Student Debt Forgiveness Is Already Happening Because of the Payment “Freeze”

In March of 2020, Donald Trump paused federal student loan payments and “froze” interest accumulation in an effort to help borrowers through the difficulty of pandemic shutdowns.

The Oval Office has changed occupants, pandemic shutdowns have ended, but the payment and interest freeze has been extended several times. As Friedman quipped, “there’s nothing so permanent as a temporary government program.”

When Brad Polumbo and I wrote about temporary pandemic programs (including the student-loan payment freeze) becoming permanent in September, I noticed some criticism in the line of “the programs are still here because the pandemic is still here.”

Well, for what it’s worth, Fauci now says we’re out of the pandemic phase. Of course, some may simply disagree with Fauci. To some, we may never be.

In any case, the student loan payment freeze has certainly outlasted the government shutdown. And, although there are many problems in the economy right now, it wouldn't be hard to point to worse economies in the past when student loan payments were still being collected.

So I think it’s safe to say that the payment freeze has moved on from being temporary relief, and it can now be better classified as “student loan forgiveness”.

Whose Interest?

Why would a pause on payments and interest accumulation fall under the category of student loan forgiveness?

Well, every day this program continues, borrowers are exempted from paying interest they agreed to pay. Or, put differently, the federal government is taking the hit for the monthly interest payment in terms of lost cash inflows.

Ultimately, this means taxpayers are the generous ones picking up the tab. Why? Well, when the federal government chooses not to charge interest it is owed, the revenue of the government is lower than it would be.

All government spending must ultimately be financed with government revenue. So when the government spends money or borrows money, it must ultimately come from the taxes it collects (for the sake of simplicity we’ll ignore revenue via seigniorage).

So if the government decides to spend the same amount it budgeted to spend before freezing interest, and it receives less money from interest due to the freeze, it must take more money from present or future taxpayers.

Alternatively, even if the government decided to spend less money to offset the lack of interest received (an otherworldly scenario), taxpayers would still be worse off because they’d be paying the same taxes for less government services provided.

In either case, taxpayers are left holding the bag. Student loan holders who don’t have to make payments or deal with interest accumulation are better off. Interest is forgiven on the public’s dime.

How Much Have We Forgiven?

If you’re not a finance person, this might seem minor. How much could this really be costing? Well, in the first few months, it was probably not that much. But the thing about interest is, it compounds.

To estimate the total revenue the federal government has forgone with this freeze, let’s do a simple back-of-the-envelope estimate.

Student loan interest compounds daily, but the rate on the loans is represented in annual terms. In other words, a 4% interest rate on your federal student loans means your balance will be 4% larger at the end of the year if you didn’t pay anything toward the initial loan amount itself.

For simplicity's sake, imagine you had a loan of $100, and a 4% interest rate in annual terms. At the end of the year, you’d owe 100*1.04=$104. Next year the 4% interest would accumulate on the balance of $104 so your new balance would be $104*1.04=$108.16.

In reality, this understates the growth of the loan balance because of factors dealing with how annual interest rates are expressed compared to how interest compounds, but this simplification will do for a conservative estimate.

So to find the total amount of interest forgone, we need the balance of federal loans and the average interest rate (weighted by loan amount).

Average interest rate data are difficult to come by. Educationaldata.org claims the average rate for Federal Student Loans is 4.12%. But this number is just an average of interest rates since 2013, not a weighted average. It also uses only undergraduate loans which have lower interest rates. If you extend that back to 2007, you get an unweighted average of 4.66%.

I also did some quick calculations using Federal Reserve Data on outstanding student loans to determine the weight of different years. This gave me a weighted average of 4.69%. Lastly, If I use only the last 10 years, I get a weighted average of 4.03%.

Since most federal student loans are paid off in 10 years, let’s stick with the lower 4.03%, which will provide a more conservative estimate anyways. (My guess is this is much lower than reality, but it provides some guidance.)

We have an interest rate, but what about an amount? Well, outstanding Federal Student Loan debt is $1.61 trillion.

Finally, as a last simplifying assumption, I’ll be calculating the forgiveness over two years. It’s been 2 years and 3 months, but not including the last 3 months of forgiven interest provides a more conservative estimate.

So, compounding 4.03% interest on $1.61 trillion twice leaves a total balance of $1.74 trillion. This means a total of over $130 billion dollars in interest has been forgiven. Since there are 43 million borrowers, this comes out to an average of around $3,078 of interest forgiveness per borrower.

In other words, we’re already 30% of the way to Biden’s $10,000 forgiveness dream.

Forgiving Who?

As a recent FEE article summarized, student loan forgiveness tends to benefit the wealthy at the expense of the poor and middle class. Economists call this sort of policy regressive (not to be confused with the “going backward” meaning of the term).

