Why loan forgiveness may not solve anything

President Biden ultimately delivered on its campaign promise to erase student loan debt for certain types of borrowers. As of this writing, his new plan forgives up to $10,000 in federal student loan debt per person earning less than $125,000 per year or per household with incomes less than $250,000. The rebate amount also doubles to $20,000 for those who used Pell Grants to attend school, which makes sense given that these grants are only eligible for borrowers with the greatest need.

Other elements of Biden’s student loan forgiveness plan include a new income-focused repayment plan that requires lower monthly payments based on 5% of Discretionary Income (instead of 10%), more forgiveness fixes public service loan (PSL
LSP
F), and somehow lowering the cost of higher education by “holding schools accountable when they raise prices,” according to a press release from Whitehouse.gov.

Unfortunately, this is all starting to look like a lot of theater for a plan that will only help eligible borrowers struggling with student debt. in this real moment.

Everyone, including future students, will find themselves facing a higher education landscape that still uses the same exorbitant prices and predatory practices that families face today.

In fact, student loans taken out after June 30, 2022, or earlier this summer, are already ineligible for Biden’s forgiveness plan.

More student loans on the way for college students

How bad is our student debt crisis? According to student loan expert Mark Kantrowitz, who is the author of How to Apply for More College Financial Aid, higher education borrowing currently exceeds $94 billion a year. He says that, according to the most recent data, total federal student loan disbursements for 2020-21 were $82 billion and private student loans added another $12 billion.

However, those numbers are about $10 billion lower than a year earlier due to a downward trend during the pandemic, he says. In other words, pre-Covid higher education borrowing was higher, which likely means students will take out billions more in student loans as colleges return to normal for the 2022 academic year- 23.

Of course, none of this is surprising.

According to Jonathan McCollum, President of Federal Government Relations at Davidoff Hutcher & Citron, the current student debt crisis (and its continuation) is the result of tuition fee increases that have outpaced inflation, as well as predatory institutions that have reduced the purchasing power of existing forms of federal aid over time.

McCollum says the Pell Grant provides a strong example since this aid is the most basic federal student aid program for low-income students. While the Pell Grants were generous enough to cover about 80% of higher education costs in public four-year schools in the 1970s, they are now only enough to cover 30% of college costs, he says.

This has left needy students borrowing more and more money for college year after year – even as the return on investment for many college degrees has all but eroded.

And while the $10,000 or $20,000 forgiveness will ultimately help millions of borrowers in debt right now, prospective students face dire prospects when it comes to paying for college. Financial Ryan H. Law of Ryan Law Consulting, LLC adds that this pardon is nothing more than a band-aid solution to a much bigger problem.

Rather than aiming for short-term political victories, politicians need to sit down and have a conversation about solving the real issues around student loans and education costs, he says. For example, Lawn has a daughter who is starting her freshman year of college this year. Should she expect to also receive $10,000 in loan forgiveness? Almost certainly not.

Potential Solutions to Part Two of the Student Debt Crisis

Law adds that it would likely help more long-term borrowers if the U.S. Department of Education scrapped origination fees for federal student loans and permanently lowered interest rates.

“Many borrowers have been paying for years and owe more than they did when they started paying back,” he says.

McCollum also says other initiatives could help solve our higher education crisis, or at least not make it worse. For example, Congress should move forward with legislation to double the maximum Pell grant, he says, adding that he should also consider expanding the program to include middle-income brackets that still need it. of financial assistance.

Once students graduate and their loans come due, the borrower repayment system also needs major reform, McCollum says.

“The government should consider reducing or drastically reducing interest rates and allowing borrowers to repay their debt without increasing the principal,” he said. “And those who can benefit from existing loan forgiveness programs should be able to access them without navigating a maze of red tape.”

Tax and retirement advisor Bob Falcon of Falcon Wealth Managers also adds that the way families buy and compare schools today is completely reversed. For example, today’s students visit colleges without having a clue what a school might cost them. From there, they fall in love with a school and work very hard to get the admissions equation in order. Once they are accepted into their dream school and their financial aid award letter arrives, only then do they realize they cannot afford it.

Tears and tantrums usually ensue, Falcon says, and parents often feel guilty enough to allow the student to attend. This often leads to students maximizing available federal student aid, as well as parents taking out PLUS loans, second mortgages, or both to fill in the gaps.

Instead, Falcon says families should calculate the net price for different schools before even applying. For example, the US Department of Education offers an online net price calculator.

“Collegedata.com and other free online databases can be used,” he says.

CEO Fred Amrein of PayForED agrees, adding that today’s higher education system is based on access, not affordability. In other words, almost anyone can access federal student loans to pay for their education, but there are no measures in place to ensure that students know the ultimate cost of their education or what could be their student loan repayments in the future.

“We need to provide students and families with personalized projections of total debt and repayment options at the start of and during college,” says Amrein. “There is no transparency regarding the financial results of pursuing a specific degree or designation.”

Jeanne Scheper, who is an associate professor and chair of the department of gender and sexuality studies at the University of California, Irvine, says it is also time for society to change course and invest in a future where young people who want an education and contribute meaningfully in society don’t have to struggle with decades of debt.

“Our universities should produce magnificent minds, not mortgaged minds,” she says.

Scheper believes that society’s solution lies in our willingness to invest in the public good at the state and federal levels by building a strong, accessible and affordable public education for all.

At the same time, universities have a responsibility to reconsider privatization trends and spending that drive up tuition fees.”

The essential

Many are celebrating the soon to be $10,000 or $20,000 in student loan forgiveness, and for good reason. After all, erasing such a debt will absolutely change the lives of some and bring some relief to all who qualify.

That said, it’s time for society to answer a simple question. If student loans are so toxic that we have to forgive them, why is the federal government still facilitating tens of billions of dollars in student loans year after year?

Until we answer this question and find solutions that will reduce the costs of higher education, nothing will change.

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