I’m going off topic a bit this week to talk about a financial matter that impacts us all.

Loan Forgiveness for Students

In August, President Joe Biden announced a student loan forgiveness plan that had been hinted at since he was running for President. Under the terms of the plan, federal student loan borrowers would see up to $20,000 of their debt forgiven.

One of my prior objections was that there wasn’t a means test in previously-floated proposals. In other words, a very wealthy person who still happened to have student loans would see that wiped away.

The plan that was released addressed that objection by excluding high-income borrowers from receiving debt forgiveness.

Individuals who make less than $125,000 a year and married couples or heads of households who make less than $250,000 annually will see up to $10,000 of their federal student loan debt forgiven.

If a student also received a federal Pell grant while in college, they are eligible for up to $20,000 of debt forgiveness.

The Skyrocketing Cost of College

Before commenting on the plan itself, let me just say that I agree that skyrocketing college costs are a problem. I worked my way through college, but it would be more challenging today. It wouldn’t be impossible — after all there are many choices one can make to improve the affordability of college — but the costs of college have made it more difficult to get a college degree without going into debt.

Second, predatory lending is a problem. We are lending large sums of money to people just entering college. In many cases they are financially naive, but they are allowed to accumulate tens of thousands of dollars in loans. Credit card companies are also a major presence on college campuses. They sign up freshmen for high interest credit cards, and before you know it these students are like most Americans: Making payments every month just to pay interest on the debt they have accumulated.

That’s a pet peeve of mine, because the money going to service that debt could be going toward investments that will make people financially secure. Americans pay a mind-boggling $120 billion annually in credit card interest and fees each year. That’s money that could be making them wealthy.

OK, rant over. We have a problem with college affordability. Somehow, we have to fix it.

This Plan Doesn’t Fix The Problem

The problem I have with the proposed plan is that it doesn’t do that. It does nothing to address the underlying factors that caused the debt in the first place. In fact, it may make the long-term problem worse.

Within the range of people who owe money, there are those who made sound financial decisions. Then there are those who made careless financial decisions. They blew that money on things they didn’t need. I know some of those people personally. Now, they don’t have to be accountable for those decisions. That, in turn, will incentivize more people to borrow money in the hope that the debt will be forgiven.

To be clear, this debt doesn’t just disappear. It shifts to taxpayers, where we all share in repaying debts, whether from good financial decisions or from irresponsible financial decisions.

That brings me to my final issue with the plan. It’s the same objection I was voicing two years ago when generous stimulus payments started to show up in our mailboxes. I wrote at the time that these payments would be inflationary.

In response to a Facebook comment on this, one person asked “How could this be inflationary? We are just forgiving debts.” Sure, but how does that work? People who are paying for debts will see those payments vanish, and now that money will be available to buy other things. “That’s great!”, you might think. It’s good for the economy.

However, it is inflationary. When you flood money into the economy — just as we provided everyone with cash during the pandemic — demand is going to go up for all kinds of goods and services. If supplies can’t meet that increased demand — which is what we have seen over the past two years — you end up with 9% inflation.

Nevertheless, some have challenged President Biden’s authority to implement this plan. A number of Republican legislators have threatened legal challenges against the plan. So if you are expecting loan forgiveness, don’t start spending that newfound money just yet.

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