Student Loan Forgiveness

Mark Meredith, CFP®

I am aware that no one really wants to hear their financial advisor voice opinions over a political issue, so I’ll try to only do this on rare occasions. Student loans and college planning are well within the realm of financial planning, so here we go…

You’ve certainly heard by now that the Biden administration plans to cancel $10,000 of student loan debt. This will apply to single filers making less than $125,000 (adjusted gross income) annually and married couples making less than $250,000. The debt cancellation increases to $20,000 for Pell Grant recipients with loans held by the Department of Education.

On top of that, the pause on federal student loan repayment is once again extended through December 31, 2022. This is said to be the final payment pause, but that was also said during previous extensions of the payment pause. Student loan payments have not been required since March of 2020, and interest has not been accruing on the balances.

What you may not have heard about is the significant changes to the income-driven repayment system, which is nearly certain to send the cost of college skyrocketing.

Changes to Income-Drive Repayment Plans

  • For undergraduate loans, cut in half the amount that borrowers have to pay each month from 10% to 5% of discretionary income.
  • Raise the amount of income that is considered non-discretionary income and therefore is protected from repayment, guaranteeing that no borrower earning under 225% of the federal poverty level—about the annual equivalent of a $15 minimum wage for a single borrower—will have to make a monthly payment.
  • Forgive loan balances after 10 years of payments, instead of 20 years, for borrowers with original loan balances of $12,000 or less. The Department of Education estimates that this reform will allow nearly all community college borrowers to be debt-free within 10 years.
  • Cover the borrower’s unpaid monthly interest, so that unlike other existing income-driven repayment plans, no borrower’s loan balance will grow as long as they make their monthly payments—even when that monthly payment is $0 because their income is low.


What do these changes above incentivize? They certainly do not incentivize universities to compete on price or lower costs in any way. They do the exact opposite. Universities now have extended freedom to charge however much they want, as the cost to the end student is no different either way.

These changes also do not incentivize students to take on less debt. They do the opposite. There is no incentive to price shop universities, as $50k of student debt will be no different to them than $150k of student debt given the same income upon entering the workforce.

Penn Wharton estimates the debt cancellation alone will cost $519 billion to taxpayers, and that the new income-driven repayment provisions could drive the total cost of this policy to $1 trillion+, which is all happening without congressional approval.

When a government spends money they do not have (which is common), it is paid for in one of two ways:

  1. Increased taxes for taxpayers
  2. Devaluation of the currency

Over the last 2.5 years that seems to be apparent. If Penn Wharton is right on the numbers and we do not see increased taxation, there would be a sizable inflationary impact from this policy.

Matt Bruening of The Peoples Policy Project writes how law schools figured out the secret sauce years ago for students expected to enroll in the Public Service Loan Forgiveness (PSLF) program. Here’s how it works:

  1. The school increases their tuition.
  2. The student takes out federal loans to cover the tuition increase.
  3. The school squirrels away the debt-financed tuition increase into an LRAP (Loan Repayment Assistance Program) fund.
  4. The school disburses money from the LRAP fund to cover PSLF repayments for the student.

“Through this roundabout process, the law schools effectively use student debt to pay off student debt and make their schools free or nearly free, at least for these particular students.”

Alex Tabarrok of The Marginal Revolution provides an example:

“Suppose a student will make 150k per year for 10 years working in the public sector. If they have 200k in debt they pay 15k every year to the government for 10 years and then 50k is “forgiven.” But now the law school comes to the student and says ‘heh, I have a deal which will make both of us better off. We are going to raise the price of law school to 400k but don’t worry not only won’t that cost you a penny more than the 15k a year you are already obligated to pay it will actually cost you much less because we will pay your payments of 15k per year!’ This indeed is a great deal for the student who pays nothing and it’s a great deal for the law school which gets 200k more revenue immediately in return for 150k of payments paid out over the following 10 years. Win-win! Except for the taxpayer of course.”

An industry that never has to compete on price will never see reasonable costs.

Our Student Loan Experience

Some of you may recall a blog post I wrote for my old employer 6 or 7 years ago, about how my wife and I took actionable steps to pay off over $100,000 of student loan debt in less than 3 years. The blog post is long gone but to summarize: we didn’t buy new cars, didn’t take extravagant trips, didn’t have children before we were ready, worked a lot, bought a cheap foreclosed property to live in, and saved at a very high rate.

Our entertainment was generally a trip to Family Video (yes that’s how old we are), and a $5 pizza. I know it doesn’t sound too glamorous, but we still look back on those days with fond memories.

We didn’t graduate at a time with 11 million job openings either, which seems to be an odd time to hand out more stimulus. See the historical chart of job openings below? I graduated from college in 2010. My starting salary was $0. My starting hourly rate was $0. I was told to sell as much life insurance as I could, which wasn’t a lot.

Now that I’m off my soapbox of sounding like a grumpy old man telling the young kids how bad I had it…No one should be blamed for receiving a $10,000 debt cancellation. We would have taken one if offered (although full disclosure I did decline to take a PPP loan on the basis that the money could have been used by businesses that suffered more from the pandemic than mine did. Unfortunately, I now view that as a bad decision as I am helping pay the price for the nearly 3,000 financial advisors that decided to take PPP loans).

If you paid off your student loans before the recent debt cancellation announcement, you are now going to help pay for everyone else’s as well. I think most people could live with that if the root cause of the problem was being addressed, but it isn’t. We are worsening the issue.

Everyone agrees that education is a good investment, but not at an infinite cost.

As A Parent, Should You Still Save For College?

This question has been posed to me numerous times recently. If we are alleviating the personal responsibility to pay, then shouldn’t we consider stopping our planned savings for our child’s education? Should we just bank on future policy measures of this sort being taken?

Always plan as if there will be no future benefits of this sort. My advice has been consistent over the years that one never wants to plan on funding 100% of higher education costs with a 529 plan anyway. Also, if there are massive debt cancellations in the future, there will be rule changes to 529s I’d imagine. A bill was proposed earlier this year to allow 529 rollovers to Roth IRAs.

I know a few people that had the ability to payoff the remaining balance of their student loans over the last 2.5 years, yet they didn’t because payments were not required and they suspected loan forgiveness would be coming. They were right, and even though they had the ability to pay they did not have the requirement to do so. Now that burden is passed to everyone else. That is not reassuring to those who sacrificed and paid.

My philosophical take is that these things even out in the long run.

A Policy Prescription?

Above I point out many problems with the current medicine, so it’s only right I offer a more viable solution. I think a great starting point would be setting the interest rate at 0% on all student loans. It may not give borrowers the warm and fuzzies of $10k being erased into thin air, but it does set a more sustainable path for them going forward.

Disclosure: This article is for informational purposes only and should not be considered a recommendation. Information contained in this article is obtained from third party resources that Meredith Wealth Planning deems to be reliable.

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