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A Look at the New Student Loan Forgiveness Act of 2012: HR4170

Piggy bank standing on college books
Last week U.S. Rep. Hansen Clarke of Detroit introduced HR4170, the Student Loan Forgiveness Act of 2012. The congressman’s bill seeks to forgive student loans for borrowers who have made payments equal to 10 percent of their discretionary income for 10 years. The bill is still in its infant stages, so there is surely a long, obstacle-ridden road ahead of it, but such a proposal would have the potential to relieve education loan borrowers across the nation of a massive and crippling burden of debt.

After discipling under anti-debt financial planner Dave Ramsey, Clarke, a Democrat from Michigan recently elected to the House of Representatives in 2011, has structured his platform on the thinking that Americans should strive to live debt free.

“It’s time for Congress to stand up for the rights of student loan borrowers,” the representative said in a Congressional hearing. “It’s time to forgive these student loan debts.”

A History of Impossible Suggestions

Clarke is often criticized for being too extreme with his proposals. Before HR4170, Clarke proposed the Detroit Jobs Trust Fund bill, which seeks to rebuild Detroit and create jobs for the unemployed. While the goal behind the bill is very admirable, the practicality behind the execution of the bill is anything but.

In order to fund the Detroit Jobs Trust bill, Clarke has asked Congress to return all the last five years of federal tax dollars paid by the citizens and businesses of Detroit back to the city. Detroit could then use the estimated $10 billion to pay down its debt, develop new jobs, return old jobs, improve education, and improve the city’s infrastructure.

The Detroit Jobs Trust bill, while good-intentioned, fails to recognize the fact that there are many distressed cities in the nation. If Congress sets the precedent of returning federal tax money to one of those cities, then the others will expect similar treatment. As the national debt soars out of control, and government spending increases, the country cannot afford to return tens of billions of dollars to cities across the nation looking to correct themselves with federal aid.

Similarly, the Student Loan Forgiveness bill may carry a similar noble intention, but be plagued with an impossible plan for execution.

Debt Skyrocketing Out of Control

However, those afflicted with the curse of student loans would likely agree with the congressman’s proposal—particularly as student loan debt tips the $1 trillion benchmark and now surpasses even the outstanding national credit card debt.

Students everywhere are taking to the streets and saddling themselves with picketing signs to protest the rising cost of education and the growing problem of student loan debt.

The 99 percent have become home to radical- and ordinary-thinking students alike, and a host of websites publish the tragic stories on a daily basis of young adults who have had their finances crushed by the problem of uncontrollable student loan interest.

Some economists and experts even fear this skyrocketing debt is giving rise to yet another economic bubble. And if a bubble is forming from student loan debt, the very last thing our recovering economy needs is to suffer another explosion on par with last decade’s mortgage crisis.

If the nation’s newly educated had their debt wiped free, it may very well save us all from such a crisis—but is mass forgiveness something that’s even feasible?

There's No Such Thing as a Free Lunch

The problem with forgiving all debt after 10 years of paying 10 percent of one’s discretionary income is that it does not relieve the debt crisis, but rather moves it around. Debt exists because money that should be present is not, and thus is borrowed. Debt doesn’t magically come to existence just to plague those without money. Rather, it’s a voluntary service we all get ourselves into willingly (except for the national debt, but that’s a different beast altogether).

If Congress approves of a mass forgiveness program, the student loan debt crisis doesn’t go away—it shifts over to the lenders. In the case of federal student loans, those lenders will be Sallie Mae and the government itself.

Sure many who are disheartened and upset with the financial industry may want exactly that—to “stick it” to the 1 percent—but before making rash decisions, it’s important to consider all possible implications.

Imagine lenders getting taxed with the $1 trillion bill. They originally lent that money so that students could essentially “purchase” a degree. But if lenders were told they would not be getting paid back, they would essentially have spent a trillion dollars on nothing: no degree, no future job, and no lifetime of increased wages.

Assuming Sallie Mae could stay in business, future generations would probably find it much harder to qualify for federal student loans—if such financing even continues to be offered. But more likely, many lenders (particularly the small guys who have long practiced good business conduct and who played no part in the recent financial crises) would cease originating federal loans since Sallie Mae would probably refuse to tolerate paying for the nation's education, and the government certainly won't be in any position to continuously take on students' debt. It would be impractical for any source to continue backing federal student loans.

There's no such thing as a free lunch, and making a simple proclamation such as, "Your debt is forgiven!" does not make debt disappear. Rather it's shifted from one source to another, and it still must be paid back some way or another.

But who knows: when riddled with debt, man will go to whatever lengths he must to remedy his situation. When in dire straits and looking for relief, sometimes the selfish idiom, “Better you than me,” starts to sound very appealing.