On occasion we receive comments and notes from readers that we ask their permission to print. One such note came this week on an issue in the forefront – Student Loans.
This is a hotbed issue with progressives pushing to eliminate all student loan debt. Democratic leaders wanting to limit it to ten thousand dollars per person.
On the other side many say no way, that is totally unfair to those who paid their bills, worked their way through college or chose a different path. The issue will linger.
Here’s one readers thoughts and solutions. Thank you to him. Your responses are welcome.
A Reader On Student Loans
Unconditional Forgiveness of Student Loans- There are alternatives to this fiscal insanity
There is no denying that the $1.7 trillion dollars in Student Loan Debt is an issue that should be addressed in some manner. The current thinking out of DC is to unconditionally forgive all or provide some relief, as forgiving up to an amount as $10,000. Neither comes near to solving the systemic problem. They just kick the can down the road.
So, let’s assume we go with loan forgiveness today. In a few years we’ll be faced with a similar situation from new graduates. Rightfully, with precedence being set, we end up forgiving a new round of loans and repeat this cycle ad infinitum. We’re doing the same thing over and over and expecting different results. It’s fiscal insanity.
Unconditional forgiveness also creates a societal moral hazard. Taking away the consequences or the need to act in good faith can pervert the content of one’s character and increase the likelihood a similar offense will be repeated by the individual or others. Sadly, it is promoting a societal behavior that is way too common already.
In addition, it’s a “kick in the butt” to those individuals who sacrificed in many ways to pay off loans, or pay their kid’s way through college, and/or made the hard choices to select less “attractive” less expensive schools. Notwithstanding the “joy” they get knowing that as a reward for their sacrifices they will also be paying for someone else’s kid college.
There is a readily available way that can at the least provide a path to payment. Allow employee and employer contributions to 401k-like plans be used to pay monthly loan payments (without any early withdrawal penalties). Being tax-deferred income, usually on low tax-based individuals, there is no material near-term cost to the government for this option.
To jump start it, instead of picking winners and losers in the “great government giveaway” – provide a temporary benefit for all working- and middle-class individuals. For all participants in “401k-like” plans, the government provides a matching contribution tied to some percentage as 100% of total annual contributions. Set an annual limit of a fixed dollar amount as $2600 or $50 per week and include an eligibility limit tied to an amount as under max social security taxed salary ($147,000). In addition to the loan issue, it also helps address another great financial challenge- funding retirement. The aggregate amount of government contributions over 3 years for this approach is most likely be less than the option of providing $10,000 relief to the 44 million Americans with loan debt.
Even those that marginally make over minimum wage receive a material benefit to help pay off their loans. Example: A $20 an hour employee working a 40-hour week who contributes 6% and receives a 3% employer match, with the government match will annually have $6,864 in available funds for paying student loans. (Roughly what is needed to cover the annual payments for a $51,000 student loan balance to be paid over 10 years.)
It is a systemic problem and not just an outstanding debt issue. But providing an equitable path to solve the debt issue would be a great start. Hopefully, we just don’t kick the can down the road by following the path of fiscal insanity.