The Cost of Wiping Out Student Debts

The real price of federal debt forgiveness programs

Ric Edelman: It's Tuesday, April 30th. Over the past week or so, I've been talking with you about the federal budget, and the deficit, and the national debt. I explained that our total spending is more than our, I explained that our total spending is more than our total income, and that our discretionary spending is just a small portion of the total budget. 

So, for the little that we have control over, we decide what to spend it on and what we decide matters a lot. In that context, along comes the president's latest plan to eliminate yet more student loan debt. President Biden just cancelled another $7.4 billion on student loan debts, bringing the total to $153 billion in debt that 4.3 million borrowers will not have to repay. Instead, taxpayers will pay it. See, these debts don't go away when the government forgives them. They simply shift from borrowers having to repay it to the federal government having to repay it. All the student loans that get forgiven get converted into federal debt. It gets added to the $28 trillion that we have in national debt. With the limited resources we have at our disposal, with all the issues we face, with all the needs that are before us, is using billions to forgive student loans the best use of that limited money? I don't think so.  

But the president sure does. He says he's going to try again to wipe out the debts of 30 million people. He tried once before, but the Supreme Court said it was illegal. The Department of Education says the President's new plan will cost $150 billion. But a separate analysis says the plan could cost twice that much. Everybody in the media, on both sides, liberal media as well as conservative media, they're all tying the President's new proposal to the election. 

Polls are showing that President Biden is trailing Donald Trump among adults under age 30. They're the ones who owe a lot of these student debts. The administration says that debt forgiveness will begin this fall, just in time for the November elections. And a Biden administration official told reporters that, quote, “we are not concerned about an inflationary effect,” unquote. 

Eh, alrighty then. I've said before that I object to all these programs that are waiving student loan debt. It's not only bad fiscal policy, since we've already got $28 trillion in debt, this just adds to it. It's also bad moral policy. These debts were voluntarily taken by students. They now regret their decision. Well, that's life. We all have regrets. That's not a reason to relieve you of your obligation that you sought and accepted in good faith. It's not my fault that you spent more than you needed to, or that you borrowed more than you should have. Students got themselves into this mess. They need to get themselves out of it. 

How do they make their situation so bad? Well, 80% of students change their majors at some point. 25% change schools. When you change your major, you've got to take more courses because the courses you took in your old major don't count toward your new major's graduation. And when you change schools, the new school makes you take classes you already took at the old school because they want the tuition revenue. This is why 60% of students take 6 years to get a degree. And that's why they're so much in debt. Because instead of graduating with 120 credits, they end up graduating with 180. And at $3,000 per credit, they're not only wasting two years of their life, they're getting a degree in six years instead of four. They're spending tens of thousands of dollars more than necessary. And then they graduate with a degree that doesn't help them get a job. So they end up not paying their student debts. And so they complain about all of this to the government.  

The president's new plan will waive the debts for people who have not paid off their debts in 20 years. He'll waive the debts for people who got degrees in fields that President Biden calls, quote, “low financial value.” Fields that don't give the students good job opportunities, I guess. He's also waiving the debts for people who are experiencing financial hardship. Not that he's defining what financial hardship is, of course. And for sure, he's not going to acknowledge that the financial hardship they have is because they can't get a job because they chose a degree that's worthless in the job market. 

So, let me get this straight. These people chose the wrong school. They chose the wrong major. They selected a more expensive school than necessary. They got unlimited loans, because there's no repayment qualification to them. And when they drop out, which 50% do in their freshman year, or when they graduate with a degree that's worthless in the job market, or they simply choose not to pay off their loans, the government is telling them, hey, don't worry... we'll forgive the debt. Have a nice day.  

