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The $10,000 band-aid

The $10,000 band-aid

August 26, 2022

About two weeks ago, my wife and I dropped my daughter off to begin her freshman year at Iowa State University.  It was a day we had planned for years--hopeful and bittersweet.  Our daughter was excited to be starting a new chapter in her life and matriculating to be able to enjoy a career that she loved that she hopes will allow her to graduate without being suffocated with college debt.  The process to get to this point started a couple of years back.

After high school juniors sit for their SAT or ACT exam, their information is shared with college and university admissions throughout the US.  The onslaught of marketing materials from large universities and small liberal arts colleges across the country begins at the beginning of their junior year and continues well into their senior year.  Securing students to your institution is big business for these institutions.  Each student that commits to their school represents tens of thousands of tuition, room and board over the next 4-6 years.  Schools try to attract students with everything from renovated dorms, to new athletic stadiums, humungous dining halls, new fitness centers, rebuilt lecture halls and more entertainment options than students can participate in.  Almost all schools have multiple trendy coffee shops and fast food restaurants.  One school we visited offered an activity pass for less than $100 that allowed for unlimited greens fees to the student at the golf course near campus and unlimited lift tickets at the nearby ski hill.  "College students live the life most of us aspire to in retirement" 

Money is being spent hand over fist to one-up the competition and the costs of tuition continue to skyrocket at rates higher than the overall inflation rate.   Student loans are protected by federal statutes from bankruptcy, so the risk of default to student loan lenders is limited.  In fact, one of the few ways that debt can be discharged is through death.  There are income-based repayment plans and loan forgiveness programs for certain high-demand careers, but by-and-large most borrowers don't qualify for significant debt forgiveness.

Costs continue to skyrocket, lenders continue to underwrite more and more student loans, and ultimately, the graduate is left to pay for an education for years and years.  Limited consideration is given to the capacity of the student to repay their loans, or the viability of their future careers to provide the requisite income to repay the loans in a timely manner.  

The White House recently forgave $10,000 to certain student loan borrowers as part of a larger debt forgiveness program, and those lower-income borrowers with Pell Grants may be entitled to up to $20,000 in relief.  At this time, questions remain about whether or not the President has the authority to implement these sweeping changes with an Executive Order.  That will be decided by the courts--likely not until after the mid-term elections.  Further Presidential or Congressional action isn’t guaranteed to future borrowers, underscoring the importance of creating a wise college strategy.

This one-time relief does not fix the systemic problems of our educational system that makes higher education unattainable for many, and fiscally challenging for those who do.  The loan relief is welcomed by many, viewed skeptically as a hand-out for mid-term votes from younger voters by others, and addresses the symptoms and not the disease.  State and federal universities that accept federal funding and federally backed student loans need to find ways to keep costs in check and improve outcomes for the students they serve.   As with most difficult decisions in Washington DC, the can is being kicked on down the road.  Until these are addressed, the problem will not go away.

This letter is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your tax and accounting professionals before modifying your tax strategy in response to the White House actions.