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Editor’s note: This is an opinion article based on the author’s views on certain facts, data and events, not necessarily the views of Bankrate or its editorial staff.
The Joe Biden Administration has granted 44 million Americans who have federal Direct student loans and PLUS loans more breathing room. The extension of forbearance, the pause in interest accrual and the suspension of collections activity will run through Sept. 30, 2021. The pandemic-related measure, along with the Democrats’ recapture of the Senate, has put the policy objective of student loan forgiveness front and center. Eradication of debt sounds like a great concept, but is it?
There are no simple answers, but I have landed in the camp of erasing student loan debt up to $10,000, but only for borrowers who earn under a threshold income of $75,000. Here’s why.
Student debt: A financial anvil on everyone’s shoulders
My opinion on education debt has evolved over the past few years. When I was pitching my book, “The Dumb Things Smart People Do With Their Money,” in 2017, one publisher pushed back on “DUMB THING No. 4: You Take On Too Much College Debt.” She said, “Don’t all of the surveys show that college grads make more money over the long run? Shouldn’t parents do everything in their power, including borrowing, to make that happen?” I responded, “Well, if they are imperiling their retirement — or the student is saddling herself with tens of thousands of dollars of debt just to attend a third-rate college like (unnamed college), then no, it’s not worth it at all.”
After the book was published in February 2019, Chapter Four was the only one that garnered contention. Families did not like my view, which in essence was: “Why are you spending — or even worse, borrowing — so much money on expensive schools that offer few advantages for your kids, while putting a financial anvil on everyone’s shoulders for decades to come?”
Sure, if students attend top-tier or prestigious universities, they can leapfrog their earnings, but those schools usually offer the best grants, so their graduates are not the ones who end up owing tens of thousands of dollars. I worried more about the students who attended the middle- to lower-tier schools — or those who couldn’t finish their education but ended up with the debt anyway.
Secure the family’s finances first
For the past three decades, I have implored anyone who would ask about college funding to first secure the family’s financial foundation. That includes paying down consumer debt, establishing an adequate emergency reserve fund (six to 12 months of living expenses) and maximizing retirement plan contributions. But that advice often falls flat because many parents feel compelled to provide every advantage possible for their kids. This is especially true for those who make too much money to qualify for major grants but not enough to save or pay for college out of pocket.
This experience was quantified by New York University professor Caitlin Zaloom, whose 2019 book “Indebted: How Families Make College Work at Any Cost” gave me additional insight into the student loan crisis. When I interviewed her for my podcast, Zaloom told me that because a college degree is an essential credential in the U.S. labor force, families believe that it is their “moral obligation” to steer their kids into the best institution possible. But over the past two decades, median incomes have stagnated, while college costs are soaring. To bridge the gap, middle-class families must now make their way through a “thicket of financial policies and programs” that Zaloom calls “the student finance complex.”
‘The student financial complex’
The complex has mushroomed and now amounts to a total of over $1.7 trillion, according to the Federal Reserve, and the question of whether to wipe the slate clean for a portion of the loans is a real possibility. During the campaign, then-candidate Biden outlined his policy education loan goals, which included:
- Help for undergraduate borrowers who earn $25,000 or less.
- Automatic enrollment in an income-driven repayment program, with the opportunity to opt out.
- Changes to the taxation of debt forgiveness.
- Cancellation of up to $10,000 in debt per year for students who work in national or community service, up to five years.
The Biden plan has also contemplated canceling $10,000 in debt for all federal student loan borrowers as part of pandemic relief measures.
Once Biden took office, various legislators, like Senate Majority Leader Chuck Schumer and Sen. Elizabeth Warren, have called for loan forgiveness of up to $50,000 in student debt per borrower via executive order. When asked about $50,000 during a Feb. 16 CNN town hall, Biden said, “I will not make that happen.” The Biden team may be relying on a Brookings Institution analysis that found just “6 percent of borrowers owe more than $100,000 in debt,” which represents about a third of the outstanding debt. “At the other extreme, 18 percent of borrowers owe less than $5,000 in student loan debt,” the study says. “They collectively owe 1 percent of the debt outstanding.”
