Thoughts on Student Loan Forgiveness and 529 Plans

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What will my children want to do when they grow up? How will the world look when they’re older? How can I teach my kids to navigate a world that has rapid change and ever-increasing competition? What kind of personalities will they have? These are some questions that emerge as my wife and I think about having kids.

The recent discussion on student loan debt forgiveness got me thinking about what we can do to make sure the youth of the future, regardless of economic background, can thrive in a future where everything is getting more and more expensive and competition between people and countries is ramping up. Here’s how I’ve broken down this article:

Pros and Cons of Biden’s Student Loan Forgiveness
Why bankruptcy may not be the best option for student loans
Understanding a 529 Plan
Creating a universal 529 Plan
Going to community college and working part-time
Conclusions

Pros and Cons of Biden’s Student Loan Forgiveness

Joe Biden’s student debt relief program will give $20,000 of debt relief if you received a Pell Grant and make less than $125,000 ($250,000 if you’re married). The program will give you $10,000 of debt relief if you didn’t receive a Pell Grant.

Pros
I think that student loan forgiveness is a great idea. According to the Wall Street Journal:

“More than half of those 45 million people with federal student loans have $20,000 or less to pay, with about a third of all borrowers owing less than $10,000” [1]
WSJ

“Student debt is most prevalent among Americans aged 25 to 34” [1]
WSJ

This means more than 20 million Americans will have a massive burden of debt removed, allowing them to spend their capital and money elsewhere in the economy. To those that say that this measure is inflationary, inflation isn’t caused by government spending, but rather the creation of new money, money velocity, and supply of goods. As long as the Federal Reserve doesn’t print new money to do this, its impact on inflation is no more than the billions of dollars funneled into the defense contracting industry annually by the US government.

Removing the burden of debt of millions of young Americans is the only pro I see in this debt relief program. It’s unfortunately a band-aid on America’s hemorrhaging problem of rising educational costs and unsustainable meritocratic emphasis on college degrees.

Cons #1 – One and Done

Let’s say that Biden can explain away the unconstitutionality of an executive order related to government spending and get everyone’s student debt forgiven. The problem is that this only benefits students who have debt today and does nothing for kids of the future generation. It’s essentially a “one and done” solution and doesn’t address the problem of rising educational costs in a country.

Cons #2 – Reinforces Educational Elitism and Meritocracy

A self-employed plumber, electrician, real estate agent, and even some technicians and mechanics can easily clear 6-figures. These types of jobs are important to the economy, require a high level of skill and technical knowledge, and they don’t need a college degree. This debt relief is a signal that higher education, and therefore the debt accrued during its pursuit, is more worthy than pursuing technical trade skills, apprenticeships, or other routes that don’t fit the conventional education routes.

If we make college free, then would we create a world where a college degree becomes the norm and expectation? Would jobs that previously required a high-school diploma now require 2-4 years worth of schooling and a bachelor’s degree? Would we have extremely more competition to enter college that would cause undue stress and pressure on high school and middle school students?

The Problem With Bankruptcy Court

There is an argument that people should be able to have their student loans forgiven through bankruptcy court. If other debts can be forgiven with bankruptcy, why can’t student loans be forgiven as well?

This may be a good solution worth experimenting with, however, there may be some unintended consequences that we should be watchful for. Specifically, this may cause banks to only give loans to a certain demographic, or to only a few majors.

For example, if we can’t pay off our home loan and we declare bankruptcy, the bank can foreclose and repossess the home. If you default on your student loans, the bank can’t take back your diploma or your education. This imposes greater risks on banks and may cause them to be stricter with their lending practices. Lenders would be more calculating and now take into account what major you are pursuing, your gender, your age, your racial and family background, and the school you are planning to attend, before giving you a loan. This may cause bright students from poorer backgrounds to have difficulty getting loans, or cause them to have higher rates.

Also, anyone who wants to major in arts or humanities, which typically has a lower post-graduation income compared to majors such as computer science or engineering, may have a harder time paying for college. Banks may be less inclined to lend money to those planning to major in less lucrative fields – after all, to the banks, this is all just a risk versus return calculation. I personally can’t imagine a world where everyone majored in STEM would be a world worth living in.

A Better Option: 529 Plans

A 529 Plan is a savings brokerage account that can be opened on behalf of a child. You, or anyone you know, can depository money for your child and then that money can be invested in stocks, bonds, ETFs, and mutual funds. The money in this account grows tax-free and the final amount can be used for qualified educational and training expenses such as:

Tuition at a university or college
Books and supplies
Room and board
Study abroad programs
Private preliminary schools
Trade and technical schools (real estate, plumber, electrician, technician, etc.)

If you have extra savings each month to contribute to a 529 plan, I highly recommend doing so for your child; this plan will give your children the flexibility to decide what career path to choose and gives them the opportunity to start their young careers without the burden of debt.

The problem is that a large portion of parents can’t afford to stash away extra money in a plan. In the future, rising education costs, as well as the rising cost of other expenses, will make contributing to these sorts of plans a greater burden for middle-class families.

Creating a Universal 529 Plan

Going forward, I believe that the government should sponsor a 529 program for all children whose parents earn less than a certain income. This should be seen as a universal youth endowment that is a fixed amount: young students can either use it to pay for college, or they can use it to start a technical training program and use the extra funds to buy the equipment they need to start their own business. A portion of the national defense budget should be allocated toward the training and education of the nation’s youth.

This isn’t the same thing as “free college”; the college will still cost money, but now students have the power to choose how they spend their endowment: do they want to use it to go to an expensive private college, do they want to instead go to a community college and keep the extra money to get additional training later on, or would they rather pursue a technical education or apprenticeship program and keep the extra endowment money to start a small business?

Going to Community College and Grinding as an Option

A common argument is that if someone really wants to they can “go to community college and work nights to graduate without debt…I did it so why can’t everyone else.”

I didn’t go to community college, but I did work a part-time job while attending university. I also received Pell Grants and had to take out $16,00 in loans (which were paid off in full in 2018). Shreen-shots below for proof. If I had gone to community college instead, I probably would have been able to reduce my loan amount further.

Kudos to anyone that’s been able to grind and work part-time while going to school and paying off their debts, but there is a problem when this is expected of everyone.

If you are spending a significant portion of your time in college working part-time, then there are other opportunities for growth that you aren’t able to pursue. For example, you may not have time to pursue internships (some internships for journalism, political science, and other majors are unpaid), work on side projects such as engineering hack-a-thons or build-a-thons, spend time in clubs, or round out your education by having a double major or minor.

Conclusion

We will all benefit as a society by placing smart, talented, and driven young individuals in jobs and career paths that they will thrive in and will be excited about. We also benefit as a nation when we have enough personnel in specific, strategic fields. An educated and highly skilled workforce with the correct technical knowledge and curiosity keeps a nation at a forefront of innovation and growth. Without enough workers in the correct field, we run the risk of falling behind. That’s why making sure every young individual has not only the resources to decide what career path is best for them but also the means and funding to pursue it.

[1] https://www.washingtonpost.com/education/2022/05/22/student-loan-borrowers/