What Supreme Court?

When our Founding Fathers wrote the U.S. Constitution, they put in place a system of checks and balances that would theoretically prevent one branch of government or one person from becoming too powerful. That system only works when it is followed.

On Tuesday, The Epoch Times reported the following:

The Department of Education announced Monday that it will begin notifying more than 804,000 borrowers that their $39 billion in federal student loans will be “automatically discharged in the coming weeks.”

“The forthcoming discharges are a result of fixes implemented by the Biden-Harris Administration to ensure all borrowers have an accurate count of the number of monthly payments that qualify toward forgiveness under income-driven repayment (IDR) plans,” said the administration in an Aug. 14 press release—a month after the forgiveness plan was announced.

The department said that the forgiveness program was part of fixes to address “historical failures” in which “qualifying payments made under IDR plans that should have moved borrowers closer to forgiveness were not accounted for.”

This is the Biden administration’s workaround the Supreme Court decision that declared the student loan forgiveness program unconstitutional. There are a number of problems with this program, but one thing that needs to be looked at is the fact that the government is interfering in a contract. When these loans were taken out, the borrower agreed to pay them back. The government should not and does not have the power to interfere in a private contract.

The article notes the cost of the plan:

According to an estimate by the Department of Education, the SAVE plan will cost $138 billion over a decade.

However, the University of Pennsylvania’s Penn Wharton’s Budget Model predicts the cost to be more than three times that. “We estimate SAVE will incur a net cost of $475 billion over the 10-year budget window,” a July 17 post about the Budget Model said.

The article concludes:

In a June 30 statement, Alfredo Ortiz, president and CEO of Job Creators Network, slammed President Biden for criticizing the Supreme Court order striking down his student loan forgiveness plan and his vowing to find another way to push ahead with it.

“President Biden shamelessly failed to recognize a co-equal branch of government in his remarks,” Mr. Ortiz said. “Rather than respecting the court’s decision, Biden promised more executive overreach to forgive student loan debt. His proposals include expanded income-driven repayment plans and a 12-month grace period when payments are set to restart this fall.”

Please follow the link to read the entire article. It includes the details of how to apply and how the Biden administration claims to be within the law.

When CNN Gets It Right

On Friday, Breitbart posted an article about the overlooked item in the discussion about forcing the government to forgive outstanding college loans.

The article reports:

On Friday’s “CNN News Central,” CNN Chief Business Correspondent Christine Romans discussed President Joe Biden’s student loan plan that was struck down by the Supreme Court and noted that the plan was really “taxpayers paying off all this student debt, but not addressing the core problem.”

Romans said, “This would have been significant relief, when you think of 44 million Americans with this student loan debt. And the typical student loan forgiveness was going to be $10,000, about half of borrowers have 20,000 or less. So, that would have been a real big relief for so many people. But, from the very beginning, there was also the discussion that it didn’t do anything to address the root cause here, which is inflation in the cost of higher education, right? So, this would have been paying off a bunch of student debt, taxpayers paying off all this student debt, but not addressing the core problem. So, that’s someplace where the White House and higher education can really try to fix the core — the root of that problem.”

In September 2022, U.S. News posted the following graph:

Just as a point of reference, this is the inflation chart from the U.S. Inflation Calculator site:

Shouldn’t we be looking into the inflationary cost of college instead of enabling that inflation by offering to pay off student loans? I realize that our money is worth less than it was in 2003–but not two and a half times less. It’s time to put strings on student loans. Colleges need to be encouraged to act with more fiscal responsibility. Colleges also need to use some of their legacy money to lower the cost of tuition for students.

 

A Decision That Upholds The Constitution

On Friday, The Washington Free Beacon posted an article about President Biden’s student loan forgiveness program. The program represents the federal government interfering in a signed contract–similar to the government’s interference in contracts between renters and landlords during the Covid pandemic.

The article reports:

The United States government has stopped taking applications for student debt relief, after a federal judge blocked President Joe Biden’s loan forgiveness plan, according to a notice on a government website.