Who would benefit from canceling student loan debt?
So, if $50,000 is not going to happen, the next question is, who exactly would be helped by erasing $10,000 of education loans? The Federal Reserve’s most recent Survey of Consumer Finances (SCF) noted that “student debt has consistently been disproportionately held by higher-income families, which likely can support their loan payments. Indeed, in each survey, more than half of outstanding student debt belonged to the top 40 percent of the income distribution, and the bottom quintile never held more than 14 percent of the debt.”
Researchers Sylvain Catherine and Constantine Yannelis found that “forgiveness would benefit the top decile as much as the bottom three deciles combined,” and that “Blacks and Hispanics would also benefit substantially less than balances suggest.” And of course, student debt forgiveness would not benefit the millions of Americans who did not attend college at all.
In an article for American Prospect, Hal Singer and Shaoul Sussman counter the argument that student debt cancellation is regressive, saying that it “would reduce the burden of student debt more for lower-income indebted households. Put differently, lower-income households would get the largest relief relative to their incomes.”
Supporters of student loan relief also point to the potential economic benefits associated with eradicating the debt. Policy experts at Capital Economics say that while canceling “$10,000 of debt for every borrower would cut that balance to $1.2 trillion and eliminate the student loan debts of 15 million borrowers,” student debt forgiveness would do little for economy, because most of these folks are paying about $250 per month, or $3,000 per year. “So even if student debt was eliminated entirely, the annual income freed up to spend on other goods and services would only be worth about $140 billion, or 0.6 percent of GDP.”
Singer and Sussman don’t buy it. The cite research from the Federal Reserve Bank of New York showing that student borrowers refrain from purchasing homes or cars as a result of their debt burdens. Without the anvil of debt hanging over them, they might be able to more fully participate in the economy.
My view: Borrowers, avoid paying down more than $10,000 outstanding
Wiping out any amount of debt will not solve the underlying issue, which is that the U.S. higher education system, with its steep price increases, must be reformed. Until that time, I have landed in the camp of erasing student loan debt up to $10,000 for those borrowers who earn under a threshold income of $75,000, because that is the group most burdened by their outstanding obligations and for whom the relief would be most impactful.
If you are in federal student loan forbearance currently and are lucky enough to have a job, you may still want to make payments on your loans in order to reduce the principal amount and shorten the term of the loan. However, do not pay down more than $10,000 outstanding, in case the Biden administration does sign the executive order. If you have private student loans, you’ll need to keep paying, as any executive action is likely to affect only federal loans.
Additionally, when you file your 2020 taxes, don’t forget to deduct up to $2,500 in interest paid on federal and private student loans before March 13, 2020, which is available if you earned less than $85,000 last year for single filers or $170,000 for joint filers. If you did not receive your Student Loan Interest Statement (1098-E form), which is usually sent to those who have paid at least $600 in interest for the calendar year, access the form online or contact your loan servicer.
Jill Schlesinger, CFP, is the Emmy-nominated and Gracie Award Winning Business Analyst for CBS News, where she translates complicated business and economic news into understandable, relatable topics for everyday viewers and listeners. She covers the economy, markets, investing and anything else with a dollar sign on TV, on the “Jill on Money” podcast, radio (including her nationally syndicated show, “Jill on Money,” which won the 2018 Gracie Award for Best National Talk Show), the web and her blog, “Jill on Money.” Jill also won a 2018 Personal Finance Reporting Award from the Radio Television Digital News Association (RTDNA)/National Endowment for Financial Education (NEFE).
Prior to her second career at CBS, Jill spent 14 years as the co-owner and Chief Investment Officer for an independent investment advisory firm. She began her career as a self-employed options trader on the Commodities Exchange of New York, following her graduation from Brown University. Jill’s first book, “The Dumb Things Smart People Do With Their Money,” was published in February 2019 by Ballantine Books.