[Editor's Note: The Physician Wellness and Financial Literacy Conference on March 12-14th in Las Vegas is coming right up. We're looking forward to seeing nearly 800 of you there. If you're not yet signed up, we just had a half dozen spots open up to this event that has been sold out for months. We'd love to see you there!]
I have been amazed at the frequency at which I am running into physicians who have decided not to pay any more toward their student loans than they have to because of some ideas floated by candidates for president including Senators Elizabeth Warren and Bernie Sanders. Here are a few examples:
From the WCI Forum:
From the WCI Facebook Group:
I usually try to avoid wading into politics on this blog, but this really needs to be addressed because at the rate this idea is mushrooming, it is going to cost thousands of doctors thousands of dollars in interest. That sum total is certainly worth my time to write this post and your time to read it and point your colleagues to it.
How a Bill Becomes a Law
Let's start with some basics that I would have hoped most of you would have learned in elementary school.
For those of you unfamiliar with the song, we have three branches in our federal government.
This is composed of a House of Representatives and a Senate. The House generally operates on a “majority rule” philosophy where the majority party pushes its way around like a bully and passes whatever bill it wants to. But a bill must also pass the Senate before becoming law, where more compromise is the norm. Thanks to a “filibuster” provision designed in some ways to protect minorities (not talking about race here) from being run over roughshod by the majority, a bill really needs much more overwhelming support in order to pass. Generally 60% of Senators must support its passage, meaning it must have support from individuals in both major parties.
This branch is charged with enforcing the laws. Its power, however, has grown over the decades under the control of both parties and now it can influence a lot of things simply by setting enforcement policy. However, there are limits to this influence.
Judicial Branch is charged with determining whether the laws passed by the legislative branch are constitutional and striking down those which are not.
At any rate, my point with this simple discussion of civics is that the president, by himself or herself, cannot pass laws. In fact, the usual case is that at least one part of Congress is controlled by the opposite party as the one controlling the White House. So the only laws that ever pass are compromises that people in both parties can agree to. Only on rare occasions are both houses of Congress and the White House controlled by the same party. When that happens, pretty dramatic things can happen (for better or for worse), such as the Patient Protection and Affordable Care Act (Obamacare) or the Tax Cuts and Jobs Act (Trump Corporate Income Tax Cut).
Don't Expect Big Changes
For those not paying attention right now, the Senate and the White House are controlled by the Republicans and the House is controlled by the Democrats. So don't expect any big changes. However, this is an election year. Come next January, control of any of those three things could potentially change. However, most political observers doubt there will be any change in who controls the House or the Senate. In fact, it is also more likely than not that our president in 2021 will still be President Trump, despite current impeachment proceedings. So the most likely thing is that the status quo will continue. Which means that most of the laws we have right now will still be the law for at least several more years.
The conclusions any rational person will make from this discussion about student loan forgiveness are as follows:
- Trump is probably going to win the election, the House is probably going to be controlled by Democrats, and the Senate is probably going to be controlled by Republicans. Since the Republicans generally aren't very supportive of widespread student loan forgiveness, it is unlikely that a law that enacts it is going to be put in place at any time between now and 2023.
- If a Democrat wins the presidency, it may not be one who is supportive of widespread student loan forgiveness. Only two of the leading candidates are in favor.
- Even if the Democrats somehow both win the presidency and flip the Senate, they are extremely unlikely to have a filibuster-proof majority in the Senate.
If I have not yet convinced you that getting a widespread student loan forgiveness bill through Congress prior to 2023 is little more than a hope and a prayer from some very desperate borrowers, I'm not sure what else I can say. But I'll keep talking anyway, mostly to address those few of you who think I don't know what I'm talking about above and need more evidence that there is no white knight riding in to save you from your student loans.
Make Plans Using Current Law
As a general rule, it is a good idea to do your financial planning using current law. There are two reasons for this:
- The first is that laws don't change very often. They often last years or even generations without change.
