Biden’s Loan Forgiveness Missed the Mark

Man holding his graduation cap up in the sky

A week or so ago, President Biden introduced a plan to address soaring college costs by allowing for sweeping student loan cancellation. The U.S. Department of Education will provide up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the Department of Education and up to $10,000 in debt cancellation to non-Pell Grant recipients. Borrowers are eligible for this relief if their individual income is less than $125,000 or $250,000 for households. 

And while many former students with outstanding debt will appreciate the gift, many others disagree. Some of our Washington representatives have stated that the Administration’s decision to wipe away debt for six-figure earners goes too far, without actually addressing the root causes of our college affordability crisis — and does so at a time when working people, regardless of their education level, are getting hammered by inflation and rising costs.

Others criticize students themselves for taking on more debt than they can reasonably pay off, especially in areas of study that don’t translate to higher post-education salaries. As a parent to 3 college-age girls, I understand the appeal of having a debt like this canceled. Teddy Roosevelt once said, “If you could kick the person in the pants responsible for your troubles, you wouldn’t sit for a week.”

My take? I can’t blame students for wanting to better their lives with a higher education, and everyone deserves the opportunity if they choose. But the real root cause of our current student loan debt dilemma won’t be solved by Biden’s plan, because it doesn’t recognize the fact that the high cost of education is actually a result of federal-loan and student-aid subsidies themselves.

Folks, federal student loans and grants were initially aimed at helping low-income Americans. But they’ve taken on a life of their own and their costs have continued to climb as lawmakers boosted subsidies in order to make higher education more affordable – but in reality, they’ve done just the opposite.

Get this, according to the National Center for Education Statistics, for the 1970-71 academic year, the average in-state tuition and fees for one year at a public non-profit university was $394. By the 2020-21 academic year, that amount jumped to $10,560, an increase of 2,580%. During the same period, tuition and fees at private institutions jumped by a similarly astronomical 2,107%, from $1,706 in 1970, to $37,650 in 2020. Between 1970 and 2020, the dollar had an average inflation rate of 3.87% annually, resulting in a cumulative price increase of about 567% during the last 50 years. Not only that – in 1980 Congress established low-interest Plus loans for parents, which were expanded to graduate students in 2006. And these loans have no dollar cap.

Unfortunately, colleges have taken advantage of this free-flowing money by raising prices, increasing professors’ salaries, hiring more administrators and building extravagant campus amenities. And while tuition increases in recent years have moderated somewhat as demographic factors have reduced college enrollment and increased competition, others have adapted instead by adding expensive graduate programs.

Colleges have no financial incentive to ensure that their programs provide the skills that employers need or can provide a decent standard of living. Colleges are paid on the front end, and government is now stuck holding the bag by writing off the cost on the back end.

President Biden says his half-a-trillion-dollar loan, or more, cancellation is necessary to address unsustainable student debt. But the Obama repayment plans already limit monthly payments to 10% of discretionary income and forgive the remaining balances after 20 years. Borrowers who earn little can pay little or nothing. Mr. Biden’s plan will encourage students to take out more loans and colleges to keep raising tuition.

The Biden Administration has said that they are “holding colleges accountable for jacking up costs without delivering value to students.” 

Folks, I beg to differ. His plan is only targeting for-profit colleges. His proposed “gainful-employment rule” would cut off federal student aid to some 40% of for-profit programs whose graduates don’t meet certain earnings or debt-to-income measures. But he’s giving a pass to nonprofit and public colleges that are no saints₂.

Instead, we need to change the financial incentives for colleges in order to start reducing costs. House Republicans have proposed limiting federal graduate debt to $100,000, but even this is too high. How about we instead get rid of graduate-school government loans? 

This may mean a student pursuing a master’s some areas of study may not be able to borrow as much or could end up paying higher interest rates. But I believe this would have the effect of forcing colleges to reduce prices to attract and retain students. Students in medical and other graduate programs that typically lead to higher earnings likely won’t have problems securing private financing.

At the end of the day, while we do need to lower the cost of education for everyone, we should be prioritizing relief for all hardworking Americans — including a middle-class tax cut and medical debt cancellation — and not just those with college degrees. President Biden’s loan write-offs show that our current system has failed to reduce student costs while enriching colleges and universities and left taxpayers holding the bag.  We need real reform that holds them accountable, something the new plan just doesn’t do.

So as always – be vigilant and stay alert, because you deserve more!

Have a great week.

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield, MA. 

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