Student Loan Forgiveness Stalled, But Consider the Benefits

As far as student loan forgiveness is concerned, right now the ball is in the Supreme Court, er ... court. On one side of the stalled-out student loan question, the Biden administration asserts that provisions in the HEROES Act grant him explicit permission to forgive such balances.

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On the other side, Republican lawmakers are rightly concerned that such a huge sum of money — around $400 billion in round numbers — might be wiped from the books without their involvement. Given that the Federal budget in 2022 was $6.3 trillion, that giveaway represents nearly 6.5 percent of the total.

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I can see where Congress wants to assert the "power of the purse" over which the Constitution says it has control.

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Pondering the Benefits of Forgiveness

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According to CNBC (March 17 story), student loan holders could receive either $10,000 (those with student debt but no Pell Grant) or $20,000 in debt relief (those with student debt AND a Pell Grant) if Biden’s plan goes through. It is limited to loan holders whose annual income is at or under $125,000 (or double that, for married couples).

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This would affect up to 43 million Americans. The Biden team asserts that 87 percent of those individuals make less than $75,000 annually. According to CNBC again (Sept. 11 story), somewhere around "two in three of the lowest-income borrowers would have their federal student debt fully erased." (CNBC cites a JP Morgan study on that point.)

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Loan forgiveness has the biggest impact on the lowest earners, as should be obvious. Why is that? Because those who earn less gain more back both relatively and absolutely when their monthly disposable income increases. In other words, spending less (or nothing) to service debt frees more money up to cover the necessities of life.

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There will also be a rise in borrowers' credit scores, as they can use the liberated funds to make more timely payments for other things, with follow-on effects that include lower interest rates on future loans of all kinds, more likely entry into the ranks of homeowners, and better prospects for future employment. (Credit and background checks are a fixture in the modern job application and vetting processes.)

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Millions for Defense, But Not One Cent for Tribute

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American politician Robert Goodloe Harper (who died in 1825) served in various governmental assemblies (South Carolina House from 1790 to 1795, U.S. House from 1795 to 1801, and U.S. Senate in 1816). He uttered the famous phrase in the preceding heading in connection with the infamous XYZ affair, during which French foreign minister Charles Talleyrand essentially demanded bribes before formal negotiations to avert conflict could begin.

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The U.S. government is still very much of this frame of mind when it comes to defense spending versus other forms of spending. In this connection, it’s worth observing that the U.S. defense spending budget for 2022 was $728 billion (expected to increase to $797 billion this year, not including supplemental funding for Ukraine and military construction).

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I would like to observe that the loan forgiveness program is a one-time expense, and probably less than half what actual defense spending will be for 2023 (including Ukraine, currently somewhere around $47 billion, and construction spending, probably $10 billion or more). It’s not tribute to a foreign power, either: It’s a boon to those who’ve taken on debt to increase their lifetime earnings and job suitability potential.

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Ultimately, the real benefit of forgiveness is that it allows loan holders to become more economically productive and to increase their incomes and future prospects. In terms of overall economic gains, I have to believe that the long-term benefits to the entire U.S. economy will more than balance out the costs involved.