Many have asked us at Vizionary Wealth Management for our take on the federal government’s recently announced forgiveness of student loans. By way of this blog post, allow me to weigh in.
While this discussion may not be a “red” or “blue” issue, it certainly is an emotional one. That is because a lot of people—including many of our clients—have worked tirelessly to make sure their kids would not have to be on the receiving end of student loans in the first place. Alternatively (and as significant) they have dug deep to pay off loans they or their family members have previously taken. Now, suddenly, the government has stepped in and waived the financial obligations of those in debt for $10,000 or less.
Is This An Example of Governmental Overreach?
On the surface, student loan forgiveness for a select group seems clearly unfair. But what is behind the new policy?
Understand, the federal government has backed somewhere between $1.75 and $2 trillion worth of student loans. Unfortunately, a very high percentage of these loans are not being paid back. This is because the students that received them simply cannot afford the payments since the degrees they earned (if at all, countless student loan recipients never even graduate from college or university) cannot be leveraged into high enough paying jobs. Ultimately, some debtors (young and old) have thrown in the towel, stopped paying down their debt, and have adopted a “screw it, come get the money from me” mentality.
A Cost-Benefit Analysis: Debt Forgiven or Collected?
Consequently, the federal government must operate an entire department to chase down debtors, many of whom owe south of $10,000. This comes at a cost, so our bureaucrats have asked themselves some important questions: "How much are we spending over time to collect on the existing student loan debt? What could we save in terms of spending if we limited these efforts? And might debtors be more productive members of society if they were freed from the emotional capital and stress tied to student loans in the amount of $10,000 or less?”
Clearly, the answers have tipped in favor of loan forgiveness and the federal government has acted accordingly. But remember, this is not a waiver of student debt across the board; rather, it is a lifeline to those earning less than $125,000 annually and applies to a maximum of $10,000 owing. As such, many of us with student loans will not benefit from this new policy—that is left to those deemed most in need.
Debt to be Satisfied Over Time
As a matter of economics, the federal government looks at student loan debt—and the amount now being forgiven—through a very long lens of its ability to float whatever hundreds of billions being waived as long-term, low-interest treasury data. This is spread out over the course of the next 30, 40, 50 or even 100 years. And then there is this: over time and factoring in inflation, the amount of capital the federal government will actually spend to pay back the forgiven debt erodes markedly.
Hopefully, this provides some context to ponder a very hot-button issue—a governmental decision that does not impact our economy or the state of the republic. And with that remember, at Vizionary Wealth Management, we are always here with perspective for the decisions ahead.