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Should I Borrow Extra Student Loans to Maximize Forgiveness?

Michael Lux Blog 0 Comments

Student debt has been in the news a lot lately, and for once, it is good news for borrowers.

Two leading presidential candidates, Elizabeth Warren and Bernie Sanders, have proposed massive student loan forgiveness programs… often called student debt cancellation.

While there is certainly plenty to like about the plans for debt elimination, it might be a bit premature to start making plans for life with fewer student loan bills.

Some current students may even be thinking about borrowing a little extra while they are still in school in order to get the most of the debt forgiveness.  After all, if the debt is going to get forgiven, why not get as much free money as possible?

Planning on Student Loan Forgiveness for All

To put it bluntly, it would be foolish for any current student to assume their student loans will eventually be forgiven.

How dangerous is it to bet on forgiveness?  We did the math on the Elizabeth Warren forgiveness plan.  Borrowers would be better off going to a Vegas casino to bet on Warren.  The odds of forgiveness happening are too slim when compared against the risk of it not happening.

The odds of student loan forgiveness for all happening are slim enough that it really doesn’t make sense for most current borrowers to adjust their current repayment strategy.

This means current borrowers really shouldn’t be borrowing extra in the hopes that it will be forgiven.

There are a number of reasons why such a move would be a bad idea…

Student Debt Cancellation May Never Happen

To illustrate how difficult the debt forgiveness campaign promise would be, lets take a look at all the things that need to happen in order for all student debt to be forgiven:

  • Warren or Sanders have to win the Democratic primary. (Note: The Warren forgiveness plan caps forgiveness at $50,000 and has income limitations, so it really isn’t a “for all” forgiveness.)
  • The winning Democrat needs to beat Donald Trump in the general election.
  • The Democrats will have to regain control of the Senate.
  • The Democrats need to keep control of the House of Representatives.
  • President Warren or President Sanders will have to get enough Democrats on board with their plan to get it through Congress.  (At present, they are in a small minority of Democrats who support such a proposal.)

Aside from all the electoral items on this checklist, another major obstacle to debt cancellation happening is that there are a ton of alternatives to student loan forgiveness.  These alternatives, such as restoring bankruptcy protections and improving income-driven repayment options, could help many borrowers and cost far less than forgiveness.  Many Republicans and some Democrats will argue for taking smaller steps first.

Even if some sort of student loan forgiveness bill does become law, it may not help all borrowers…

Student Loan Forgiveness Limitations

To get an idea of how complicated government “forgiveness” can be, one needs to look no further than the Public Service Loan Forgiveness Program.  Over a decade ago, students were promised total federal loan forgiveness in return for working 10 years for the government or a non-profit.  At present, approximately 99% of the Public Service Loan Forgiveness applications have been denied.

Forgiveness for all could easily become forgiveness for some:

  • Like Elizabeth Warren, Bernie Sanders may eventually decide that there should be a cap on the amount forgiven.
  • The government may decide to only forgive federal student loans while private student loans are left alone.
  • Strict income limitations could be imposed and might prevent many borrowers from qualifying.
  • The forgiveness may be limited to students who have been out of school for a certain number of years.

The hard truth is that we have no idea what limitations might be imposed.  Even if forgiveness becomes a reality, the rules could be so strict that most borrowers don’t even benefit.

Don’t Ruin Things for Others

Many borrowers are not just hoping for student loan forgiveness… they desperately need it.

If word spreads that current students are borrowing extra in anticipation of student loan forgiveness, it could hurt the chances of forgiveness ever happening.  News coverage could show drunk college students on spring break bragging about debt that is about to be forgiven while taxpayers are interviewed talking about how they don’t want to pay extra in taxes for forgiveness because they never got the opportunity to go to college.  Such coverage might not be fair or accurate, but it would certainly generate ratings.

Abusing the system is a great way to get the rules changed.  Student loan cancellation is already the longest of long shots… don’t make it even more unlikely.

Final Thought on Borrowing Extra for School

One thing is for certain: borrowing more student loans results in more student loan debt.

As soon as that money is borrowed it starts generating interest.  Funds frivolously spent in college can become debts that are a huge burden to pay off.

Borrowing extra student debt in the hopes that it gets forgiven is foolish… be smart and borrow only what is absolutely necessary.