A good friend of mine's kid is graduating this year. My friend was excited that starting next month, he doesn't have to pay tuition bills anymore. All that money he's been paying for the past four years is over. He's so excited. I told him he's an idiot. He should have let his son borrow the money to go to school instead of him paying the bills for his son, and then the son could simply not pay the loans back and wait for the government to forgive the loans. This kid would have a free education. Instead, my friend forked over $150,000 over the past four years in cash for his son's education. I was being facetious, of course. He's my friend. We were joking around. But yeah, just think about all the people who didn't go to college because they couldn't afford it. Or they chose a cheaper school. Or they chose a major specifically for the job prospects. Or their parents got second jobs to raise the cash to pay for their kid's school. Or they raided their own 401k to find the money for their kid's school. Or they borrowed against equity in their home instead of getting a student loan. None of these people are getting any benefits from the President's Student Loan Forgiveness Program. How is this fair? And while all this is going on, Vanderbilt University is now starting to charge students $100,000 per year. Well, why not? Students don't have to pay that. They'll just get loans. And the loans will get forgiven. 

So go ahead, Vanderbilt. Why stop at $100,000? Make it $200,000. Government will bail you out. And here's my biggest lament. The overwhelming majority of the people listening to this right now thoroughly disagree with me. In all the polls I've seen on the subject, more than 80% support the President's plan to forgive student loans. Well, of course they do. Half of all US households have student loans. There aren't very many people looking at the bigger picture here. Everybody's focusing on what's in it for me. Without considering the moral hazard, the lesson we're teaching our kids, we're not considering the impact on the federal deficit or the federal national debt. I want money. I'll vote for whoever gives it to me. So yeah, the president is doing everything he can to win by buying votes for November.  

I did an earlier podcast on the fact that people tend to vote with their pocketbook. Remember, it's the economy, stupid. So yeah, President Biden is smart to be doing this. It might be distasteful, it might be morally wrong, but it's smart politics. If you can't give the people what they need, give them what they want. If I was a financial advisor today, I'd be telling my clients to max out their student loans and never pay them off. I'd tell them to invest the money instead. Worst case, you can pay off the debts later. If you, in fact, end up having to pay them at all. But the way things are going, it's looking more and more like college really is going to be free.  

On tomorrow's show, the future of maternity wards. 

----- 

Announcer: Have you registered for VISION? DACFP’s biggest crypto conference of the year. It's exclusively for financial professionals and accredited investors. It's June 2nd to June 4th, in Austin. You'll get the latest cutting-edge educational content and actionable ideas from leading investors and industry thought leaders. The information you need about crypto to serve your clients and attract new AUM. This event is designed to maximize your learning experience. No breakout sessions. So you don't miss a thing. Private one one-on-one meetings and dine-arounds. Check out our list of speakers at DACFP.com. VISION has sessions on all the latest in crypto, spot bitcoin ETFs, capturing alpha in crypto stable coins and CBDCs tokenization, AI and crypto. The institutional view of crypto and a whole lot more. And of course, terrific networking. You can also sign up for the optional pre-conference workshop, an introduction to blockchain and digital assets, a four-hour course taught by Ric Edelman. This course includes continental breakfast, lunch, and a cocktail reception at 5:00pm. Registration is only $149 – secure your spot for VISION now at DACFP.com.  

----- 

Subscribe to podcast updates: https://form.jotform.com/223614751580152 

Ask Ric: https://www.thetayf.com/pages/ask-ric 

----- 

Links from today’s show: 

VISION – Register Now: https://dacfp.com/2024-dacfp-vision/  

It's the Economy, Stupid (3/27/24 Episode): https://www.thetayf.com/blogs/this-weeks-stories/its-the-economy-stupid  

----- 

Follow Ric on social media: 

Facebook: https://www.facebook.com/RicEdelman 

Instagram: https://www.instagram.com/ric_edelman/ 

LinkedIn: https://www.linkedin.com/in/ricedelman/ 

X: https://twitter.com/ricedelman 

YouTube: https://www.youtube.com/@RicEdelman 

----- 

Brought to you by: 

Invesco QQQ: https://www.invesco.com/qqq-etf/en/home.html 

Schwab: https://www.schwab.com/ 

Disclosure page: https://www.thetayf.com/pages/sponsorship-disclosure-fee 

-----