wiping out all student debt

Could the Government Forgive All Student Loans?

Michael Lux Blog 0 Comments

Editor’s Note: This article discusses the viability of plans to wipe out all student debt in the United States.  For details on existing programs, be sure to check out our page on student loan forgiveness programs.

For years, the idea of forgiving all student debt has functioned more as a wish of student loan borrowers than a viable policy position.  The idea got a bit more realistic this week when Congresswoman Alexandria Ocasio-Cortez endorsed the idea on twitter.

Though Ocasio-Cortez is one member of a very large body, a sitting member of Congress considering forgiving all student loans is noteworthy.  Because such a move would provide immediate financial relief to millions Americans, it certainly merits a serious discussion.

Borrowers who have student loans will also want to follow this debate closely as it could affect their financial planning.

Is the government allowed wipe away all student debt?

From a legal and procedural standpoint, student loan forgiveness for all borrowers is quite easy.  The vast majority of all student loan debt is owed directly to the government.  Forgiving this debt simply requires the government to say that it doesn’t have to be paid back.  As it would function similar to a tax cut, there really isn’t a significant legal or Constitutional hurdle preventing blanket student loan forgiveness.

The real challenge is a political one.  Student loan forgiveness would require a majority in the House and the Senate and the President’s signature.  With only one member of Congress even seriously discussing the idea, there is a long way to go on the political front.  That being said, if the will of the people dictated student debt being wiped away, it could go from dream to reality fairly quickly.

In order for student loan forgiveness to become a reality the American people, not just student loan borrowers, will likely need to be convinced of the benefits of the move.  A number of hurdles most also be overcome in order to make such a plan work.

Can the United States Afford to Forgive all Student Loans?

Plenty of people will say the answer is a definite no, but it could be done.

As the Ocasio-Cortez tweet notes, it is a question of priority and we could afford the comparatively more expensive tax cuts.

The true cost of student loan forgiveness is hard to determine.  A key part of the motivation behind the move would be the boost that it would provide the US economy.  Like the tax cuts, the idea is that by putting more money in the pockets of many Americans, they have more money to spend and the economy grows.  The growth results in more tax income for the federal government.

During the most recent round of tax cuts many Republicans argued that they would pay for themselves.  Many economists disagreed.  It will be years before we can put a true cost to the cuts.  Similarly, we wouldn’t ever know the true cost of student loan forgiveness until long after it happened.  Even then, it would be hard to say how much it cost and how much it helped.

One part that often gets left out of the cost debate is that the government wouldn’t be spending the $1.5 trillion next year… or even in the next 10 years.  The government is owed $1.5 trillion, but nobody expects that entire balance to be paid back in the next couple of years.  In other words, the dent in the yearly budget is substantially smaller than any trillion dollar figure.

Reasons why it Probably Won’t Happen…

The biggest hurdle to eliminating student debt is the high cost of college tuition.  If the student loans are forgiven, many future college students may think that their student loans will also be forgiven eventually.  This could lead to some irresponsible borrowing and further escalate the runaway cost of college.  For a blank slate on student debt, fixing the high cost of college will have to come first or at the same time.

Many lenders make a great deal of money on student loans.  Many corporations that run for-profit colleges make a ton of money on student loans.  Schools continue to operate because of student loans.  These stakeholders have deep pockets and the financial ability to influence Congress.  They will  likely be against sweeping changes to higher education.

Similarly, many of the student loan refinance companies would be opposed to student loan forgiveness… especially if only federal loans are forgiven.  These companies make money by targeting federal borrowers who are likely to repay their debt.  Even though the federal government treats borrowers the same regardless of credit score, the refinance companies do not.  They can offer lower interest rates to the low risk customers to steal the governments top borrowers and make a profit.  This is the reason why refinance interest rates are usually several percent less than federal loan interest rates.

Private student loans make the idea of wiping out student debt especially difficult.  If the government is going to forgive all private loans, it would require a ton of money to pay off all of the existing private student loans.  If the government decides to focus on federal loans exclusively, the borrowers with large piles of private debt, who have arguably been hit hardest by the student loan crisis, will not be helped.

Another group that might be a surprising obstacle would be borrowers who already paid off their loans.  These people wouldn’t actually be hurt by student loan forgiveness, but many would be vocal in their opposition.  It seems that whenever the idea is floated, there are a number of former borrowers who feel like it is unfair that others might get help when they didn’t.  If student loan forgiveness ever gets a serious discussion, expect to see former borrowers featured on the news in opposition to the plan.

The Benefits of Forgiving all Student Loans

Student loan borrowers know the burden imposed on their personal finances by student debt, but this burden is felt across the broader economy.

A federal reserve study found that student debt was a key contributor to the drop in home ownership rates.

Student loans have been shown to have a “Disastrous Domino Effect” on borrowers.  This means borrowers find themselves unable to keep up with their loans, unprepared for any sort of financial emergency, and delaying major events like getting married and having kids.

Erasing student debt would produce a huge boost to millions of Americans and a boost to the economy.

Planning for the Future

As someone who owes over $100,000 on their student loans, I would love it if the debt was forgiven.

Unfortunately, I don’t see it as a realistic outcome.  Addressing the high cost of college almost has to come first, and it seems we are years away from that possibility.  In my opinion, the best student loan borrowers can hope for is the possibility that bankruptcy rights are restored to borrowers.

Others may disagree, but as someone with a vested interest in forgiveness, I just don’t see it happening.  As a result, when I have the money to pay off my student loans, they will get paid off.  I won’t be spending extra money on interest in the hope that the government decides to erase all of the debt.