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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Dec 13, 2012

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HR 4170, better known as The Student Loan Forgiveness Act, currently sits before a Congressional Committee. It’s sat there since March 8, 2012, and shows little sign of passing onto the House or Senate floor despite the best efforts of its creator, Congressman Hansen Clarke. In fact, according to GovTrack, the bill only has a 5 percent chance of getting passed by the committee.

Thanks to media coverage of the Student Loan Crisis (also called the Student Loan Bubble) millions of people have rallied in support of the Act. Over one million people even signed an online petition with SignOn to be delivered to the House of Representatives, the Senate, and President Obama in support of student loan forgiveness.

“People don’t have the purchasing power they need. There’s tremendous public support for this. The question is whether there is enough momentum on a relevant Workforce Committee behind it. I think we can get members of that Committee behind it. I think republicans understand the message of reducing consumer debt that people need more control over their income. People have basically given away their financial independence at this point,” said Justin Zorn, Legislative Director for Congressman Hansen Clarke, in an interview with loans.org.

A large portion of these people no doubt represent holders of the $1 trillion dollar national student loan debt. This massive figure has eclipsed the nation’s credit card debt proving just how costly college has become.

But why is student loan debt the only debt being rallied for forgiveness? Why not car debt or credit card debt?

Unlike car and credit card debt, which are largely viewed as being held across all demographics, student loans are mostly borrowed by young adults. Quick to anger, quick to rally, and quick to act thanks to a massively interconnected online community, our nation’s youth wisely band together in their self-interest to push for student loan forgiveness. Even though everyone wants to be out of debt, some forethought is needed to examine just how damaging student loan forgiveness would be for the rest of the country and the future. Forgiving college financing debt may, in fact, snowball and lead to widespread devastation in ways not presently understood by many “pro-forgiveness” adults.

First, there is precedent.

The Power of Precedent

The problem with setting a precedent, especially in legislation, is that it can be used as a model for similar situations. While in the courtroom this allows the justice department to better understand and manage cases, in the legislative branch this can lead to similar bills being proposed and passed in the future.

So why stop at student loans?

If student loans are forgiven, some predict that lenders would be burdened with a $1 trillion debt that they would have to manage. As you can predict, many lenders would go out of business. However, not all agree.

“It wouldn’t have much effect with lenders at all since the government would be compensating for any loss above and beyond the new payment standards set for this bill. Student loans under this bill won’t be forgiven. They will just be subjected to a different standard for income. The title is forgiveness but it would shorten the repayment period for income. Under the bill, the student borrower just needs to pay 10 percent discretionary income for 20 years. The situation we have now is one in which the government pays back a lot of debt after a period of time. There are just a bunch of hurdles for people to join income-based repayment,” said Zorn.

If Zorn is correct, then government money (which is taxpayer money) would compensate for this loss. If he is incorrect, then burdening financers could lead to a contraction of lending—leaving many young high school students without lenders to turn to for money.

As we faced whatever outcome spawned from that, other crises would begin.

The Slippery Slope

Is it too far of a stretch to imagine credit card borrowers, wanting to receive the same treatment as student borrowers, rallying together and pushing for their debt to be forgiven also? After all, their debt is less than the $1 trillion student loan debt. What’s another few billion to forgive?

Well, what about medical debt?

In fact, the argument could be made that forgiving medical debt would be far better than student loan debt. Injured and ill people can’t work, while some will never even recover. Students have a fighting chance of landing a job and paying off their debt, but the disabled and terminally ill? They usually don’t have a shot, so why not forgive their debt too?

If the precedent is made for forgiving such a gargantuan amount of student loan debt, the flood gates will open and every demographic or interest group in debt would push to have their balance forgiven.

While most won’t lose sleep over huge banks and massive financial institutions losing money to forgiven loans (except maybe bankers), it would set the dangerous precedent that massive amounts of money can be forgiven. Worse still, corporations, the increasingly cartoonish enemy of a society riding on a wave of anti-greed sentiment, could see this as an opportunity to push to have their own debts forgiven. Unlike crowds of students, who protest in their designer scarves whilst listening to music on their iPhones, corporations actually have the cash, resources, armies of lawyers, and know how to successfully get their own debts forgiven… once a legal legislative precedent is set.

So let’s transpose ourselves into scenes from the future and imagine that this is all happening at about the same time.

Students cheer and dance in the streets like a scene from a bad musical. Credit card owners rally online to sign petitions to cancel their own debt. Corporate officers at banks get increasingly closer to having heart attacks as they attend late night meetings brainstorming ways to recoup a $1 trillion loss. But where did the money for the Student Loan Forgiveness Act—which started rolling the snowball down the hill in the first place—come from?

It came from national defense.

Raiding the War Chest

According to the Library of Congress, HR 4170—assuming it passes in the Senate and House—would draw its gargantuan funding from Overseas Contingency Operations.

As the name implies, Overseas Contingency Operations funds are for the purpose of financing military and civilian costs necessary to achieve objectives in Iraq, Afghanistan, and Pakistan. While public sentiment has turned against the current war in Afghanistan, that does not mean that funding for ongoing efforts should be gutted to pay for student loan forgiveness.

Worse still is that the budget for Overseas Contingency Operations has actually declined. In 2010 the budget stood at $167 billion. It fell in 2011 to $164 billion. This past year it plummeted to $126 billion

“As you know one of the President’s main points in his 2012 agenda is to do more nation-building at home. We’ve invested trillions in the last decade in wars in Afghanistan and Iraq as well as dealing with the consequences following the war. The OCO is spending on the Afghanistan and Iraq wars. This bill would call for any dividends from our withdrawal to be invested in young people,” said Justin Zorn.

America’s longest war, which kicked off the War on Terror, has a scheduled end date in 2014 for the withdrawal of US troops from Afghanistan. Even though that is a year or two away, it still begs the question of whether it is wise to take funds from US forces and civilians that are operating in the area. These forces still need resources to complete their daily tasks and meet their daily challenges. Cutting these funds as the war reaches its end is not a decision to be made lightly.

If the funds for HR 4170 came from politicians’ salaries or a tax on lobbyists then perhaps that would be wiser (and celebrated across cities). As it stands, more discussion is needed to ascertain whether taking funds from military operations in the Middle East, where things have been rather chaotic lately, is the best choice for obtaining financing for the Student Loan Forgiveness Bill.

Even though HR 4170 has a snowball’s chance of passing—let alone passing intact—it still represents an outcry against the high costs of attending college. Hopefully, the Student Loan Forgiveness Act isn’t forgotten as the pipe dream of energetic youth who protest at the drop of a hat with romantic notions of raging against “The System.” Instead some change should come from it, if only in the form of humbled lenders, wiser borrowers, or a retrospective nation that avoided a potentially devastating snowball that could have rolled downhill gaining size until it crushed most everything in its path.