5 Myths About Student Loan Forgiveness: Debunked


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.

  • http://twitter.com/MonroeOnABudget Paula Wethington

    Ginger – you brought up some good points including the fact that students “did what they were supposed to do and the economy failed them.” But the statistics I’ve found include the fact the average debt load for bachelor degree students does come in right about or a little less than starting annual salary. I have been working on a special report on student debt with a Michigan spin. It’s ready to go but it will be printed first in my newspaper, The Monroe Evening News, and then I will post it on my blog. The research includes statistics from Sallie Mae’s How America Pays for College report, The Project on Student Debt and Accounting Principals that include the fact that 60 percent of Michigan students with bachelor’s degrees in the class of 2010 had student debt and of those, the totals were averaging $26,675. That works out to payments of $306 a year on the standard 10-year plan. …. Now, what I learned beyond the loan amounts that are getting lots of attention this summer are the REASONS this pile of debt is happening. I heard stories of students running out of options because grants, scholarships, parents’ savings and part-time jobs would go only so far. A particular point that is popping up in headlines about the Sallie Mae report, and backed up by one of my sources, is that parents are shifting more of the expenses into the students’ names. But that’s just the start, as the length of time a typical student takes to earn even an associate’s degree is the connection few people have made yet. Yes, that’s adding to the cost. Although my report isn’t posted yet, the backgrounder files are up. Go to http://www.monroeonabudget.com and look on the left side for “student loan crisis: causes and solutions.”

  • Pingback: The Mortgage Forgiveness Debt Relief Act of 2007. : An article from: The Tax Adviser()

  • Pingback: 5 Myths About Successful Career. | The Skilled Ones()

  • http://www.50by25.com Laura

    Wow, didn’t expect that level of vitriol from what I thought was a rational response on my part!

    I graduated in 2007 with a liberal arts degree from a private university – which my parents did NOT help pay for; it was financed entirely through scholarships and student loans. I worked my butt off to get good grades, and basically hibernated fall semester of my senior year so that I could study companies and prepare for interviews – I had a job offer by Christmas for an analyst role in strategy consulting in New York.

    I was laid off in 2008, along with many of my friends (New York got hit pretty hard with layoffs). Very small sample set, I know, but those who were willing to do anything found new jobs (e.g., I took a $10k pay cut and moved to a different industry – getting that job offer within a week of leaving my old position), and those of my friends who were content with their fallback methods (i.e., parents would take them in and support them) and kept looking for a similar job to their old one did not. I have a few friends who are STILL unemployed, three years later, and from what I can tell, it IS for lack of trying. One of my still-unemployed friends doesn’t even have a resume put together! Ridiculous. Meanwhile, I see “help wanted” signs at many stores/restaurants/etc – but those jobs “aren’t good enough” for my friends. I get really bothered by things like the recent NYT article talking about recent grads living at home – there needs to be some sort of impetus to find a job, not just rely on your parents, and I think forgiving loans would even further remove that.

    Steven – you make a very good point about demand for different industries fluctuating.

    • Ginger

      Hi Laura,

      Then I think your original post should have made a disclaimer that from your perspective this has been the experience with your friends. The reality is that many people are indeed trying and have a few low paying jobs to help make ends meet. Your friends and their experiences are just that-their experiences, which don’t speak for the majority.

      • http://www.50by25.com Laura

        I also base my opinions on the many protestors at Occupy Wall Street. They wasted weeks invading a park and pestering hundreds of innocent people who were just trying to go to work, when they could have been out looking for jobs. They destroyed the businesses in the area (see: how McDonalds let them come in and use their restroom, only to have it get so backed up and flooded by protestors who cared only about themselves), and couldn’t even come up with a message beyond “we wish we had jobs.” I just have to agree with E on this one – if you really will take ANY job, there is work out there. It’s being picky that is causing people to be unemployed.

