As the cumulative total of student loan borrowing approaches $1 trillion dollars, calls to forgive some or all of that debt are mounting. Federally guaranteed student loans make up more than half that total and Barack Obama is pushing to cap the amount any borrower must pay back in a given year and forgive outstanding balances after 20 years.
But forgiving student loan debt is a very bad idea for at least three reasons.
1. These loans are voluntary. All borrowers are excrutiatingly well-informed of how much they’re borrowing and how much they’re going to have to pay back.
About half of all college students take out loans and when they do, every lender clearly spells out exactly how much you’re on the hook for and what your monthly payments are going to be after you leave school.
Critics say that 18-year-olds don’t understand what they’re getting into and shouldn’t be held accountable for their decisions. But that’s an argument against letting kids attend college, not against letting them borrow against future earnings to get a degree that will increase lifetime earnings by somewhere between about $280,000 and $1 million.
2. The amounts being borrowed are hardly overwhelming. While the cumulative total of all college-related debt is huge – approaching a trillion dollars, it’s bigger than credit-card debt – it’s not so big for individuals. The typical college graduate who borrowed money to attend graduatesowing about $25,000. They’ve got a minimum of 10 years to pay back that amount and the repayment schedule can be extended and modified for a wide variety of reasons.
The monthly payment for $25,000 in student loans at going rates comes to around $290 a month. That’s not chump change. But given that the that college grads have unemployment rates that are less than half the national average and that the average salary offer for graduating seniors is almost $50,000, the loan amount isn’t so bad either.
3. Bailouts are never a good idea. Like Tea Party activists, Occupy Wall Street protesters are right to rail against bailouts for big banks and financial institutions that are politically connected. But student loan forgiveness advocates are wrong to perpetuate yet another cycle of bailouts. It’s never right to socialize losses while privatizing gains. That’s what the banks did – they risked their money on stupid investments and then got made whole at the expense of taxpayers. Student loan forgiveness is simply another version of the same swindle. And it offloads the costs of other people’s decisions onto taxpayers, who guarantee federally backed student loans.
College is an important decision – and it’s made even more expensive by heavily subsidized loans. But letting people off the hook for loans they made with full knowledge of the costs will not only dissuade anyone from lending to students with no collateral other than their future work output. It will make it that much harder to argue against the next call for bailouts from the next group of special interests.