Should student loans be forgiven?

[matrixman124]

9 hours ago, Raptorpat said:

It's a reflection that the entire system is broken. It's not the entire fix, it's just simply the most splashy component because it's the most tangible. 

For the sake of this conversation, I'ma focus on the tangible impacts on those who received loans (setting aside all the other issues, like the lifetime of societal pressure to go to school and promise of class mobility, the lack of financial literacy education in high schools, or the impacts of widely accessible loans on the growth in education costs). Pre-COVID, half of America all had to make our monthly payments like any other loan because we're charged interest (in the range of 5-8%), which is all a normal loan thing. But there are a number non-normal things, or normal things that combine to create a non-normal outcome:

• Here's the key thing - paying anything less than the amount of interest that accrues for the month means your interest continues to accumulate, and you can't touch your principal until you've paid off all your accrued interest. It seems kind of basic but let's see how it adds up.
• Unpaid interest that accrued during the schooling period capitalizes and increases the size of the principal, which increases the amount of interest that accumulates.
• Loans were deferred for people who didn't land a "real" job right out of school, or they payed a minimum-to-zero amount via the basic IBR repayment (obligating you to pay an income-derived amount rather than the default 10-year repayment plan) while they ramped up their career, all while the excess interest accrues.
• As a person's income increased, the minimum IBR payments increased, however even if the person ever reached the earning capacity anticipated to adhere to the default 10-year payment plan, that doesn't account for all the excess interest that accrued during the deferments or IBR periods. 
• If someone completely fell under water, student loans could not be discharged in bankruptcy.
• Outside of the specific public sector program (which we all know had its bureaucratic issues), basic IBR loans are forgivable after 25 years' (it might be 20, not sure off the top of my head) worth of on-time monthly payments. For those who think making IBR payments for 25 years is a sufficient way out, the tax code treats the entire forgiven amount as taxable income and the person then owes the IRS - basically starting the entire process over.
• And just to top it off, the student loan interest tax deduction is capped out at $2,500, but that amount adjusts downward and phases out at certain income thresholds.

So given all that, the focus of student loan forgiveness is not the people who aren't making their payments or otherwise cheating the system. The focus of student loan forgiveness is the people who have been dutifully making monthly payments to the best of their income capacity and aren't appreciably touching their principal. People who have paid thousands or tens of thousands of dollars back but their loan balance hasn't changed, or is only getting bigger. Then after scraping by for 25 years, the whole process restarts but with the IRS instead of DOE, and the IRS likes to wear leather.

To the extent that student loans obligations ballooned exponentially for an entire generation, that is a societal problem regardless of whether some people have succeeded in paying theirs off through sacrifice or luck, or whether others never needed them in the first place. It affects the macro economy. We've all heard (or lived through) more than enough stories about millennials deferring home ownership, marriage, kids, or whatever consumer demands because of student loan debt. That is a massive social and economic problem. It's no coincidence that home sales and consumer demand skyrocketed with the student loan freeze. (As an aside, to the extent that this pent up demand factors into inflation [when factoring out fuel and food prices due to global instability], it's probably more accurate to say the consumer economy experienced artificially deflated demand for years prior.)

 

So all that said, we turn to solutions to address the structural failures:

• Blanket forgiveness for existing loan holders under income threshold. To grease the skids, Chuck Schumer and Elizabeth Warren slipped a five-year exemption for student loan forgiveness from the income tax. (Ideally this provision is extended or made permanent so that future IBR payors don't have to worry about the 25-year "tax bomb".) Everyone's head about and has an opinion on forgiveness, so there's not much to say here.
• Structural reforms for the future of the program. The DOE will promulgate a regulatory reform that allegedly does the following (from press release):
  • For undergraduate loans, cut in half the amount that borrowers have to pay each month from 10% to 5% of discretionary income.
  • Raise the amount of income that is considered non-discretionary income and therefore is protected from repayment, guaranteeing that no borrower earning under 225% of the federal poverty level—about the annual equivalent of a $15 minimum wage for a single borrower—will have to make a monthly payment.
  • Forgive loan balances after 10 years of payments, instead of 20 years, for borrowers with original loan balances of $12,000 or less. The Department of Education estimates that this reform will allow nearly all community college borrowers to be debt-free within 10 years.
  • Cover the borrower’s unpaid monthly interest, so that unlike other existing income-driven repayment plans, no borrower’s loan balance will grow as long as they make their monthly payments—even when that monthly payment is $0 because their income is low.
• Not typing it all out, but this and the various other reforms are here: https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/24/fact-sheet-president-biden-announces-student-loan-relief-for-borrowers-who-need-it-most/

 

Based on the above, I highlighted the bullet that I think will make the most systemic difference to the student loan system. I am 100% biased, and obviously the blanket forgiveness part is in the news due to its extreme tangibility, but I think it's absolutely crazy that the fourth bullet has not trickled into the public discourse.

I have seen it come up on Twitter. The main problem has been the detractors screaming about how it's unfair for everyone else and people engaging in their stupid ass arguments.

[discolé monade]

My final attempt to help those that don’t understand the student loan game.

Mortgage: At closing, you know exactly what you will pay back. Interest is calculated monthly. Extra payments pay down principal.

My Mortgage was $135k for a 30-year loan in 2004. Refinanced once for lower interest rates and terms. We made a couple of lump sum principal payments and the house was paid off in 2021. That's 13 years early.

Student Loan: Interest is compounded daily. Extra payments go toward future payments, not to pay down the principal. If you don’t make a monthly payment because you are paid up in advance, your interest is still calculated daily.

I was told if I made my payments on time (I never missed a single payment nor paid late) loan would be paid off in 20 years. I won’t say the college financial aid rep lied to me. What I will say is she probably didn’t understand it herself.

I was also told about the Public Service Forgiveness. Make 10 years of payments and the rest is paid off. Well, when I applied, I was told my loans weren’t eligible.

I borrowed $45,000 in student loans

First 10 years I paid $275/month = $33,000

Next 15 years I paid $550/month = $99,000

1 final lump sum payment = $16,000

Total $148,000

Mortgage $135k paid off in 17 years for a total of $183,000.

Student Loan $45k paid off in 25 years after making a final $16k payment for a total of $148,000.

Yes, you can say everyone should know better, but chances are you wouldn’t have known any better either.

We are told over and over that your way out of poverty is through education. Yet, the poorest, most vulnerable, first-generation college students are just happy to be living their dream and trying their hardest to escape the cycle of poverty.

What the government should do is take every penny people have paid toward interest and apply it to the principal and preferably stop charging interest. This would probably pay off many loans. At the most, the loans should be set up like a mortgage.

Anyone who reads this and doesn’t understand the system is broken doesn’t want to understand.

 

Mary Jacob/FB