content that relates to our advertisers’ businesses (and especially those with whom I have an affiliate marketing relationship) more frequently than other content. However, we try to balance our content as best we can. Frankly, most of our content decisions are made based on what I feel like writing or talking about rather than any sort of pressure from “the business department”.
We are incentivized to accept guest posts from financial professionals who advertise with us more frequently than those who do not, although the only “sponsored posts” this site has ever run are those by the five platinum scholarship sponsors each year (and 100% of that revenue goes to the scholarship recipients). We have a policy to judge guest posts purely on the basis of the content and do our best to follow it.
We are incentivized to recommend you refinance your student loans when perhaps it would not be a good move for you (which is awfully rare if you’re not going for PSLF, but last year was a notable exception given the temporary changes with federal student loans for 2020.
We are incentivized to recommend you seek out professional help with insurance, financial planning, investment management, student loan advice, purchasing and selling real estate, negotiating contracts, borrowing a practice loan, and preparing your taxes when perhaps you may be able to do that on your own.
We are incentivized to recommend and discuss alternative investments such as real estate over boring index funds. We’re still trying to get Vanguard to advertise with us, but so far no luck.
We are incentivized to accept advertisers who do not meet our high standards for recommendation to friends and family.
We are incentivized to recommend you use a physician mortgage loan over a conventional one.
We are incentivized to recommend you read financial books, including and especially our own.
We are incentivized to recommend you take our financial courses and those of our affiliate partners.
We are incentivized to recommend you attend WCICON either in person, virtually, or preferably both!
We are incentivized against recommending content by others who have the same affiliate marketing partners or who compete for the same advertisers unless I am also a partial owner of their site.
We are incentivized to recommend the content and products of our WCI Network blog partners, in which I am a minority partner.
We are incentivized to recommend you use the WCI Forum over the Bogleheads and other forums and the White Coat Investors Facebook Group over others.
That’s all I can think of for now. All of us still share the “blame” for these conflicts of interest. We must take some of it, because we are not willing to do this work for free (and none of our staff members are). However, you must also take some of the blame, because you are not willing to pay for the content that we are currently giving you for free. We could make the blog, newsletter, podcast, etc. a subscription (i.e. fee-only) service, but when we survey you, fewer than 1% say they would be willing to pay for it, and those who would aren’t willing to pay very much. So we would only be helping a tiny fraction of those we are helping now. We’d make less money, do a lot less good, and probably quit. Seems like a bad idea to me, but if you want to try to compete with us using that payment model, we wish you the best of luck.
Great points made.
Higher education doesn’t seem to follow the rules of supply and demand dictating prices. As you have pointed out, school selection can make an enormous difference in the cost and eventual loan burden. But Harvard, etc will never have trouble filling the incoming class regardless of how much they raise tuition.
Doesn’t help matters that too many parents are willing to go along with whatever the kid wants. I plan on making the same deal with my kids that my parents made with me: pay the cost of an in-state public school, if the kid wants to go somewhere more expensive they pay the difference. My Duke acceptance letter when I was 18 didn’t look anywhere near as exciting once I figured out what the cost was, vs a free (to me) option.
Great post – I agree with all your points wholeheartedly. Except for #11 I think. Correct me if I misinterpreted the bill, but I think the March COVID relief bill from this year made student loan forgiveness a tax-free event.
I don’t think that’s true at all. Only PSLF provides tax-free forgiveness. Even those poor folks whose schools scammed them still get a tax bill on their forgiveness.
I do believe this is actually correct. The March bill did include a provision that any student loan forgiveness through 2025 would be tax free.
https://www.kiplinger.com/personal-finance/credit-debt/loans/student-loans/602412/forgiven-student-loan-debt-will-be-tax-free
Oh yes, you are right. The problem is it is a non-starter for the $10,000/$50,000 forgiveness thing because there is no $10,000/$50,000 forgiveness thing, it is a non-starter for IDR forgiveness because no one can have 20-25 years of payments by 2025, and it is a non-starter for PSLF because that was always tax-free anyway. It does help those who get loans forgiven because they were scammed by their school though.
Another great article Jim. Thank you! I especially found #11 great…having dealt with the IRS as a CPA and Fedloan as a parent of borrowers going for PSLF, I would rather deal ANY day of the week with Fedloan than the IRS. The IRS seems to have closed their doors with Covid, no longer answering consumer phone calls, and sending out notices for non-filing and nonpayment erroneously. They have sent notices that they are freezing assets without prior notice (as they state in their letters). A nightmare to deal with. You are right about most loan forgiveness being taxable, except PSLF thankfully.
So funny. The last commenter liked everything but # 11. I guess you just gotta take what you find useful and leave the rest.
The Covid acts just deferred payments and interest on federal loans through Sept 30, 2021. Didn’t change the rules.
Meant interest doesn’t accrue on the federal loans during the Covid payment deferral.