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Monday, June 17, 2024

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Student Loan Forgiveness is Bad Policy

By Herald Staff

Here we are just months from the midterm elections and the Biden Administration is preparing to launch its one-time student loan forgiveness program. This program will not benefit anyone who used federal student loans and paid them back. This program will also not benefit anyone who receives a student loan after June 30, 2022. No, this is a one-time benefit and you have to be one of the 43 million or so borrowers who still have debt and whom the White House estimates will get relief.
These estimates are that 20 million or so of these borrowers will have their total loan forgiven and the remainder will have to pick up payments again when the almost three year old pause in payments expires at the end of the year. 
What gives here? 
We are told in a White House fact sheet that the soaring cost of college dwarfed maximum Pell grants, leaving students whose income was low enough to have qualified for those grants with added debt. Even those without Pell grants fell into the spiral of rising costs, an unrelenting push emphasized the need for a college education and the availability of easy to obtain federal loans.
We are told that the size of the student loan debt pool is such that it acts as a drag on the economy, preventing some young people from buying homes and doing other things that would benefit economic growth. 
But this is a one-time give away. What it does is transfer billions in debt to the federal government and ultimately the taxpayer. It benefits a specific group of borrows at a specific point in time. It corrects none of the factors that led to this moment.
It is critical to remember that this forgiveness comes with stipulations. 
First, the debt must be federal. Students who participated in the private student loan market are out of luck. Why? Because Biden is already on shaky legal ground forgiving federal debt. He has no authorization from Congress to forgive debt. As the coronavirus recedes, the administration is relying on pandemic-provided powers to argue that the President can do this by executive action only.
Second if students made voluntary payments during the payment freeze period, they can request a refund in order to add the amount that they had paid back into the pool for forgiveness. 
Third and most expected, the program comes with income limits. To qualify for forgiveness the borrower must make less than $125,000, or $250,000 if married. It is possible to be earning over a $100,000 a year and still get taxpayer relief on your loans. The White House says in most cases the benefits will go to lower income individuals.
How much can an individual get forgiven? The administration says up to $10,000, but this eligibility doubles to $20,000 if you received Pell grants while in college.
Best of all forgiveness will likely not be taxable. There is one complication. The feds cannot make the forgiveness tax free in the states, so we could end up with some states taxing the amount forgiven.
How much will this cost? The White House initially refused to give an estimate but did so later in the week. They say the program over 10 years will cost $240 billion. Many experts say it will cost more than twice that. One model developed by the Wharton School puts the price tag at potentially $1 trillion when all of the other ancillary aspects of the program are considered. 
The White House dismisses the Wharton projecting because the feds expect that only about 75% of those who could benefit will actually apply. It is an odd arrangement when the government hopes to keep the costs down by counting in a quarter of the people it aims to help not participating.
The program includes a new Income Driven Repayment (IDR) schedule. Under that feature future repayments for all student loans would be cut in half for most borrowers, with low income borrowers possible not making any payments.  
The White House also says the program will “reduce the cost of college.” This will not come from any true reduction in college costs but rather by “continuing to fight” to double the maximum Pell grant and make community college free. We are not going to change what colleges cost; we are just going to shift more of the burden to the taxpayers.
What does this program really do? 
The program sets up a moral hazard situation whereby future students may borrow more heavily assuming a new forgiveness program will relieve them of the debt. 
The program does nothing for those who dutifully paid off their obligations.
There is nothing here that deals with the real problem of the soaring cost of college, a relentless rise in cost that was enabled by easy money made available by the federal government. The White House speaks of “holding colleges accountable when they hike up prices.” Details on this are nowhere to be found. 
 Lastly the program continues the morally indefensible marketing of college as the solution to all things for all individuals. Those who should have options for trades and careers that do not benefit from a college education will still be enticed to borrow and go to college.
None of this makes this program good public policy.
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From the Bible:  
Pay to all what is owed to the lender. From Romans 13:7

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