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Student Loan Forgiveness: An Economic Trap

Going to college; having a college education that will enable you to have a good and steady job in order to take care of your kids, was always perceived as the American Dream. And to achieve that American Dream, President Lyndon Johnson implemented a program in the 1960s that would allow working-class people to pursue a college education and achieve the American Dream. And this government program would grant a loan to any person, especially of modest socioeconomic upbringing, to afford tuition. This program is known as the Free Application for Student Federal Aid (FASFA). The particularity of that program is that it would grant student loans to anyone pursuing a college degree, regardless of the academic field that the student is pursuing. On moral grounds, this program is irreproachable. Who wouldn’t want his child to have a college degree? Of course, everyone wants the best for their child. But this program, rather than making the cost of tuition affordable, dramatically increased over time.

Source: National Center for Education Statistics

In the early 1970s, college tuition in America was less than $2,000 per person. Fast-forward to the early 2020s, college tuition surged to more than $30,000 per person. How come? What had happened? What has happened is that President Johnson tried to mix compassion with economic reality. He tried to supersede economic laws with compassion. He thought that by implementing “compassionate” policies, in other words, making education available for all through government loans, economic reality would adjust itself to those compassionate policies. The problem is that economic reality is tied to economic laws, and these laws are the laws of market forces (supply and demand). When you make a good or service affordable to everyone at a very low cost or no cost at all, the demand for that good or service logically increases. When the demand for a good or service increases, the cost of that good or service also increases, which eventually makes the good or service more expensive. Education is a service. And granting student loans to everyone who studies anything, incentivized universities to increase the cost of their tuition. As a result, the cost of college tuition dramatically increased over the years, which make tuition less affordable to the working-class, although these student loans were specially designed for them.

Many people have taken these student loans to study majors whose skills are not in demand in the job market. As a result, many of these people could not afford to pay back their student loans and subsequently had to default on them. This is when the concept of student loan forgiveness arose. What is student loan forgiveness? It is a program that was created under the College Cost Reduction and Access Act of 2007 to provide indebted professionals a way out of their federal student loan debt burden by working full-time in public service. It is also known as the Public Service Loan Forgiveness (PSFL). The particularity of that program is that it forgives the remaining balance on one’s direct loans after that person has made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer. This qualifying employer is the government or a non-profit organization.

The Biden Administration announced a plan to cancel up to $20,000 in federal student loan debt, which would affect nearly 43 million Americans who borrowed to attend college. According to U.S. News data, student loan borrowers on average carry about $30,000 in debt, including federal and private loans. Thus, this student loan forgiveness program sounds good in theory but in practice, it has several economic implications. The plan could cost taxpayers upward of $300 billion to $400 billion over the next decade, according to the Department of Education. One thing that the federal government does not tell people about the consequences of this student loan forgiveness program is that the IRS will consider the amount of the forgiven balance to taxable income. Depending on how much is forgiven, that could amount to tens of thousands of dollars one may owe in taxes.

In this whole student-loan situation, the biggest winner of all remains the federal government. It issues you with a loan that you will have to repay, which leads to an increase in the cost of tuition. If you default on the loan, the federal government will implement punitive laws such as affecting your credit score, which will prevent you from taking loans for a mortgage or a car. If your loans are forgiven, you still have to pay taxes on that balance forgiven to the IRS, which is a government agency. Is that what the American Dream is about? Indebted to be free?


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