Student Loan Forgiveness Not the Answer

May 13, 2013

After years of unlimited federal student loan making, student loan debt now totals more than $1 trillion. This tremendous debt load saddles many new graduates with large monthly payments in a tough job market. Many students hope that Uncle Sam will soon forgive their loans. Student loan forgiveness is popular among recent grads and even among some politicians, though the loans will never be forgiven, says Andrew Heaton of the Foundation of Economic Education.

  • H.R. 1330, The Student Loan Fairness Act, proposes that recent graduates pay one-tenth of their disposable income for 10 years, after which their debt would be forgiven.
  • Other graduates joke that President Obama will simply write off their loans altogether.

The problem with "debt forgiveness" is that the term means that someone else is paying your debt for you, not that the debt is wiped away entirely.  Because the federal government is funded by taxpayers, student loan debt forgiveness would mean that taxpayers would be picking up the tab for a large portion of total student debt.

  • Loan forgiveness would essentially amount to a transfer from taxpayers to students, many of whom opted for expensive colleges and useless degrees as federal loans were easily available.
  • The simple fact is that one way or another, student loans must be paid.
  • Because they are not eligible for discharge in bankruptcy, a student loan sticks with an individual until it is paid off or until the individual dies.

One suggestion has been to make student loans eligible during a Chapter 7 bankruptcy, a proceeding that would render "true forgiveness," as opposed to "debt forgiveness," while at the same time blemishing an individual's credit rating for life. With this option on the table, graduates could weigh their options given their income and future ability to pay back the loan while future students might find it prudent to choose degrees with higher rewards.

Source: Andrew Heaton, "Your Student Loan Shall Not Be Forgiven," Foundation for Economic Education, May 3, 2013.

 

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