It’s clear why. Those with large student loan balances tend to be people pursuing higher-paying careers with an expensive education. Being a doctor or a lawyer is lucrative but becoming one is expensive. And top liberal arts schools charge higher tuition than state schools.

The student loan payment freeze is in some ways even more regressive. Remember, the $3,078 of forgiveness was an average. That means some borrowers are benefiting more than that and some are benefiting less. Unlike a flat $10,000 forgiveness, which at least forgives all borrowers equally, the interest freeze is most beneficial for those with large loan balances.

Bankrate claims the average lawyer graduates with $165,000 in student loan debt. At the interest rate of 4.03% this translates to over $13,000 in forgiven interest. In fact, anyone with student debt more than $125,000 has already received more than the $10,000 in forgiveness Biden has promised.

Compare this to someone who graduates from a regional college with $10,000 in debt. This only translates to around $800 in forgiveness.

To sum up, student loan forgiveness is already here. And it’s already helping the rich at the expense of the poor.

Peter Jacobsen

Peter Jacobsen teaches economics at Ottawa University where he holds the positions of Assistant Professor and Gwartney Professor of Economic Education and Research at the Gwartney Institute. He received his graduate education George Mason University and received his undergraduate education Southeast Missouri State University. His research interest is at the intersection of political economy, development economics, and population economics. His website can be found here.

This article was originally published on FEE.org. Read the original article.

Student Debt Forgiveness Is Already Happening Because of the Payment “Freeze”

Struggling to Pay Back Your Student Loans? These States Will Revoke Your Job License

 

Student loan debt is one of the biggest burdens to young Americans, recently ballooning to $1.5 trillion and topping car and credit card debt. Millions are struggling to repay money they borrowed for an education they were told would set them up for financial success, but many states across the country have barred individuals from working if they have not yet paid off their loans.

Fourteen states across the country currently impose policies to suspend, deny, or revoke occupational licenses from borrowers, preventing them from working and, ultimately, fully paying off their loans. This practice applies to a wide range of professions, from massage therapists, barbers, and firefighters to psychologists, lawyers, and real estate brokers.

License Revoked

With over 8.9 million recipients of federal student loans reportedly in default and as much as 40 percent of student loan borrowers at risk of defaulting on their payments by 2023, these restrictive policies only make it more difficult for them to work their way out of debt.

In one recent example, last month 900 Florida health care workers received notices from the Florida Board of Health notifying them that if they didn’t repay their student loan debt, they would have their licenses suspended. Denise Thorman, a former certified nursing assistant in the state, lost her license last year because she fell behind on her payments.

“Your license is gone, your livelihood's gone, the care of your patients is gone. How fair is that?” she told local ABC affiliate WFTS last month.

The degree of enforcement of these laws varies from state to state, but those with such rules nonetheless claim the right to revoke professional licenses. In 2017, The New York Times reported there were “at least 8,700 cases in which licenses were taken away or put at risk of suspension in recent years” due to student loan defaults, “although that tally almost certainly understates the true number.”

Fourteen states currently assert their authority to rescind occupational licenses over unpaid loans: California, Hawaii, New Mexico, Texas, Louisiana, Mississippi, Georgia, Florida, Arkansas, Minnesota, Tennessee, Massachusetts, Iowa, and South Dakota, Iowa, and South Dakota. Iowa’s laws allow the revocation of all state-issued licenses, like driver’s licenses, while South Dakota can revoke driver’s, hunting, and fishing licenses, along with camping and park permits.

A National Burden

For many Americans, the opportunity to work in a specialized field was the reason they opted to go into debt in the first place. A bipartisan effort in the US Senate now seeks to prevent states from denying borrowers the ability to work because of delinquent loans.

Sens. Marco Rubio (R-FL) and Elizabeth Warren (D-MA) recently partnered to introduce the Protecting Job Opportunities for Borrowers (Protecting JOBs) Act (S.609). This is the second time they have proposed this type of legislation. The bill would “prevent states from suspending, revoking or denying state professional licenses solely because borrowers are behind on their federal student loan payments,” according to a press release issued last week by Rubio’s office. The legislation, which would give states two years after its passage to comply, offers protections for driver’s licenses, teacher’s licenses, professional licenses, and “a similar form of licensing to lawful employment in a certain field.”

“It is wrong to threaten a borrower’s livelihood by rescinding a professional license from those who are struggling to repay student loans, and it deprives hardworking Americans of dignified work,” Rubio said when announcing the legislation.

State policies revoking or suspending the licenses of delinquent student loan borrowers affect a surprising number of workers, largely because the number of occupations requiring a state-issued license has quadrupled since the 1950s.

“At the national level, nearly 20 percent of workers are now licensed, up from just 5 percent in the early 1950s,” researchers at the Institute for Justice (IJ) said in a recent report.

