“Are they going to forgive $10,000 or $20,000?” one medical resident in the crowd asks me.
“Why don’t they just forgive it all?” another chimes in.
“I owe over $500,000 in student loans now, PSLF better survive!” shouts their program assistant director, referring to the popular Public Service Loan Forgiveness program, outdoing them all.
As a Certified Financial Planner™ lecturing at hospitals across the country, such questions on college debt are voiced at every talk I give. It’s to be expected. These medical and dental residents are typically in their first salaried job, making roughly $60,000, have yet to accumulate much assets or engage in any meaningful financial planning, but often have an item in the liability column as big as a mortgage. While graduate students may represent the extreme of the student loan epidemic, the plea for debt relief is apparent across young professionals.
Since the COVID-19 payment pause (from March 13, 2020 through September 1, 2023, federal student loan repayments were paused and interest rates were set to 0%), and especially since the Biden Administration has revived their campaign promises of student loan reform, outright forgiveness has become a popular petition.
In 2023, the U.S. Supreme Court squashed Biden’s initial attempt at $10,000 and $20,000 forgiveness for most federal student loan borrowers. The court held that the Higher Education Relief Opportunities for Students Act (HEROES Act) does not authorize the administration’s student loan forgiveness plan, claiming that the Secretary of Education does not have the authority to cancel student loan debt as the statute only permits a waiver or modification of financial assistance.
Student loan borrowers are obviously dismayed by opposition to forgiveness, but many are also bewildered.
“This makes no sense. Not only would it help me get started in life; but wouldn’t it be a boon to the economy? I could begin investing, start a family and be financially responsible, possibly buy a house in this hot real estate market.” I hear this rationale constantly from younger clients.
The potential, or lack thereof, for student loan assistance is based entirely on economics. As any Econ 101 professor will say, “There is no free lunch.” The overwhelming majority of help would need to come from the federal government. Over $1.6 trillion of student loans are held by the federal government. Employers, nonprofits, and state governments can all chip in, but their financial means pale in comparison to the federal government.
According to the Congressional Budget Office, the U.S. federal government rakes in over $4.8 trillion of tax revenue annually. This begs the question; where do our tax dollars go?
The Constitution’s Preamble says that the purpose of the federal government is “…to establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity.” These goals are pursued through government spending.
According to the U.S. Treasury, the federal government budget is roughly $6.7 trillion. Based on the $4.8 trillion of tax revenue mentioned earlier, simple math suggests a mismatch of inflows and outflows. The nearly $1.9 trillion gap is plugged primarily by debt. The U.S. national debt is currently $34.8 trillion. This reality is one of the main reasons student loan forgiveness is not so practical. Aside from the moral hazard of blindly sending every kid to college and allowing campuses to spend money frivolously without consequence, the government is banking on repayment of its $1.6 trillion of loans to student borrowers.
“Why can’t more of that $6.7 trillion budget go towards student loans? My $100,000 debt is a drop in the bucket to them?”
“Don’t we spend more on defense than any other expense? Can’t some of that be redirected to help us instead?” I often hear defense mistakenly quoted as the largest line item.
Here are the primary recipients of federal funds:
- The Office of Management and Budget estimates the total annual cost to the federal government for Medicare/Medicaid to be $1.78 trillion. These programs, which provide healthcare assistance to the elderly and those with low-income, represent the biggest entitlement in the American economy.
- Social Security This entitlement, a social insurance program primarily funded by payroll taxes, costs $1.44 trillion annually. Social security was initially meant to be a supplement to income in niche cases for retired workers and the disabled, but today it is the largest source of retiree income.
- The U.S. Department of Defense reports an annual budget of $898 billion. While the U.S. does have the largest defense budget in the world, it is not the federal government’s biggest expense.
- Interest on Debt. The federal government pays $868 billion of interest on debt-- the total of interest paid on U.S. treasury notes and bonds, and government securities. This line item is one of the most frustrating for American taxpayers as interest seemingly offers no tangible benefit. Granted, its timely repayment is what maintains the federal government’s stellar credit rating and ability to continue financing its budget deficit.
In year 2000, at the turn of the millennium, the U.S. national debt stood at $5.5 trillion. The ballooning deficit over the past 24 years is alarming, but an optimist could point to this as a natural symptom of inflation and economic growth. An effective measure to provide relativity is the National Debt to GDP (Gross Domestic Product) ratio. In the year 2000, National Debt to GDP was 57.6%. In 2024, it is currently 122.28%. This proves the growth of debt far exceeding that of the U.S. economy.
Just as a household is responsible for balancing its budget and financial plans, so is the government. They must be ready for a rainy day too, just like back to the economic stimulus benefits enacted during the COVID-19 pandemic that pushed the budget near $8 trillion. The $34.8 trillion of liabilities mentioned earlier is growing rapidly and must be addressed. The only way to do so is by either generating more tax revenue, or cutting government expenditures, basic inflows and outflows. Writing off any debt is akin to cutting revenue.
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Bryan M. Kuderna is a Certified Financial Planner™ and the founder of Kuderna Financial Team, a New Jersey-based financial services firm. He is the host of The Kuderna Podcast and author of ,"WHAT SHOULD I DO WITH MY MONEY?: Economic Insights to Build Wealth Amid Chaos".