The Supreme Court dealt a heavy blow to President Joe Biden and millions of Americans as it blocked student loan forgiveness promised by the administration since in 2019. Understandably, this decision causes great frustration and possibly bitterness toward the powers that be.
Fortunately for them, we citizens can be very forgiving and they certainly know this. We will likely forgive and forget as soon as the next hot button issue grabs our attention.
But, before we move on, it is valuable that we spend a moment reflecting on this saga to ensure we move forward with as many lessons as possible. Here are my reflections on key lessons we can all learn from the recent student loan debacle.
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Take All Presidential Declarations With A Grain Of Salt
In a perfect world, everything presidential candidates promise will happen. Unfortunately, the world isn’t perfect and we should take each presidential declaration with a grain of salt.
The current iteration of student loan forgiveness traces its origins to April 2019 with Elizabeth Warren, who as Democratic primary candidate, said that she would cancel up to $50,000 in student loans if she were elected president.
This should have been seen as an obvious red flag based on the timing and stakes.
About a year later, Democratic primary candidate Joe Bidden tweeted “we should forgive a minimum of $10,000/person of federal student loans”. Luckily for Biden, he had a captive audience thanks to the pandemic. This declaration certainly helped increase Biden’s stock as the democratic candidate and eventual president.
On both sides of the aisle, presidential candidates deploy the tactic of making emotionally stirring declarations. Before Biden and Warren, there was Donald Trump with his “Make America Great Again” slogan. Trump also stirred people up by talking about building a wall that never came to fruition.
As a takeaway, we should recognize that our political leaders frequently make promises that they fail to deliver upon.
It is beyond the scope of this post to discuss why that fact exists, but we should recognize it and act accordingly. One thing we know for certain is that motives come into play. Meaning, a candidate has extra motivation to say whatever is necessary to galvanize the support of millions of people to win votes.
Don't Leave Your Life Up To “They”
We’ve all heard the statements. “They will fix the problem” or “they raised taxes”. I’ve even frequently heard that “they don’t care about a certain race of people”. Today, we are likely to hear someone say “they blocked student loan forgiveness”.
But, who are these “they” that we often speak of?
The Trump administration declared a national emergency on March 13, 2020. That same day, the interest rate on student loans was set to 0% and required payments were suspended. It would seem that “they” did us all a major favor, right?
They may have truly done us all a favor in the short run as we wrestled with the pandemic, but it’s not so clear that they did most people good from a long term perspective.
Why might this be so?
Borrowers Regressed Or Remained Stagnant
In the more than 3 years since the pandemic started, student loan interest has been held at 0% with suspended payments. At the same time, the economy has been booming and we’ve seen record low unemployment rates. Additionally, there has been a general sense of exuberance for everything from real estate to meme stocks.
Given how well things have gone, we would expect many people to have made significant progress on paying off their student loans. Unfortunately, reality paints a different picture as most student loans borrowers have stagnated or regressed over this time.
Back in May 2022, the Federal Reserve reported that 60% of borrowers in their sample had not made a single payment toward their student loans from August 2020 through December 2021. Beyond that, other reports show the number of student loan borrowers who continued to pay their loans was between 1 – 18 percent. And to make matters worse, credit card debt is at an all time high which means that people have been busy spending.
Its curious that we see such trends during a time of great prosperity. As such, this forces us to question what has actually happened?
I believe that what has occurred is that most borrowers expected student loan forgiveness, naively accepted deferment, and failed to make any headway as a result.
Never Wait For They
This situation highlights the importance of us taking care of our own lives first. Sure, we’d love for a benevolent government to actually deliver, but they fail us all the time.
A better approach to life would be to take matters into our own hands rather than waiting for gifts handed down from politicians. And if the gifts come, they can serve as boosts to the plans we are already working for ourselves.
With this mindset, many more student loan borrowers would have made progress over the last 3 years.
It’s Best To Make Decisions Based On Known Facts
Dealing with unknowns is one of the most difficult things about making long term plans. Fortunately, an efficient counter for this problem is to focus on known facts when making decisions and tackling unknowns as they arise.
In terms of student loans, we were aware of proposals for forgiveness with no concrete resolution in place. Therefore, the only known fact that we’ve had to work with for several years was that talks were happening. In the meantime, we were still bound to our deferred student loans.
Finding myself in this situation, I chose to continue forward with my plan to pay off my student loans. Just as I had before the pandemic, I put money toward my student loans each month and eventually paid them off in March 2022. This means that I continued to make progress for 2 years despite 0% interest and the option to defer payments.
Many other borrowers missed in this regard as they sat idly by waiting for a final decision by the powers that be. Meanwhile, a large portion decided to live as if forgiveness was a sure thing and went further into other forms of debt.