IJ authors analyzed data from 36 states to calculate the burden of these government-issued licenses, estimating they cost Americans two million jobs annually. Further, they reported that “[b]y a conservative measure of lost economic value, licensing may cost the national economy $6 billion. However, a broader and likely more accurate measure suggests the true cost may reach $184 billion or more.”

To their credit, some states have already moved to do away with these restraints on economic freedom. Forbes reports that last year, “Alaska, Illinois, North Dakota, Virginia, and Washington all eliminated their default suspension laws for job licenses,” and eight more are considering similar legislation this year. The Kentucky legislature just passed a bill to prevent licensing agencies from suspending borrowers’ professional credentials.

The Root of the Problem

The federal government has played a central role in the student loan debt crisis and exploding costs of higher education. As FEE recently explained, the Higher Education Act of 1965, which put taxpayers on the hook for the loans made by private lending institutions, helped create the higher education bubble, which has seen a 1,600 percent increase in costs since its passage.

Tuition data from National Center for Education Statistics and inflation data calculated using 1963–1964 tuition and tuition increase at rate of inflation from CPI Inflation Calculator. Graph by Noa Maltzman.

By the 1980s, student loan defaults were already becoming a problem. In 1990, the Department of Education followed the lead of a handful of states, like Texas and Illinois, which had already started imposing laws to restrict borrowers’ licenses if they fell behind on payments. “Deny professional licenses to defaulters until they take steps to repayment,” the department said in its lengthy guidance entitled “Reducing Student Loans Defaults: A Plan for Action.”

Nearly 30 years later, student loans continue to weigh down individuals and the economy as a whole. That the federal government issues loans to people, assisting their plunge into debt, and then advocates barring them from working to pay them off only adds insult to injury.

Carey Wedler

Carey Wedler is a video blogger and Senior Editor for Anti-Media.

This article was originally published on FEE.org. Read the original article.

Revoking Work Licenses Over Student Debt Is Cruel and Senseless

Nearly one-third of Americans today must be licensed by the government in order to do their jobs.

Many of those people are among the 44 million Americans who have outstanding student loans. For that group of people, falling behind on student loan payments can mean that the state will strip them of their occupational license and their ability to earn a living in the job they were trained to do.

You Can't Squeeze Blood from a Turnip

This shocking policy kicks people while they are down and is an abuse of the government’s licensing authority.

The New York Times recently reported on the troubling practice of some states revoking and suspending occupational licenses of workers who fall behind on student loan payments. According to the Times, at least 19 states, from California to Virginia, have statutes authorizing such heavy-handed collection practices.

These policies have a practical problem, noted by the Times: It’s difficult for a person to bring overdue loan payments current after removing his or her ability to work in his or her chosen field.

The phrase “you can’t squeeze blood from a turnip” comes to mind. But these laws may also be unconstitutional.

The "Rational Connection" Is Lacking

In the 1957 Supreme Court case Schware v. Board of Bar Examiners of the State of New Mexico, the court held that under the 14th Amendment’s due process clause, state licensing requirements “must have a rational connection with the [professional’s] fitness or capacity” to work in their chosen profession.

In that case, Rudolph Schware had applied for a law license but was denied when authorities accused him of lacking a “good moral character” on account of his pro-communist activism some 15-plus years prior.

The Supreme Court reviewed the evidence and held that Schware’s past political activism and resulting arrests were insufficient to call his character into doubt or have any bearing on his ability to practice law. Therefore, the court ordered that he be allowed to sit for the state bar exam.

Likewise, the ability to afford personal loan payments doesn’t appear to have much connection to one’s ability to do his or her job. There are numerous circumstances — from medical problems to divorce or temporary unemployment — that might cause someone to default on a student loan.

A Cruel Catch-22

It’s hard to see why that means someone should not be permitted to continue offering services as a licensed cosmetologist, for example. The license revocation or suspension only becomes a Catch-22 because if they can’t work, they can’t earn the money to pay back the student loan.

Moreover, it is unclear how much discretion licensing boards retain under these laws to pursue less-draconian collection measures before revoking or suspending someone’s license.

Because the vast majority of student loans are given or guaranteed by the federal government, enforcing these statutes often causes state licensing boards to function as little more than debt collectors for the Department of Education — hardly the consumer-protection role they are alleged to perform.

It’s tragic that so many people today have seemingly insurmountable student debt, and it’s appropriate to hold people accountable for the loans they take on, of course. There are debt-collection laws and even bankruptcy laws that can be enforced.

But unless a state can articulate a strong reason why a person with an occupational license is no longer competent to perform his or her job simply because he or she has defaulted on a loan, it makes no sense to take the license away.

At best, the laws are heavy-handed. More likely, they violate the well-established constitutional right to earn a living.

Reprinted from the Daily Signal.

Caleb Trotter


Caleb R. Trotter is an attorney at Pacific Legal Foundation.

This article was originally published on FEE.org. Read the original article.