Skip to content
The Best Interest » Loan Forgiveness Ain’t Magic

Loan Forgiveness Ain’t Magic

A short and sweet post this week. Send this post to anyone in your friend group who thinks Uncle Sam can magically snap his giant fingers to eliminate student loan debt.

Loan forgiveness is not loan disappeareance. It ain’t magic.

A Simple Loan Analogy

Follow this analogy. You lend $500 to your brother. That $500 could be earning you 4% in a high-yield savings account right now, so you agree to a 4% interest rate on the loan.

Jesse – you’d charge your own brother interest?! Relax. It’s an analogy.

Your brother makes a few payments but eventually complains to your parents. The loan is too burdensome and he wants it forgiven. Your parents agree and forgive the loan. Poof. Presto. Magic. It’s forgiven. And from that day on, everybody lived happily ever after.

Well, except for you. Because you’re out $500.

You can’t just make a loan disappear! Because someone somwhere is owed that money.

When a loan is “forgiven,” the forgiving party (e.g. your parents) takes responsibility for the loan. They pay the lender (you) the balance of the loan, and then tell the borrower (your brother) that they are forgiven. But forgiveness is not disappearance. Someone (in this case, your parents) is out the $500. The debt ends up on your parents’ balance sheet as a loss.

An alternative “forgiveness” method – like the government “forcing” the lender to forgive the loan – is equivalent to your parents forcing you to eat the $500 debt your brother owes you. The injustice!

In the case of student loans, about 92% of student loan debt is owned by the U.S. government. It’s not owned by a person, like the way you owned your brother’s debt. I think this fact—that an intangible government body owns the debt—combined with other factors**, leads people to falsely believe the government can magically make student loans disappear.

**factors like student loan forgiveness programs, political loan forgiveness rhetoric, which don’t always clearly explain how forgiveness works etc.

The debt doesn’t disappear. It’s either:

  1. Paid off and forgiven, just like the scenario where your parents paid you the $500 your brother owed you, then they forgave your brother’s debt.
  2. Unjustly and forcibly “forgiven,” which as far as I can tell does not happen in equitable society.

In other words, it’s just the first option. Since the Federal government owns that debt, this means that student loan forgiveness equates the the government eating that loss, just as your parents could have eaten the $500 your brother owed you.

And what that really means is taxpayers will eat the loss.

Is that good? Is that bad? That’s not the point of this article. Personally, I love certain ways the government chooses to spend money and I abhor other ways it chooses to spend money. You have your opinions too. I shared my opinons last September.

I’m a big fan of proper incentives. For example, I love the idea behind PSLF and similar programs (although, in practice, the programs’ adminstration has been bungled badly). It’s not complete forgiveness, as it requires borrowers to A) make 120 months of payments and B) work for public-service job for 10 years. It’s a middle-of-the-road solution that incentivizes something our society needs.

I’m not here to pass judgment on the government (a.k.a. taxpayers) taking an L on their balance sheet to forgive student loans. Maybe it’s good, maybe not.

The point, instead, is a simple reminder and lesson that loan forgiveness isn’t magic. The debt must be paid off somehow. And in the case of student loan forgiveness proposals, that method is via the taxpayers absorbing the loss. I’ll let you be the judge on that. Call your Representatives to make your opinion heard.

Thank you for reading! If you enjoyed this article, join 8000+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.


Want to learn more about The Best Interest’s back story? Read here.

Looking for a great personal finance book, podcast, or other recommendation? Check out my favorites.

Was this post worth sharing? Click the buttons below to share!

Leave a Reply