October 2022
To err is human; to forgive is divine. Alexander Pope
*Market index data as of 9/30/2022
The “Ant and the Grasshopper” is one of Aesop’s many allegorical fables. In this particular tale the ant works diligently all summer preparing for winter while the grasshopper squanders his time in non-productive pursuits. When winter comes the hungry grasshopper approaches the ant begging for food. The ant is both shocked and appalled the grasshopper didn’t better manage his affairs and subsequently refuses him. The moral of the story is that prudent behavior consisting of hard work and planning for the future is rewarded while failure to do has dire consequences.
President Bident recently announced a federal student loan bailout, which would absolve borrowers earning less than $125,000/year ($250,000 per couple) of $10,000 in federal student loans, and up to $20,0000 for Pell Grant recipients. The plan would forgive debt, in part or in full, for up to forty million people. Additionally, the moratorium on student loan payments was extended a seventh time, until the end of this year.
The sticker price for the bailout is thought to be about $500 billion, but that estimate fails to consider key components of the plan, such as the cost of loan forbearance and the new income-driven repayment program (IDR). When all of the associated bells and whistles are factored in the Wharton School of Business budget model suggests the price tag could exceed $1 trillion. But even this estimate ignores the cost of forgone interest, which further increases the cost to taxpayers.
Presently the total amount of student loan debt in the US is over $1.7T. To put this in context, total credit card debt is $912B and total auto loan debt is $1.6T. Proponents of the plan contend that an educated society serves the public good, a point on which everyone can agree. They further state that freeing borrowers from this burden will increase their appetite for home, auto, and consumer spending, which also cannot be argued.
Interestingly, House Speaker Nancy Pelosi made it clear that the president did not have the authority to unilaterally cancel student loan debt. President Biden also went on record expressing doubt as to both his ability and resolve to do so. Which begs the question does the president have the authority to forgive student loan debt? The Administration says yes, claiming the 2003 HEROES Act, which was passed in the aftermath of the September 11 terrorist attacks, grants executive power to give students serving in the military financial assistance with their student loan obligations. Specifically, those whose studies were disrupted due to deployment or a national emergency.
Not everyone is supportive of the proposal, however. The most common criticism tends to focus on the perceived fairness of a debt relief scheme—that doesn’t include them. There is little doubt that if the proposal was, instead, to forgive mortgage debt, credit card balances, or auto loans the aforementioned debtors would likely welcome such relief. Such is human nature I suppose.
What to do? It is this author’s opinion that public policy should seek to do good rather than simply enable supporters to feel good. To that point, would student loan forgiveness serve the public good? To answer that, I would first ask the following questions:
- If college graduates are unable to repay the cost of their education, does this not indicate the cost exceeded the value provided? How do we make college a better value for both students and society as a whole?
- If the price of a college education is too costly today, how does the Administration plan to fix that so we don’t have Student Loan Forgiveness 2.0, 3.0, and so on?
- Do colleges have a moral obligation to counsel students as to the economic costs/benefits associated with higher education?
- The President’s plan effectively subsidizes college tuition, and subsidies always increase the cost of a good or service. With no credit underwriting standards applied to student loans (can the borrower repay the debt?) what is the incentive for colleges to make education affordable?
- US college endowments exceed $731B. Shouldn’t the institutions that directly benefitted from the student loan crisis take responsibility and first use their money to help struggling borrowers rather than passing the burden on to taxpayers?
- While median income in the U.S. is $44,225, the majority of debt relief is going toward borrowers in the top 60% of income earners—borrowers whose wages and benefits will increase faster than the average non-college graduate, effectively widening the pay gap. How is a plan, which is inherently regressive, aligned with the President’s executive order on diversity, equity and inclusion?
While it’s safe to assume that Alexander Pope’s forgiveness quote was not referring to personal debt, Planer’s Rule suggests that an exception granted becomes a right expected the next time it is requested. Perhaps we can learn a lesson from Aesop’s ant; a society that teaches its youth the value of self-discipline, hard work, thrift, savings, prudence, and personal accountability is far preferable to one that relies on the charity, willing or otherwise, of others.
Mark Lazar, MBA
Certified Financial Planner™
Pathway to Prosperity
Planer’s Rule
October 2022
To err is human; to forgive is divine. Alexander Pope
*Market index data as of 9/30/2022
The “Ant and the Grasshopper” is one of Aesop’s many allegorical fables. In this particular tale the ant works diligently all summer preparing for winter while the grasshopper squanders his time in non-productive pursuits. When winter comes the hungry grasshopper approaches the ant begging for food. The ant is both shocked and appalled the grasshopper didn’t better manage his affairs and subsequently refuses him. The moral of the story is that prudent behavior consisting of hard work and planning for the future is rewarded while failure to do has dire consequences.
President Bident recently announced a federal student loan bailout, which would absolve borrowers earning less than $125,000/year ($250,000 per couple) of $10,000 in federal student loans, and up to $20,0000 for Pell Grant recipients. The plan would forgive debt, in part or in full, for up to forty million people. Additionally, the moratorium on student loan payments was extended a seventh time, until the end of this year.
The sticker price for the bailout is thought to be about $500 billion, but that estimate fails to consider key components of the plan, such as the cost of loan forbearance and the new income-driven repayment program (IDR). When all of the associated bells and whistles are factored in the Wharton School of Business budget model suggests the price tag could exceed $1 trillion. But even this estimate ignores the cost of forgone interest, which further increases the cost to taxpayers.
Presently the total amount of student loan debt in the US is over $1.7T. To put this in context, total credit card debt is $912B and total auto loan debt is $1.6T. Proponents of the plan contend that an educated society serves the public good, a point on which everyone can agree. They further state that freeing borrowers from this burden will increase their appetite for home, auto, and consumer spending, which also cannot be argued.
Interestingly, House Speaker Nancy Pelosi made it clear that the president did not have the authority to unilaterally cancel student loan debt. President Biden also went on record expressing doubt as to both his ability and resolve to do so. Which begs the question does the president have the authority to forgive student loan debt? The Administration says yes, claiming the 2003 HEROES Act, which was passed in the aftermath of the September 11 terrorist attacks, grants executive power to give students serving in the military financial assistance with their student loan obligations. Specifically, those whose studies were disrupted due to deployment or a national emergency.
Not everyone is supportive of the proposal, however. The most common criticism tends to focus on the perceived fairness of a debt relief scheme—that doesn’t include them. There is little doubt that if the proposal was, instead, to forgive mortgage debt, credit card balances, or auto loans the aforementioned debtors would likely welcome such relief. Such is human nature I suppose.
What to do? It is this author’s opinion that public policy should seek to do good rather than simply enable supporters to feel good. To that point, would student loan forgiveness serve the public good? To answer that, I would first ask the following questions:
While it’s safe to assume that Alexander Pope’s forgiveness quote was not referring to personal debt, Planer’s Rule suggests that an exception granted becomes a right expected the next time it is requested. Perhaps we can learn a lesson from Aesop’s ant; a society that teaches its youth the value of self-discipline, hard work, thrift, savings, prudence, and personal accountability is far preferable to one that relies on the charity, willing or otherwise, of others.
Mark Lazar, MBA
Certified Financial Planner™
Pathway to Prosperity