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Should I Borrow Extra Student Loans to Maximize Forgiveness?

Michael Lux Strategy, Student Loan Blog 0 Comments

The movement for student loan forgiveness appears to be gaining momentum. Major presidential candidates have called for forgiveness for all, while others have suggested forgiving large amounts of student debt to help stimulate the economy.

While there is certainly plenty to like about the possibility of 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 while she was a leading candidate for the presidency. Borrowers would have been 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 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 several reasons why such a move would be a bad idea…

Student Debt Cancellation May Never Happen

Even though some Democrats have called for across the board forgiveness, we are a long way away from that possibility ever becoming a reality.

For starters, neither of the remaining 2020 candidates have called for canceling all student debt. Massive student loan forgiveness will require the support of the president, and realistically, we are –at a minimum– four years away from having a president who could be in favor of debt cancellation.

Aside from all the electoral challenges, 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 ten years for the government or a non-profit. The early results were not promising, with approximately 99% of the Public Service Loan Forgiveness applications being denied.

Forgiveness for all could easily become forgiveness for some:

  • 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. At the same time, taxpayers would be interviewed talking about how they don’t want to pay extra 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.

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