Blanket forgiveness of student loans has serious consequences

December 6, 2011  

By Ashley Withers
awithers@smu.edu

Jessie Farrow, an Occupy Dallas protester who has been camped out for three weeks, owes the bank $12,000 on his student loan — an amount he can’t pay off since he is currently unemployed.

“It was $40,000 and I’ve worked hard to get that down,” Farrow said. Farrow used to work as a welder before he lost his job.

But while he doesn’t regret his decision to go to school, he feels like the interest charges keep piling on and he wishes his debt would just go away.

“It would be so nice if they could just go and forgive them all,” Farrow said. “I would like that a lot.”

The idea of student loan debt forgiveness has garnered a lot of attention lately, particularly after President Obama announced his own student loan plan in late October. Obama’s plan would lower interest rates and forgive the debt on federal student loans after a certain number of years.

While the Obama plan focuses only on federal loans, SMU economics professor Dr. Tom Fomby is worried about the type of mentality that could stem from a blanket forgiveness of student loans, as Occupiers are asking.

“The first thing that stands out to any economist in this is the notion of moral hazard,” Fomby said. “People need some skin in the game.”

Moral hazard is a situation in economic theory that says that people without personal danger behave differently than if they had to take a risk themselves. If students could go to school without ever taking on the risk of student loans, Fomby and other economists believe this would change their decision on where to go to school.

“For me, blanket forgiveness is out of the question,” Fomby said. “Why should we treat students any differently than any other person taking out any other type of loan?”

Cindy De Jesus, an Occupy Dallas protester and a graduate of University of Texas at San Antonio, feels differently.

“It’s not realistic to expect an 18-year-old to know how this decision will impact the rest of their life,” De Jesus said.

De Jesus graduated in 2006 and still owes almost as much as she originally borrowed because of the interest accumulated over time.

“I feel like I keep putting money into it but it doesn’t go down as much as I would like,” De Jesus said. “After a while it just feels like a scam. It is the banks that are really profiting off of this and they had nothing to do with my education.”

De Jesus is not alone. She says she has met several other Occupiers struggling with student loan debt and her sister is also fighting the same battle.

“I’m actually most concerned about my sister,” De Jesus said. “She already has more student loan debt than I do and she hasn’t even gotten her bachelor’s degree yet.”

However, Fomby believes that despite the cost, education is still worth it and that students are still getting a positive return on their higher education investment. He feels that blanket forgiveness of student loans will set a negative precedent.

“If we do this for one generation of students, where does it stop?” Fomby said. “Who is to say you won’t do it again?”

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