The recent Democratic presidential debates made one thing clear: cancelling outstanding student debt is on the table. U.S. Sen. Elizabeth Warren wants to wipe away $640 billion in outstanding loans, while U.S. Sen. Bernie Sanders would like to cancel all $1.6 trillion in student debt now on the books. As attractive as these proposals may sound, they are a mistake. Here’s why:
First, loans when cancelled, don’t vaporize into thin air. In fact, legislation freeing student debt would transfer this financial burden to the American taxpayer. The deficit would then go up by roughly $1.6 trillion. That’s $1,600,000,000,000! The interest on the additional debt service alone would cost taxpayers, who didn’t take out college loans, over $30 billion per year.
Second, wiping out student debt sends a message that accumulating debt isn’t a concern, because the government will save you. Use the 2008 mortgage crisis as an example. If all student loans suddenly disappeared, students and parents working several jobs to pay for college educations, would discover this had been a waste of time. And what about the grandparents who have emptied their retirement accounts? The message being sent by some Democratic presidential hopefuls is this: Those who scrimped, saved and budgeted wisely to pay for college were foolhardy.
Finally, if the government forgives student debt, where will the funding come from for other initiatives, like Universal Health Care? Where will the $3 trillion come from to fix America’s roads, bridges and drinking-water systems? Where will the federal government find funding for Social Security and disability before they go bankrupt? The United States already runs a trillion-dollar annual deficit during a strong economy. In other words, funding even one of the aforementioned initiatives would be difficult, especially during the eventual recession.
What I don’t understand are the poor choices students make by running up $100,000 or more in undergraduate student debt. For New Yorkers in particular, going to a local community college for two years and a top-notch SUNY School for two more, would cost a total of $65,000, which is what a private university’s tuition with room and board is for one year. Is going to a private university a better value and going to improve your future pay several times more than a state school? I don’t think so.
Your average 18-year-old students can’t comprehend what the debt service is on a $100,000 student loan, or how that will affect their future ability to purchase a home, save for retirement or even start a family. The standard repayment plan for a student loan is for 10 years but studies show the average bachelor’s degree takes 21 years to pay off. To pay off a $100,000 student loan at 6 percent over 15 years would cost $844 a month, which is over $10,000 a year of after-tax income.
If the federal government can now borrow at roughly 2 percent, which is the current interest rate on the 10-year bond, why isn’t our government initiating student loans at the same interest rate? The difference in payments between 6 percent and 2 percent interest on a 15-year, $100,000 loan is $200 per month.
Here’s a better solution to the student debt problem: the interest accruing on student loans could be frozen or even wiped out if borrowers can prove they are struggling to make payments, but the principal borrowed must eventually be repaid. That’s the very least that should be expected when a loan is taken out.
Here’s another suggestion: there should be a mandatory Intro to Finance class given to every high school senior. The curriculum should include costs of loans with different interest rates and payment schedules, the negative effects of poor short-term spending habits, suggestions for smart choices necessary for prudent long-term financial planning, and how to apply for every possible college scholarship out there. A prospective college student should have a thorough understanding of the future sacrifices that may need to be made to pay back outsize loans.
Presidential hopefuls like to put forth initiatives where everything is free, such as wiping out outstanding student loans. They will offer anything they can in the hopes of getting elected, and let future generations worry about how to pay for it. Unfortunately, student debt needs to be paid back. Regardless of how attractive these candidates’ magical thinking may sound, the consequences for abandoning debt are real. Student debt doesn’t magically disappear on its own.
