Student Loan Debt Relief - A Middle Class Income Investing Experiment
by Christopher Levarek
“I can only show you the door, you’re the one that has to walk through it.”
- Morpheus (The Matrix)
What if I told you that you are a blind investor investing 20-60% of your annual income into a fund with no voice as to where it goes.
Sounds made up right?
Actually it happens daily to each and every citizen in the United States. These investments are orchestrated through the biggest fund of all, government spending.
Now whether you like paying taxes or not, you are trusting that those taxes are a worthwhile investment. An investment into the economy or infrastructure of the United States.
Did you know that inflation acts in a similar manner as taxes? Did you know it’s a tax?
When there is inflation in the economy, prices are higher and so you pay more. So, you are inevitably investing more of your earned dollars to buy things. Just like when you have a higher tax to pay, you are paying more of your earned dollars into the system or economy.
Inflation is therefore a tax on your income.
Today, I want to explore the new student loan debt relief program introduced by the current administration. This post is not meant to be political, nor take sides. Rather it is simply about good or bad investments.
This post is about investing. It is about showing how this program is a middle class income investing experiment. So let’s jump in!
What’s the Student Loan Debt Relief Program?
The current Biden administration recently introduced a program which will forgive student loan debt for many Americans across the United States. The Student Loan Forgiveness Plan comes in tandem with an already “paused” or loan forbearance program in progress since Covid.
In brief, “the U.S. Department of Education will provide up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the Department of Education and up to $10,000 in debt cancellation to non-Pell Grant recipients.” as per studentaid.gov.
The estimated cost of this program will be around $605 billion in strict assumptions. Costs could be much higher depending on how the plan develops or even expands in future years. Some analysts expect indirect costs to raise the total plan to 1 trillion dollars.
Helping People with Student Debt, This is Great…Right?
On the front of the program, this seems wonderful. It’s helping people right? Not only this, the program will be mostly targeting those making less than $125,000 and offering some major debt relief. Who wouldn’t want to help the middle class get some relief?
Before I answer this question, let’s explore a key principal of how the student loans work.
Who Owns the Student Loan Debt?
U.S. student loan debt amounts to $1.75 trillion as of July 2021. Of this, 92% are owned by the U.S. Department of Education, a federally owned institution. The remainder are funded by privately held, but very often government run or supported companies such as Sallie Mae which was previously a government entity.
Go ON…..What’s all this Matter?
Here is the rub. If 92% of the debt is owned by the government and the government will spend $600-1 trillion dollars to PAY ITSELF, what is the end result?
More importantly, where does this $600-1 trillion dollars come from?
I’m glad you asked…
When the government pays down debt, they are simply increasing the amount of 0’s or dollars on one side of their balance sheet. Effectively this what people call “printing more dollars”.
So they add to the overall government debt column and remove it from the student loan debt column. Whenever a company or program is “bailed out”, this is what is happening. Effectively however, this introduces more capital into the economy.
You can’t just pay off debt with nothing, it must be created.
As we know, whenever more capital is put into the market or “more dollars are printed”, inflation rises. Just look at where we are now.
Inflation is in double digits because over 80% of the dollars were “printed” in the last two years.
So Why Is This a Middle Class Income Investing Experiment?
Two reasons. One due to increased inflation and two, taxes.
You might have heard of the new $80 billion funding going to the IRS approved by the current administration.
Did you know however that 78-80% of the money that the IRS is projected to raise from the new approved $80 billion funding,
...will come from taxpayers making $200,000 or less.
This is according to The Joint Committee on Taxation, who work for Congress.
Are you starting to see?
Not only will the middle class be receiving more taxes and scrutiny from the latest bill in the upcoming future, they will also be paying higher prices due to increased inflation from an increased dollar supply.
It is not the 1% who suffer from inflation or rising taxes, I assure you it the middle class. The 1% have CPA’s, attorneys and businesses that allow them to understand and use the tax code to their advantage.
The middle class in most cases do not have these experts on their team and end up taking the burden of the majority of inflationary costs and rising taxes.
Again, I’m not saying either is wrong or right, it’s simply the way it is.
IN FINAL
Anytime debt cancellations or bailouts occur, someone has to pay.
In most cases when it is done by government, the middle class end up paying through inflation or increased taxes.
As should become apparent, the debt relief program at hand today will give $10,000-$20,000 back to the middle class, only to take it back through taxes and inflation over the next years.
All this to say, be smart with your investments and look to use the tax code to your advantage. You are the only that can truly be in control of your finances and tax strategy.
We use real estate investing in our tax strategy both as a company and personally, but there are many methods to use the tax code to your advantage.
It is up to you to choose the one that aligns with your lifestyle.
I encourage you to read “Tax Free Wealth” by Tom Wheelwright if you are unsure of where to start.
Until next time, have an amazing day and Happy Investing!