It will actually make it much, much worse.

4 minute read

In this hyper-partisan era, I’m usually ecstatic when Democrats and Republicans decide to work together. Regardless of my personal beliefs, I realize it’s best for the country when our leaders unite to attack our country’s problems.

Except when it comes to student loans.

Earlier this month, Forbes reported, “Rep. Vincente Gonzalez (D-TX) proposed to cancel student loan debt in new congressional legislation aptly called the Student Loan Relief Bill.”[1] It would forgive $25,000 of student loans and cancel a total of $775.5 billion in student loan debt.

Three days later, Forbes ran this headline: “Trump Includes Student Loan Forgiveness In Latest Stimulus Proposal, Signaling Its Broad Appeal.”[2]

Trump’s idea is much more modest than Gonzalez’s, Forbes reported:

“The administration is now proposing that $25 billion of the $1.8 trillion package be dedicated to student loan forgiveness. This figure represents only a tiny fraction of the estimated $1.7 trillion in total outstanding student loan debt, indicating the effort would have a small impact if enacted.”

Then there’s Joe Biden’s plan. Sticking with Forbes: “Biden would forgive all undergraduate federal student loan debt for borrowers with annual incomes under $125,000 who attended public colleges and universities. … Biden also supports $10,000 in across-the-board student loan forgiveness for all borrowers as an economic stimulus in response to the recession.”[3]

The headline? “Biden Affirms: “I Will Eliminate Your Student Debt.”

While these proposals vary in the details, they all suffer from the same fatal flaw: You can’t give away enough tax dollars to solve the student loan crisis.

Too big to buy out

Student loans are such a huge problem, it’s hard to grasp just how bad it really is.

In 2010, the total student loan debt in this country was $830 billion. A decade later, it’s nearly double that, at $1.6 trillion. What changed in 2010? The federal government took over the administration of public student loans from Sallie Mae.

Now more than 40 million Americans have student loans. When you consider there are 209 million Americans over the age of 18, that means nearly 1 in 5 of us owe our own government – and not a little bit.

College graduates today receive a diploma and a bill for an average of $37,000 in student loans.

You might think with loan burdens like these, our institutions of higher learning are cutting costs and living leanly. Sadly, no. Not when they know the government is guaranteeing their expenses. Maybe that’s why CNBC reported last year that over the past decade, “costs increased by roughly 25.3 percent at private colleges and about 29.8 percent at public colleges.”

Meanwhile, inflation rose less than 3 percent over the same time period. What’s that money being spent on?

“Forty years ago, America’s colleges employed more professors than administrators,” Washington Monthly has reported. “Today, administrators and [other] staffers safely outnumber full-time faculty members on campus.”

Earlier this year, David Randall, research director at the National Association of Scholars, put it bluntly: “American higher education is also grotesquely top-heavy. Deans and Provosts have multiplied like rabbits.”[4]

If that’s happened since the federal government got more deeply involved in student loans, imagine what will happen if that same government starts forgiving loans.

Cruel psychology

Whether it’s Trump or Biden or Congress, any form of loan forgiveness won’t look as good in the real world as it does on paper. Why? Not because of the math, but because of the psychology.

Not only will college administrators take even greater advantage of the system, but young college graduates will learn the wrong lessons.

First, what about those diligent grads who have spent many years and many dollars paying off their education? What do they get, besides angry?

Second, what message do we send to young people? When you get too deep into debt, someone will bail you out? If we start down this path, here’s a prediction: These new college grads will one day buy too much house, get saddled with too burdensome a mortgage, and then demand mortgage forgiveness just like they did with their student loans.

The unsexy solution

So what is the solution? Because if there’s another bipartisan consensus, it’s that the status quo can’t continue.

I’ll propose something that may not happen, simply because it’s not sexy enough for most politicians to campaign on: Slash the interest rates on federal student loans.

Right now, the average interest rate is 5.8 percent among all households with student debt, according to New America, a nonprofit and nonpartisan think tank. I propose cutting those to 1 or 2 percent.

It’s unlikely that will cover the default rate and other expenses for administering those loans, but it will still be cheaper than forgiving loans. It will split the difference between wiping out debts and sharply subsidizing them.

It will send a message that education isn’t free, but that we’re investing in Americans. Even if you’re skeptical this will work, then I say this: Let’s start there. Because once you forgive loans, or start talking about free college, there’s no going back. You can’t put that genie back in the bottle.

If you need proof of that, look across the pond. It was a decade ago that riots erupted in London. “An estimated 50,000 turning out to vent their anger at government plans to raise tuition fees,” The Guardian reported on Nov. 10, 2010.[5] “Protesters smashed windows and waved anarchist flags from the roof of the building housing the Conservative party headquarters as the fringe of a vast rally against university funding cuts turned violent.”

Sadly, once you offer something for nothing, people will never agree to paying anything ever again. If the United States experiments with free college, don’t expect to go back without similar protests. Even worse, expect Americans to take free college for granted in other ways – treating it like many do high school.

Here’s the simplest truth: People who pay something for their education will also pay more attention to it.

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About the Author

Howard Dvorkin, CPA

Howard Dvorkin, CPA

I’m a certified public accountant who has authored two books on getting out of debt, Credit Hell and Power Up, and I am one of the personal finance experts for Debt.com. I have focused my professional endeavors in the consumer finance, technology, media and real estate industries creating not only Debt.com, but also Financial Apps and Start Fresh Today, among others. My personal finance advice has been included in countless articles, and has appeared in the New York Times, the Washington Post, Forbes and Entrepreneur as well as virtually every national and local newspaper in the country. Everyone should have a reason for living that’s bigger than themselves, and besides my family, mine is this: Teaching Americans how to live happily within their means. To me, money is not the root of all evil. Poor money management is. Money cannot buy happiness, but going into debt always buys misery. That’s why I launched Debt.com. I’m glad you’re here.

Published by Debt.com, LLC