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Ideas Post

Bill Bergeman


10 Reasons Why Student Debt is a Complete Scam

One of the topics du jour in the United States is student debt cancellation. This list is not intended to be for or against cancellation. My view is both sides are flawed, and the debate distracts us from the real issue:

Children and teenagers are brainwashed by teachers, guidance counselors, college marketing departments, mass media, and sometimes even their parents, to believe that a worthwhile life can only be achieved by receiving a college education - at any cost.

Young people have this message beaten into their heads from an early age. The favorite trope is that college graduates make more money throughout a lifetime than non-college graduates. In reality, this is not always the case. According to a 2019 Georgetown University report, "at 1,233 postsecondary institutions...more than half of their students 10 years after enrollment are earning less than a high school graduate." (https://cew.georgetown.edu/cew-reports/roi2022/).

As for the student debt cancellation issue, those who say, "They borrowed it, so they should pay it all back!" probably do not understand the inherent challenges built into the extraordinarily flawed student loan system in the United States that essentially forces people into debt bondage for decades. Most borrowers want to pay off their debt, but the system that is supposed to help them is preventing them from paying it off. These people often forego having children, purchasing homes, and in many cases are dealing with stress and mental health issues related to their debt. It's not as if these people bought too many large-screen plasma televisions, too large of a house, or too expensive a sports car, and now they expect someone to take care of their debts for them. They did what they were told all their lives to do: they took out loans to go to college and try to better their lives. Do we say "fuck you" to millions of people who pay their bills, work hard, and contribute to society, yet for no fault of their own are being prevented from escaping the death grip of student debt?

On the other hand, those who say, "Cancel all student debt now!" are only seeing things from one side, and can't imagine the enormous resentment felt by those who worked hard and are successful without the advantage of a high-priced education. And, what about those folks who paid off their student loans? Were they just lucky to get good jobs? Did they already come from financially healthy families and therefore didn't have to borrow much money? Or, did they work themselves to the bone for years to pay off their loans, only to see that if they had simply waited and not worked so hard the government might have gone ahead and canceled their debt anyhow? Will they get a refund?

This is a complex issue, with no easy solution, yet it's a problem that can no longer be ignored.

    1. Students borrow against an asset (education, degree) but they have little idea of its financial value.

    If a student takes out 200,000 in student loans throughout college (not uncommon these days), how does she know that this value will be returned throughout her career? She has to assume the education will qualify her for a career that will net her X amount over a career that she would have without the degree. Obviously, this is an impossible figure to calculate. She may or may not get a career related to her education (in fact, only 27.3% of people obtain a career related to their college major: https://libertystreeteconomics.newyorkfed.org/2013/05/do-big-cities-help-college-graduates-find-better-jobs/). Economic and life disruptions may challenge income in the non-educated career and not the other, as well as vice versa. On its surface, taking out that much money for an asset of such unknown value is irrational.

    2. Financial terms are not disclosed.

    Unlike a mortgage, revolving line of credit or auto loan, financial terms for a student loan are not agreed to at the time of signing. The interest rate is not disclosed until after graduation - long after the loan has been signed. You are borrowing money with no clue what the interest rate will be, what the lifetime interest will be, and what the payments will be.

    3. Student debt cannot be refinanced.

    Pretty much any loan can be refinanced in some way, except student debt cannot be refinanced through the federal government. And, guess what? Those already high interest rates for student debt are about to go up again. That said, nowadays there are an increasing number of private lenders who offer to refinance; however, the moment a borrower goes this route, that borrower loses all protections provided by the federal government (look no further than the COVID-19 pause on payments as an example).

    4. Students are the ultimate high-risk borrowers, yet they are allowed to take out massive amounts of student debt.

    Remarkably, tens of thousands of dollars of student loans are freely offered to teenagers with zero credit or financial history. Few other debt obligations are offered to such risky borrowers. Do you think a 17-year-old would qualify for a 200,000 home loan with no income or credit history? Yet, we're happy to give that money to the same kid for a college education.

    5. Student debt puts all the risk on the borrower.

    This is not how any other loan functions. For example, when a bank provides a couple with a mortgage, it is understood that if the couple defaults, there are options. Bankruptcy. Foreclosure. Short sale. The bank may offer temporary forbearance. They're not pretty options, but the couple can get out of it. If you default on a student loan, there is no recourse. The government will come after you like you're a tax evader, including but not limited to garnishing your wages.

    6. Many student debt holders faithfully pay every month, sometimes for 20+ years, only to watch their principal increase.

    Borrowers that are on an income-driven payment plan pay 10-15% of their monthly income and often see their principal increase every month - sometimes for the entire life of the loan. For these people, they will literally never pay off their debt no matter what they do. At least with a credit card, if you're making the minimum payment, you'll eventually pay off the debt (even if it takes 15 years).

    7. Bankruptcy is a tool for people to recover from almost any debt. Except student debt.

    Regardless of your circumstances, it is virtually impossible to discharge student debt through bankruptcy.

    8. Forgiven student debt is counted as taxable income.

    In what world would someone have a debt discharged, via bankruptcy or any other means, and then have to turn around and pay taxes on that amount? In the student debt world, that's where.

    The four income-driven repayment plans offered by the federal government allow for debt forgiveness at 20 or 25 years (depending on the type of loan) as long as the borrower pays every month during that period. However, that amount is then considered taxable income. Let's do some math.

    Suzy borrowed 100,000 in student loans. She registered for one of the income-driven repayment plans and paid every month for 20 years.

    Suzy never made more than $50,000 a year, so she averaged $500 per month in payments for those 20 years.

    Let's assume a 5% interest rate for the entirety of the loan. That means Suzy paid $120,000 toward her student loan ($500 x 240 months).

    But, with the interest rate in this plan, using a simple interest formula (this is not exactly how it would turn out, but we're just roughing numbers here ), the loan will generate an additional $100,000 in interest ($100,000 principal x .05 interest x 20 years).

    Therefore, when Suzy gets the balance forgiven (Which she probably won't. NPR recently reported most servicers aren't even counting payments: https://www.npr.org/2022/04/01/1089750113/student-loan-debt-investigation) she'll have $80,000 of taxable income added to her $50,000 actual income. Meaning she'll have to pay taxes as if she made $130,000 that year. How fun is that?

    9. Student debt allows colleges to raise costs at an astronomical rate.

    It's a negative self-perpetuating cycle. Students are allowed to take endless amounts of money from the government to pay for college, and in turn, colleges realize that students have endless amounts of money and therefore continue to raise tuition - because they can. According to https://finaid.org/savings/tuition-inflation/, "On average, tuition tends to increase about 8% per year. An 8% college inflation rate means that the cost of college doubles every nine years."

    10. Student debt is racist.

    Student debt negatively affects minority populations the most. According to Investopedia, "...Black, Hispanic, and Native American borrowers generally had higher unmet financial needs, incurred more student loan debt, and were more likely to struggle financially to stay in school in 2020." (https://www.investopedia.com/student-loan-debt-by-race-5193137).

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