A judge in Texas who was appointed by former President Donald Trump ruled on Thursday that Biden’s plan to cancel hundreds of billions of dollars in student loan debt was unlawful and must be vacated. The Biden administration is appealing the ruling.

In July 2021, The New York Post reported the following:

House Speaker Nancy Pelosi disputed the notion that President Biden has the authority to unilaterally ​cancel students’ federal loans.​

“People think that the president of the United States has the power for debt forgiveness,” Pelosi said during her weekly news conference on Wednesday.

“He does not. He can postpone, he can delay, but he does not have that power. That has to be an act of Congress.”

However, the President signed an Executive Order providing student loan forgiveness, and applications have poured in.

The student loan forgiveness program, even if it does not move forward, has served its purpose.

On Wednesday, Breitbart reported the following:

Voters between the ages of 18 and 29 cast their ballots in favor of Democrats 63 percent of the time in the 2022 elections, exit polling data found.

Data from NBC exit polls found that the demographic, comprised of Generation Z and the Millennials, voted 63 percent for Democrats and just 35 percent for the Republicans.

Generation Z and the Millennials were promised free stuff and do not have the education or the critical thinking skills to understand that free stuff isn’t free. The government has no source of revenue other than printing money or taxing Americans. I suspect we will see more promises of free stuff for this group in the future as this group traditionally does not come out and vote at election time. This time Generation Z and Millennials made the difference.

How Does Loan Forgiveness Work?

On Wednesday, CNBC posted an article about the tax impact of the student loan forgiveness. Obviously, the loan forgiveness is a cost to the federal government, but is there any financial return?

The article reports:

If you’re poised to benefit from President Joe Biden’s up to $20,000 in student loan forgiveness, you may also be wondering if the erased debt will trigger a tax surprise come April.

The short answer is: It won’t, at least on your federal tax return. 

Biden on Wednesday announced that he will forgive $10,000 in federal student debt for most borrowers, limited to borrowers making less than $125,000 per year, or $250,000 for married couples filing together or heads of households.

He will also cancel up to $20,000 for Pell Grant recipients, Biden said in a tweet.

The article notes how actually paying their student loans has impacted their taxes in the past:

Borrowers with federal or most private student loans are usually able to subtract up to $2,500 a year in interest payments they’ve made on their loans from their gross income, reducing their tax liability.

The deduction is considered “above-the-line,” which means you don’t need to itemize to qualify for the break. 

There are income phaseouts, and individuals who earn above $85,000 and couples who make more than $175,000 in 2022 are not eligible at all. Your lender is supposed to report your interest payments to the IRS on a tax form called a 1098-E, as well as provide you with a copy. You claim the deduction on line 20 of Schedule 1.

Most borrowers haven’t been eligible for the deduction in more than two years because they haven’t been making payments on their loans.

Since March 2020, the government has allowed most borrowers to press the pause button on their payments without interest accruing. “You can claim the student loan interest deduction based only on amounts actually paid,” Kantrowitz (higher education expert Mark Kantrowitz) said.

The article concludes:

If the debt forgiveness cleared your balance entirely, you’ll no longer be able to claim the deduction. Yet you should be eligible if you’re still left with student debt and resume your payments.

More than 12 million taxpayers claimed the student loan interest deduction in 2018, with tax savings of up to $550, according to Kantrowitz.

Just for reference, this is what has happened to college tuition since the government got involved. Since this chart was posted, there have been more increases.

While We Were Looking Elsewhere?

Politicians are shifty creatures. Some are more shifty than others. The Friday night news dump occurs when an administration wants to reveal news they are hoping won’t get a lot of attention. Other information is lost behind the screen of a major story.

On Wednesday, Red State reported the following:

Biden Quietly Forgives Student Loans for Thousands of Government Workers While Millions of Others Remain Crushed by Debt

Seems a little unfair. Where does the money come from to forgive these loans?

The article reports:

While tens of millions of other Americans remain burdened with massive student loan debts, government and other nonprofit workers have enjoyed substantial amounts of student debt forgiveness, and at a rate we’ve never seen before, thanks to a combination of policies most voters know very little about.

