NHEG-September-October2022

September October 2022
NHEG EDGUIDE September - October 2022
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.
Source: The Foundation for Economic Education (FEE)
https://fee.org/
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WEDNESDAY, NOVEMBER 10, 2021 It would be for your own good, of course.
BY JON MILTIMORE
Should the Government Get To Decide What You Do
after High School?
f you’re in high school, you probably get asked a lot
about what you plan to do after you graduate. Maybe the
answer is obvious for you. Perhaps you’re planning on
going to college or trade school, or you want to get a job
right away. Or maybe you don’t know quite yet. Maybe
you’re still exploring your options and trying to figure out
what kind of career you really want to pursue.
No matter what you end up choosing, the first steps you
take after high school can be kind of a big deal. After all,
this is your entry into the real world. The options before
you are vast. For the first time in your life, you get to
choose your own future.
But what if you couldn’t choose? What if the government
decided for you what your post-graduation plans would
be, at least for a year or two? Would you be happy about
that? Would you appreciate being told how and where to
take your first steps as an adult?
I know I wouldn’t be. After slaving through 12 years of
compulsory schooling, the prospect of spending even
more of my life doing what someone else tells me to do
would be, to put it mildly, disconcerting.
Sadly, this is exactly the kind of thing that some people
are trying to make a reality.
Obama and former US diplomat, the piece suggests that
this is the best way to address political polarization, and
that it would also give young people valuable skills and
experience.
“A program of mandatory national service, if designed
effectively, would bring together young Americans from
across the country and all socioeconomic groups,” Carden
writes, “to work on public interest projects and accomplish
common goals for the good of the country.”
Carden suggests a number of projects that could be
part of the program, such as “tutoring and mentoring...
improving environmental conservation...building public
housing...and helping in the construction, rehabilitation,
and maintenance of public parks and facilities.” In return,
participants would be given substantial benefits, such as
government-covered tuition and living expenses for college
or trade school. Service would be for a fixed period of
one or two years, and Americans would need to complete
the requirements at some point between the ages of 18
and 24.
Addressing the Polarization Problem
In theory, one of the main benefits of this program would
A recent article in Foreign Policy, for example, argues be less divisiveness and a greater respect for others.
that America needs a mandatory public service program.
Americans from vastly different backgrounds and locations
could come together in common causes, building
Authored by David Carden, a long-time friend of President
comradery and being exposed to new ideas and people.
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