Government

Will Forgiving Student Loans Change How People Repay Their Loans And Save For Higher Education?

It seems likely that there will be another round of forgiveness in the future.

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Student-Loans-CapStudent loan repayment planning is a complicated process. Most people choose one of two paths. Some will plan to pay them off within a certain time. Others will take advantage of the Public Service Loan Forgiveness program to get their loans forgiven in 10 years or the Income Driven Repayment program and pay for another 20 years.

Other means of loan forgiveness weren’t a factor in the planning process for most unless they were disabled or willing to take a chance in bankruptcy court. Until now.

President Joe Biden is pushing forward with his student loan forgiveness plan that will provide $10,000 in federal loan relief to people making under $125,000, or $20,000 in relief for those who received Pell grants. The forgiveness application is available now.

While this will help some people, it will do little for those with six-figure debts and three-figure paychecks. For them, their interest accrual will match whatever amount was forgiven in a few years.

Also, there appears to be no plans to keep schools from controlling their costs. Tuition and living expenses will continue to increase, so students and parents will have to take out more loans.

And let’s remember the future graduates who didn’t get forgiveness. They will want their share too.

So it seems likely that there will be another round of forgiveness in the future. Republican politicians and others are trying to get Biden’s proposal overturned in court. We don’t know whether they will succeed. Even if they do, it will only delay the inevitable.

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The possibility of future forgiveness leaves a third repayment plan for borrowers: pay as little as possible. Why should they pay off the loan if it will be forgiven eventually? After all, some Democrats in Congress have proposed forgiving up to $50,000 in loans. For some, the extra money can mean purchasing basic necessities. For others, it means starting a family. And a few will use the available funds to purchase their third rental property.

But changes to planning are not limited to graduates in repayment. For future students, some might feel empowered to borrow as much as possible even if they do not plan to go into public service. Maybe they will get housing in a safer area more conducive to studying. Or buy crypto.

Lastly, parents will have second thoughts about putting their money into a college savings fund. Instead, it will go toward retirement savings, investments, medical bills, or a luxury cruise.

The plans mentioned above are not foolproof. Forgiveness will most likely come from Democrats. To do this, they must control Congress and the White House. And even then, politicians will have to be pushed to put forgiveness on the table as it is still a sensitive issue. Eventually, it will be expected from their base every election year or they will vote … Republican?

Time will tell as to whether loan forgiveness will change repayment and financial planning strategies. The ultimate solution is to prevent another round of loan forgiveness. Perhaps this can shed some light as to which schools’ graduates are sending the most forgiveness applications. The data can be used to evaluate schools’ performance and determine whether they should continue to receive student loan funds.

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Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at stevenchungatl@gmail.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.

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