The Washington Post published an article this morning which centered on the myths around student loan forgiveness. Admittedly I was irritated because I find the writer’s statements intellectually insulting and disingenuous.
Before I go in on this article, yes, I am well aware that many people feel that the Occupy Wall Street movement lacks a clear sense of who they are and what they want. But one thing is clear, whether or not you belong to that movement, if you have burdensome student loans, then you’re probably hoping, wishing even for loan forgiveness.
1. Forgiving student loan debt would help stimulate the economy.
People who want all student loan debt forgiven argue that getting rid of monthly loan payments would lead to increased consumer spending, thereby providing a quick boost to the struggling U.S. economy. However, only about 40 percent of all outstanding student loan debt is actively being repaid. The remaining borrowers are still in school or otherwise not paying their loans back, so they wouldn’t immediately benefit from forgiveness.
There are thousands of people out there who have deferred their loans and their lives due to the fact that they are unable to purchase a home, start a business or start a family due to burdensome student loan debt. If they were able to do these things then it might support the desperately needed tidal wave to jump start the economy. Note, the position here isn’t that this would be the sole factor needed to boost the economy, but it would certainly help. In 2008, no one thought the housing market would crash the way it did, yet we saw large banks (Lehman Brothers much?) fail and millions of people lose their homes with others drowning in underwater mortgages.
The reality is that many homeowners and student borrowers were not privy to the back dealings going in behind the scenes which led to the 2008 crash and ensuing recession. See the movies Client 9, Too Big To Fail and Inside Job, tells the tales of the backroom deals. Many homeowners did what they were supposed to, bought a home they were able to afford, but due to the recession, lost their job, cleaned out their emergency funds trying to stay afloat but still ended up in debt and homeless.
The same goes for student loan borrowers. In some cases the debt owed is relatively low (compared to 6 figure debt) because they worked through school with the expectation that they would find a job upon graduation to pay off the loans. They did what they were supposed to do and the economy failed them. So this accusation levied towards many young borrowers is baseless and rather disingenuous. They went to school instead of sitting on their butts at home waiting on a check or begging for welfare.
2. All education debt is good debt.
Certainly, taking out loans to pay for college is an investment in your future and a key to a better-paying job. So it’s good debt. But too much of a good thing can be bad for you……A good rule of thumb is that students’ total debt at graduation should be less than their expected starting salary — ideally, a lot less.
Where does he live? No, where has he been? In what world (certainly not the one we live in!) will students ever graduate with student loans that are equal or less to their starting salaries? Yes, this is a solution I have often thought about but it is far less than realistic given the fact that schools like The George Washington University cost no less than $50k per year for students who live on campus. State schools like UVA will end up costing students at least $15k per year when living on campus. These ideas are dead in the water.
3. If you declare bankruptcy, your student loans go away.
Neither federal nor private student loans can be discharged in a bankruptcy unless the borrower files an “undue hardship” petition — which often involves a very harsh and high standard that was set in a New York state case more than 20 years ago. It requires that the borrower cannot maintain a minimal standard of living while repaying the loans, that the circumstances that prevent repayment will probably persist for most of the life of the loans and that the borrower made a good-faith effort to repay the loans.
I’m sorry but is this a news flash we somehow missed? This is a well established fact which explains why so many people are angry and frustrated! Students, former and current understand that they are unable to discharge these loans in bankruptcy. Meanwhile, someone who deliberately bought more house than they can afford is allowed to discharge the mortgage in bankruptcy and start over with a clean slate? Bankruptcy is hardly a cake walk, however, at least this is an option for borrowers who can’t pony up the cash to keep their underwater home. Students who went to school with the intentions to better themselves are left in the dark with lukewarm solutions which don’t solve the problem.
4. Widespread defaults on federal student loans would worsen the government’s deficit.
Some people argue that the student loan “bubble” could be the next to pop. Yet despite the recent increase in default rates to nearly 9 percent, federal education loans remain profitable for the government. Default rates would have to more than triple for the government to lose money on federal education loans.
Welcome to the reality that this just might happen. What the unemployment rate doesn’t include are people who are unable to claim unemployment or people who just haven’t done so for one reason or another (ineligible, homeless and unaware of their benefits etc) As a result, yes, those of us who are tracking this topic know that this is the next bubble to POP! These are the same kind of statements clowns like this writer made just before the real estate bubble popped and we all see where that’s taken us.
5. The federal government should get out of the student loan business — the private sector can do it better.
No, correction, the federal government should get out of the student loan business and stop acting like the sharks they claim to protect the citizens against in the interest of consumer protection. The writer of this article wrote the following statement which supports my point:
“the government has strong powers to compel repayment on defaulted loans. For example, it can garnish up to 15 percent of take-home pay without a court order for a borrower who is 12 months behind on student loan payments. The government can also intercept federal and state income tax refunds and lottery winnings, and offset up to 15 percent of Social Security disability and retirement benefit payments. ”
Private loans make up a relatively small percentage of total education debt. Some private loans currently offer lower interest rates than federal education loans — but most of those rates are variable and restricted to borrowers with excellent credit or with a creditworthy co-signer (usually a parent). Interest rates are unusually low now, but the rates on variable loans are likely to start increasing soon.
I don’t yet see how they would get out so that the private sector can do it better. Who says the private companies do it any better? They lobbied back in 2005 to make it so that private student loans could not be discharged in bankruptcy. Furthermore, unless you went to school 20 years ago, the private loan rates are much higher than the federal government rates. I just keep wondering where this writer is getting his information from and who is paying him to vomit up this rubbish?
Clearly, my position on the matter is that the student loan bailout would be a good idea. If it’s good enough to bailout several big banks who were deemed too big to fail then it’s good enough for student borrowers who could otherwise help spur on the economy with new businesses, buying homes, paying down other debt and starting families. I am a huge supporter of Barack Obama, however, this is an area he should do more to support the generation that helped put him in office.