Rather than working off the known fact principle, they operated in the unknown. Sadly, this strategy did not work as millions must now add student loans back to their list of monthly obligations.
There Is A Right And Wrong Way To Take Advantage Of A Situation
Imagine you suddenly inherited millions of dollars. What would you do with it?
We’d all like to think that we would be great stewards of our new fortunes, but there is something about advantageous situations that make us careless. Perhaps it’s because the windfalls are unearned or we think the good fortune will last forever.
Whatever it may be, something causes us to squander good situations all the time. Just ask the 70% of lottery winners who end up going broke.
I remember my first year of true adulthood like it was yesterday. I was fresh out of college and working as a teacher for $36,000. My income wasn’t in the six figure range at the time, but my overhead was low with rent at $300 and practically no other bills.
As I look back, I can’t help but think that I should have done more to take advantage of this ideal situation. Paying $300 for rent for an entire 3 bedroom house in a good location is a mere dream nowadays. What I did instead of becoming debt free was spend nearly every dollar I earned eating out and buying gadgets.
Hindsight shows me that I took advantage of this ideal situation the wrong way.
Many Borrowers Failed To Properly Take Advantage Of The Situation
My story is a great example of the wrong way to take advantage of situations. Similarly, many student loan borrowers have recently fallen into the same trap.
A recent paper by the National Bureau of Economic Research found that borrowers who benefited from student loan relief increased their private debt balances during the moratorium. Similar to my story, these borrowers took advantage of not having to make student loan payments by taking on credit card, mortgage, and auto debt.
Using administrative credit panel data, we show that the payment pause led to a sharp drop in student loan payments and delinquencies for borrowers subject to the debt moratorium, as well as an increase in credit scores. We find a large stimulus effect, as borrowers substitute increased private debt for paused public debt. Comparing borrowers whose loans were frozen with borrowers whose loans were not frozen due to differences in whether the government owned the loans, we show that borrowers used the new liquidity to increase borrowing on credit cards, mortgages, and auto loans rather than avoid delinquencies.
Unfortunately, student loans won’t be forgiven which means that these borrowers are now further behind where they started. Thus, they have taken advantage of the relief period the wrong way.
This then calls into question what is the right way to take advantage of a situation?
The Right Way To Take Advantage Of A Situation
Using the student loan relief program as our example, I will highlight a better way to take advantage of fortunate situations.
For starters, taking advantage of a situation the right way versus the wrong way comes down to our relationship with time. More specifically, we should look to leverage our good fortunes to set ourselves up for long term success.
If properly done, we should find ourselves better off than we were before the good things started to happen for us.
My personal student loan balance was greater than $50,000 when the relief program began. I could have taken advantage of this situation the wrong way by purchasing a Ford Taurus, which I was obsessed with at the time. Instead, I took the better route which was to save for the lump sum payment that cleared my debts.
In this manner, taking proper advantage of the relief program enabled me to save even more money thanks to 0% interest. Then, I used the money saved to become debt free. I now enjoy the benefits of being debt free and am in a better long term position than before the pandemic started.
All of us will stumble upon fortunate moments in life as we move forward. The key is for us to avoid thinking only in the short run and make decisions that set us up well into our futures.
Be Angry But Don’t Be A Victim
The underlying message of this entire post is that we should always take care of ourselves first. Our government is notorious for selling us a bag of lies and this student loan fiasco is no different.
Many people are undoubtedly moving forward with bitter tastes in their mouths – and rightfully so. I suggest that we don’t soon forget this ordeal and hold our politicians accountable as best we can. My next recommendation is for us to not let this situation turn us into victims who then need to rely on the very same people who let us down at the start.
A better strategy would be for us to take extreme ownership for our situations, no matter how difficult they are. With this attitude, there is little we can’t accomplish. Plus, this mode of thinking beats waiting on someone else to make our lives better. We now know from this student loan experience that they will only leave us disappointed.
The Path Forward
As student loan repayments start in October, many borrowers will find themselves in the same financial positions they were in 43 months prior. There is no recourse for these individuals which means that it is time to start taking matters into their own hands.
Fortunately, we now have clarity as opposed to being held in limbo.
Looking ahead, we know that time will pass and I urge you to consider where you will be after an additional 43 months. For most, this is ample time to clean up our own messes.
Those who take charge will find that the time and effort was well worth it. The benefits of clearing debt are deeply rewarding. For those who don’t, they may find themselves in the same position after another 3+ years. In which case they will likely look for the next politician promising grace.
In the end, it’s up to you to decide who you will be and how you will use your money, time, and focus.