Does President Biden’s loan forgiveness change student loan strategy?
Millions of borrowers were ecstatic when President Biden announced an executive order to forgive up to $20,000 in federal student loans for each borrower. As a current graduate student, I saw this excitement firsthand from my classmates who felt like they just won the lottery. And why not? They just received a $10,000+ windfall. Although I had received Pell Grants and never made a six-figure income, I didn’t benefit from this action. Disappointed, I considered whether I should have changed my student loan strategy by during college and what I would do differently if I were starting college today.
Staying out of student loan debt was the right strategy at the time and is usually the optimal financial decision
I was lucky to have the US Army fully fund the first half of my college education. When I left the Army in 2015, I had the Post 9/11 GI Bill funded at 70% and enough credits so that I could graduate in two years as a transfer student. For those unaware of the Post 9/11 GI Bill, a 70% rating means that Uncle Sam will pay up to 70% of the tuition for a state school as well as 70% of the housing allowance that a sergeant with dependents would get for the zip code where your school is located. The Post 9/11 GI Bill is a truly amazing deal that every veteran should take advantage of.
While my choice of school wasn’t entirely financial, financial considerations definitely played a factor in my choice of undergrad. Attending George Mason offered several financial benefits:
- In-State Tuition – At the time there was no national requirement for state schools to offer in-state tuition for veterans using the Post 9/11 GI Bill. However, Viriginia did offer this benefit at the state level for veterans. They were one of a few states that offered this benefit at the time
- Athletic Scholarship– During my recruiting trip to the school I negotiated a partial scholarship to offset most of the remaining 30% of tuition that the GI Bill didn’t cover
- High Cost of Living – In this case a HCOL is desirable. The high cost meant that I was eligible for 70% of ~$2500/month or about $1750 each month. Even though the DC area is expensive I was able to reduce costs substantially by renting out an entire house and splitting the rent evenly with five other roommates. We managed to get our rent down to $450/month which left me with significant cash flow. If I had instead gone to school in Pittsburgh, then there’s no way I could have had $1300 in my budget after rent. It would have been impossible because my housing allowance would have been under a $1000 a month total!
- Higher Paying Jobs -Wages in the DC are much higher than most other metro areas outside of a handful of other big cities. Ironically, I received my best offer from a company headquartered in Wisconsin. Go figure.
Given all the financial support I had, there really was no reason for me to take out a loan. Had I gone to a more expensive school then I might have needed loans, but I had no desire to spend money I didn’t have just to go to a private school. I’m glad I ultimately decided to attend George Mason as the school provided me an excellent education.
We can only make decisions with the best available information we have at the time.
It’s easy but foolish to beat yourself up when events don’t go your way. It’s easy because taking a different course of action would have been easy in most cases. For example, after finding out the winning lottery ticket was bought from the 7/11 you stopped at you might think “I knew I should have purchased that lottery ticket today. I had a feeling!” In reality though, there’s no way you could have known that the winning ticket would be sold at your 7/11. Similarly, I would never have guessed five years ago that the federal government would enact widespread student loan forgiveness in 2022. The federal government could have taken another ten years or perhaps never addressed the problem in my lifetime. With the information I had at the time it would have been a suboptimal student loan strategy to take out student loans only to live a more luxurious lifestyle. Given my understanding of compounding interest I probably should have saved more than I did, not less.
What I’d do differently today
If I were just starting college today, my strategy for saving and spending wouldn’t be drastically different than before student loan forgiveness was announced. $10,000 is simply not enough money relative to the overall cost of a college degree to radically shift decision making. However, it is enough to change a few small decisions at the margin. Now that we’ve learned the federal government is willing to enact widespread student loan forgiveness, the chance that we some other action in the future is more likely. I’m definitely not suggesting that college students should load up on debt. Please don’t. Here’s how I’m thinking differently about my finances today.
- Maximize Retirement Accounts While in College– Thanks to an internship that I continued through the year part time I was able to both invest LendingClub notes and contribute to my Roth IRA. However, I didn’t max out my Roth IRA in each year. I certainly had enough income to contribute the maximum amount, but I did not take advantage at the time. If I were in the same position today, I’d want to focus on maximizing my Roth IRA while in college using income from a part time job even if that meant I’d need to take out a small loan amount to cover the difference.
- Maximize Retirement Accounts over Children’s College – Before President Biden unveiled his executive action on student loan forgiveness it was the optimal decision to maximize your own tax advantaged accounts before worrying about tax advantaged accounts for your children This hasn’t changed. There are many ways to pay for college but few ways to efficiently fund your retirement. Even so, there’s definitely an emotional component as a parent. My wife and I always want to do what’s best for our daughter, so we feel guilty about funding our retirement accounts over our daughter’s education. It’s not logical to feel guilty but that’s part of being a parent. What’s changed now is that I feel less guilt about prioritizing my own retirement accounts. Even if our daughter needs to take out loans they could be forgiven.
- Place More Emphasis on Work Life Balance – $10,000 in loan forgiveness isn’t going to make or break most people’s long term financial health. However, on the margin it suggests that my family’s life might be easier by staying within an income limit of $250,000 to benefit from future policy decisions. The Financial Samurai even noted that $250,000 might be the Ideal Income right now based on fiscal policy. Instead of spending 80 hours a week working to try to maximize my family’s potential income, I might be more inclined to prioritize time.
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