- The second is that when change comes, it can go either way. Consider a backdoor Roth IRA. Maybe Congress outlaws it. Maybe Congress allows high earners to simply contribute directly thus eliminating the need for it. It could go either way. A couple of years ago a lot of people thought that both tax rates and interest rates had to go up. Then they went down. Same with student loan forgiveness. Maybe it gets easier to get your student loans forgiven. Maybe it gets harder.
But the point is to make your plan based on current laws and adjust your plan as laws change. Try to get yourself into a financial position that your student loans are not the biggest part of your financial life and then you won't care nearly as much.
Lots of People Don't Like Student Loan Forgiveness
Most medical students, residents, and young attending physicians spend their days surrounded by people that think student loan forgiveness would be the cat's meow. They might be surprised to find out there are lots of people who think widespread student loan forgiveness is a terrible idea, including people who are likely to vote Democrat in the election. Here's one:
This father (and there are lots of people like him) thinks student loan forgiveness is unfair. It rewards those who borrowed lots of money, went to more expensive schools than they could afford, perhaps didn't work very hard, and perhaps didn't pay back their loans as they should have. It also rewards those who received an education they are already presumably being rewarded for in the marketplace.
However, beyond the people who think it is unfair, there is another, perhaps even larger, group of people who just think it is bad policy. They argue that the student loan crisis is caused by student loans. The ability of anyone to get a student loan no matter what they are studying, how they are doing in school, or how likely they are to pay it back has allowed schools to charge higher and higher tuition that they would not have otherwise been able to charge. The general rule with government is to tax what you want to see less of and subsidize what you want to see more of. We subsidized tuition and student loans so we shouldn't be surprised to see more tuition and student loans.
But my point is that there is significant, widespread opposition to the expansion of student loan forgiveness and perhaps even the maintenance of the current IDR and PSLF forgiveness programs. Here's Dave Ramsey's take on Senator Warren and her student loan debt relief proposal in particular:
As you can see, there will be significant political pushback from those who paid for their loans in the event of serious discussion of widespread student loan forgiveness.
[Update after publication: I know those of you who like the concept of student loan forgiveness won't like this section of the post. I don't include this section of the post nor these videos to try to convince you that student loan forgiveness is a bad idea. I'm including them to show you that there are lots of people who disagree with you, making it very difficult for these laws to pass. Don't send me hatemail wanting some sort of balanced political discussion of the merits of student loan forgiveness. That's not what this post is. This post is a very practical argument that student loan forgiveness does not currently exist nor is it likely to exist any time soon and therefore you should include it in your financial plan. That's it. Don't read more into it than that.]
Sander's and Warren's Loan Forgiveness Programs Aren't For YOU
Okay, let's keep going. Even if you are a diehard believer in Democratic presidential candidates and widespread student loan forgiveness as a fantastic public policy, you need to realize that as a doctor or other high-income professional, they are not talking about you. Consider Senator Warren's proposed policy. Here is a good summary:
Did you catch all that? $50K TOTAL of forgiveness. That isn't going to move the needle for most docs who are interested in 3-10+ times that amount of debt being forgiven. And only those who earn under $100K are even going to get that. In fact, if you have an average single physician income ($275K), you aren't going to have anything forgiven.large student loan burdens also have significant amounts of private school loans. Just like these aren't eligible for IDR forgiveness or PSLF forgiveness, they probably wouldn't be eligible for inclusion in any new student loan forgiveness programs. Yes, Senator Warren's proposal is to allow you to consolidate private student loans into federal student loans, but that seems even more unlikely than the rest of the program to pass Congress, especially for those who are most likely to have private loans (i.e. high earners).
Senator Sanders has put out a proposal to forgive student loans for everyone which has gotten lots of indebted docs really excited. But how likely is that to pass when the second most likely senator to support the proposal thinks it should be limited to $50K for those who make <$100K? He also wants to make college completely free. If you thought there was opposition to forgiveness, you haven't seen anything yet. I'm confident the education industry has a very strong lobby.
