In June, talk show host Rush Limbaugh predicted that presidential candidate Hillary Clinton would announce a plan that would forgive all student loans for current graduates. Stating that it was a potential grab to appeal to millennial voters, Limbaugh said she had already hinted at it when she stated she considered it outrageous that students have to take on so much debt to get a degree without the option to refinance federal loans. To appeal to Bernie Sanders voters who are not won over yet by Clinton, this may be her attempt to bring them over to her side. However, at what cost? Eliminating the $1.4 trillion in student loan debt is a lovely idea in the abstract, but it is not the least bit practical.
Under Clinton’s plan and mindset, millions of Americans would suddenly have hundreds or thousands of dollars left over each month to spend on other things. Proponents claim that this would stimulate the economy, giving Americans more money to spend on homes, cars, goods and services. In theory, that increased spending would lead to more demand, build new jobs and result in the launch of new businesses. Additionally, college would be free for most, allowing students to attend college without taking out loans or worrying about paying back their debt when they graduate.
Where it Goes Wrong
However, student loan debt forgiveness is a terrible, horrible, no good and very bad idea. Student loan forgiveness will not encourage more people to go to college; it only forgives the loans of people who have already graduated. A new program would have to be in place that would make loans obsolete and college free, which carries its own issues.
Loan forgiveness would only encourage schools to raise costs. If they know that students are not responsible for their loans and the government will cover them, universities have no incentives to keep costs and tuition down. Knowing that they will not have to carry the expenses, students would not have to be practical about their school choice; instead of choosing the excellent local state school, they could opt for a private college in the tropics because they will never be responsible for paying it back. Who would not want to go to school in Hawaii and party and tan all day, on the government’s dime and never needing to pay a dollar of it back?
Many anti-loan advocates suggest that borrowers do not know what they are getting into, but they do–they are adults. When I was in school not so long ago, I had to take a quiz and pass it before I was able to sign a promissory note. I had to know my interest rate, grace period and repayment terms. Taking away their autonomy and accountability sets a dangerous precedent. When another recession hits, when businesses close, bailouts will become the norm.
Regarding macroeconomics, it is just a bad idea. Forgiving debt is not the same as a stimulus. Eliminating student loan debt does not suddenly add $20,000 to their pockets; it just saves them the monthly payment they owe. That modest amount is more likely to end up being saved away, not spent. Most of it will end up in the bank, negating any value in buying goods or services.
Further, college graduates are hardly the most in-need population. They have higher earning potential and are more likely to get a better paying job. They are more likely to have access to credit cards, car loans, student loan refinancing after graduation, and more, far more than poor individuals without degrees and poor credit histories that need the largest amount of help.
What We Really Need
Rather than eliminating student loan debt, we need a more comprehensive change to the student loan system, starting with borrowers. Educating them to incur fewer expenses, rather than going to expensive private schools, wasting time on unnecessary classes or goofing off, will help focus their attention on what college means for their future and will have a significant impact. Students know they can get loans, but rarely consider other options available to them, such as community college, working part-time and going to school at night, looking for low interest student loans, or pursuing a more lucrative field. We can help students limit their debt without creating economic disasters with blanket loan forgiveness.
The Bottom Line
Attending college is a significant investment. It requires sacrifice and costs, but that is because it also reaps great rewards. College graduates out-earn their peers with a high school diploma by over $1 million in lifetime earnings. Their lifetime income is an incredible return on investment compared to the cost of their student loans. Eliminating student loan debt would be detrimental to the educational system, current students and the economy as a whole. Instead, the focus should be on comprehensive reform that emphasizes affordable alternatives and a realistic approach to education.