        The problem of underemployment that you allude to, though, is far different – and with that I sympathize.

  • http://www.50by25.com Laura

    I have to say I disagree with your opinion about buying what you can afford. The problem a lot of college students are having isn’t that there aren’t jobs available; it’s that there aren’t jobs doing what is applicable to their majors or that they want available. I think that if students open their eyes to jobs that maybe they wouldn’t have considered acceptable in the past, they would find some way to make ends meet and make minimum payments on their loans. It just feels like a copout to me to forgive student loans. If that’s the case, can I have back the money I already saved to pay back my college loans in full?

    • Joan FrisinaBowles

      First. Congratulations, if you already saved, all on your own, with no help, to pay back your college loans in full.

      Now, for the information you did not include. Go to Exporting America/jobs and labor overseas. There is a list, A thru Z, and there are thousands of employers on the list who have exported the jobs that these college students paid all that student loan money to get. Check out the list. Then come back and we will talk.

      • Ginger

        Joan you are right on target!

      • E

        Ignoratio elenchi: Students didn’t pay for future jobs, they paid for their (inflated) college tuition. Except they didn’t pay for their educations, they took out loans funded by taxpayer dollars.

        An analogy: should I take out loans to buy lottery tickets based on the possible winnings that my purchase generates?

    • Ginger

      Who says the jobs are available? Who says they aren’t trying? How do you know that they haven’t already tried and are working a minimum wage job?

      There are thousands of people doing just that so your explanation doesn’t quite fit the situation.

      Minimum payments only means they end up paying back double or even triple over the life of the loan. How is that better?

      I am happy you were able to save up and pay off your loan. But this isn’t always an option, especially for those in the 6 figure balance range.

    • L

      How about you shut yer trap and work on pullin’ yer head outta yer ass? Many of my friends who have degrees are applying to ANY jobs they can find, most of them are looking at doing work that has nothing to do with their majors to survive. I’m having to do the same. So, think next time before you open that mouth of yours.

      Not all of us are entitled brats who expected to waltz out into the market with a basket-weaving degree and expect to find a job making $50,000 a year from the start. In fact, a good majority of us are people who got our educations with the intention of better ourselves and our careers, are having to make many unpleasant compromises in terms the work we can find. That includes friends of mine who sought marketable degrees. I personally majored in Graphic Design, and can’t find work after graduating even mopping floors because all of my previous jobs have been working as a graphic designer. Now, don’t you think, as a sane and rational person, I’d be willing to compromise and take whatever would pay the bills to survive and pay back what I borrowed? Of course not. You’re one of those jackasses who thinks everyone in the current generation is a bunch of entitled pricks, because you have no ability or desire to empathize with their problem.

      Your “It doesn’t affect me, so why should we give them anything” attitude sickens me. Good for you, that you managed to pay back your loans in full. Most of us aren’t that lucky. Upon my graduation, I have EVER intention of working 70 hours a week for the next decade to pay back mine as quickly as possible. That was, however, easier said than done since I can’t even find work at a K-Mart thanks to my degree and employment history.

      Honestly, it’s selfish, ignorant, antipathic trash like you that’s poisoning this country. You should be ashamed of yourself.

      • E

        If you have a degree and “can’t find work after graduating even mopping floors,” your degree, by definition, is not marketable.

        Instead of attacking others over their prudence and success, blame your college and the higher education industry if you must blame someone else. That’s the industry that sold you out, with 5 or 6-figure debt for an unmarketable degree.

    • Steven Heydt

      The problem with trying to pick a career pathway based on what’s going to be available after you graduate is (at least) two-fold.

      First, it’s hard to say what exactly will happen from start to finish. Depending on the type of job, demand could fluctuate heavily.

      Second, you have to be realistic about what kind of work you are capable of doing. There are some great higher-end jobs that need filling, but not everyone is going to be capable of doing those jobs.

      The economy relies on some level of personal risk to function and grow because of the above.