I'll give you a tip. When people are feeling bad about people with large student loans, they aren't thinking about doctors. Nobody cares that most doctors in their early 30s have a negative net worth. They see that you are making $150-500K+ and don't see any need to give you a “handout.” When you tell people you are a doctor they think you are rich, whether you are or not. Nobody is ever going to feel bad for you and your financial problems. Get used to it. It hasn't changed in the 2+ decades since I started medical school and it probably never will.
Consider the greatest current loan forgiveness program out there for doctors, Public Service Loan Forgiveness. Many people think the inclusion of doctors and similar high earners in this program was a historical accident. President Obama's budget proposals repeatedly urged Congress to limit the amount of money forgiven to just $57K. That's not a doctor size student loan forgiveness program. And if that's the way the Democrats feel about it, how do you think the advocates of a smaller government on the other side of the aisle will feel?
Can Warren Forgive Loans Using an Executive Order?
Now some of you who really follow the news closely might object to my analysis above on the grounds that Senator Warren says she can forgive all student loans without going through Congress simply by using an executive order. It turns out this is a pretty flimsy statement when you really look into it. Adam Minsky, a student loan lawyer writing in Forbes says:
Senator Warren, however, has just announced that she plans on bypassing Congress altogether and enacting her proposal through executive authority. Her argument is that the Higher Education Act — the legislation that governs the federal student loan system — already provides authority for the U.S. Department of Education to compromise student loan debt. In other words, Congress has already allowed the federal government to cancel student loan debt, and the Department of Education can simply exercise its existing compromise authority to enact widespread student loan forgiveness.
Currently, that compromise authority is only extended to federal student loans in default, however. And even in cases of defaulted federal student loans, the Department defers to U.S. Department of Treasury regulations, which severely limit the extent to which federal student loans can be reduced or forgiven. Senator Warren is proposing a dramatic reinterpretation and expansion of this compromise authority to allow for the mass cancellation of student debt.
While her proposal would allow a future Warren administration to bypass Congress to enact her student loan forgiveness proposal, the plan is not without some potential problems. Consumer advocates have argued that using existing executive authority to cancel student loan debt is perfectly legal. However, other stakeholders (such as student loan servicers and debt collectors) could potentially challenge such a sweeping reinterpretation of federal regulations in court, arguing that it goes beyond what Congress intended when it wrote the Higher Education Act. If there is a legal challenge, any student loan forgiveness could potentially be halted by injunction until there is a final decision by a federal court.
Furthermore, the Higher Education Act only governs federal student loans, not private student loans. This means that Senator Warren would be unlikely to mandate private student loan forgiveness solely via executive order. Congress would probably have to step in for that.
Get Your Mindset Right
Mindset matters. If in your heart of hearts, you take responsibility for your financial situation (including student loans), take control of it, and start taking positive steps toward correcting it, you are very likely to be financially successful. If you passively accept your situation and simply hope somebody will come along to help you, then you are far less likely to ever be financially successful. Those of you hoping for a white knight riding in to save the day and forgive your student loan debt need to WAKE UP. The cavalry isn't coming. You'll need to summon the courage to climb out of that foxhole and storm the ridge yourself.
The Bottom Line
If you want to drag out your student loans because you're going for PSLF, I think that's reasonable.
If you want to drag out your student loans because they are only charging you 1-2% in interest and you have better uses for your money right now like paying off higher interest rate debt, maxing out retirement accounts, or even investing aggressively in stock index funds or real estate in a taxable account, I think that's reasonable.
But if you want to drag out your student loans because you think a white knight is going to ride into the White House in January 2021 and save you from your student loans, I think you're making a big mistake. Make a real student loan plan that involves obtaining Public Service Loan Forgiveness while building a PSLF Side Fund or refinancing those loans and paying them off quickly by living like a resident.
If you haven't refinanced lately, it may be time to do it again. More of your payment going to principal instead of interest and a few hundred dollars cash back will help speed up the day when you can scream I'm Debt Free! Here are the best deals on the internet for refinancing your student loans:
What do you think? How likely do you think doctors are to get their student loans completely wiped out in the next 3 years? Why? Comment below! [Limit your discussion to the topic at hand, avoid ad hominem attacks, and in general be pleasant or your comments will be deleted.]