Under the Public Service Loan Forgiveness (PSLF) program, which was created by the College Cost Reduction and Access Act of 2007, federal student loan borrowers who work full-time for a nonprofit organization, including a government, can have their entire student debt balance discharged after making 120 qualifying monthly payments, a requirement that takes at least 10 years to complete, but could take longer.

Prior to receiving forgiveness, many of these borrowers enroll in a federal income-based repayment plan, which ties student loan payment amounts to income, allowing borrowers to “pay” as little as $0 per month without penalties, and as much as 15% of a borrower’s monthly discretionary income.

The article concludes:

The average loan amount forgiven for borrowers under the PSLF program in the 2020-2021 period was $94,907, while those enrolled in Biden’s smaller Temporary Expanded Public Service Loan Forgiveness program received an average of $44,324 in loan forgiveness.

When President Biden promised to help solve the student debt crisis and reduce the cost of attending college, I wonder how many voters knew only a relatively small group of borrowers, most of whom work for the government, would benefit from his pledge.

Come this November, we may find out.

This is government interference in contract law. When the students took out those loans, they signed a contract to pay them back.

Milton Friedman famously said, “If you put the federal government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand.”

Lendedu.com, reminds us of the history of government involvement in the student loan process:

1993: The Student Loan Reform Act officially implements the Direct Lending program. Under this program, the government can now directly lend to student loan borrowers, instead of through a private institution, which had been the only system since 1965 (FFELP).

Below is a chart that illustrates the impact of that program on college tuition:

As you can see, the cost curve increased when the government got involved in the student loan program. At that point the colleges had no incentive to keep costs down because students were taking out loans to pay for school. This began a vicious inflation cycle in higher education that we are still seeing today. For the 2019-2020 academic year at Harvard, the cost of tuition and living expenses was $73,800. The cost of sending a child to the University of Massachusetts – Dartmouth as a resident of Massachusetts is about $30,000. That is ridiculous.

What Happens When Expectations Are Raised Too High?

The Daily Caller posted an article today that illustrates the problem with teaching children to expect things they didn’t earn.

The article reports:

Nearly half of all America’s college students have deluded themselves into believing that the federal government will graciously forgive their student loans despite the fact that the federal government forgives only a very low percentage of student loans.

LendEDU, a student loan marketplace website, documented this startling disparity between belief and reality in a nationwide survey of 500 students currently attending America’s colleges and universities, reports the New York Post.

The survey shows that 49.8 percent of the students surveyed think they will be eligible for federal student loan forgiveness.

In reality, only about 10 percent of all college graduates will ever see any portion of their student loans forgiven under current loan forgiveness law.

Under President Obama, the government took over the student loan program in 2010.

Yesterday Fox Business reported:

According to the New York Federal Reserve, U.S. student loan debt has soared to $1.3 trillion becoming the second highest consumer debt category, more than both credit cards and auto loans.

In an exclusive interview with FOX Business’ Liz Claman, Washington College President and former Federal Deposit Insurance Corporation (FDIC) Chair Sheila Bair said the student loan debt crisis could spark next financial crisis, since it is a “tremendous drag” on the U.S. economy.

During the financial crisis of 2008–09, excessive mortgage debt collapsed consumer spending as more families opted to pay off debt. Bair said the same dynamic could be seen if the student debt bubble bursts.

When the housing bubble burst, there were assets that could be sold (although at a loss). There will be no assets to sell if the student debt bubble bursts–a lot of the people with the debt are living in their parent’s basements.

The Daily Caller reports:

Of the $1.31 trillion in outstanding student debt, some $31 billion, is “seriously delinquent,” meaning the debtors are at least 90 days past their payment dates.

Well known economist Milton Friedman is credited with saying, “If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.” I think it’s time to get the government out of the student loan business and give that business to the banks. Banks are better judges of how to lend money and how to get paid back. I have a strong suspicion that the taxpayers may get stuck holding the bag on this one.