Hello and welcome back to MarketWatch’s Extra Credit column, a weekly look at the news through the lens of debt.
This week we’re talking about philanthropy in the form of loans and student-debt relief for members of the military who served in harm’s way. But first up, interest payments on the post-9/11 wars.
The nation largely financed the post-9/11 wars through debt
The bombings at the Kabul airport this week, which killed 13 American troops, are a stark reminder of the human toll of the Afghanistan war. And even if President Joe Biden meets a deadline to pull U.S. troops out of the country by Aug. 31, Americans will likely be paying the financial cost of the war for decades to come.
That’s because the nation largely financed the post-9/11 wars through debt, according to an analysis by the Costs of War project, an initiative from scholars at Brown University and Boston University. Taxpayers have already spent $925 billion in interest payments related to those wars, the analysis found.
The analysis estimates — had America pulled out last year — that the cost of the interest on the Afghanistan war debts could grow to $2 trillion by 2030 and to $6.5 trillion by 2050.
“ ‘There are all these various costs that don’t get talked about when the American public hears about how expensive the war is.’ ”
“There are all these various costs that don’t get talked about when the American public hears about how expensive the war is,” said Heidi Peltier, the author of the analysis and the project director of the Costs of War Project at Boston University. “One of those is the interest costs.”
That we’re paying interest on our war spending is a political choice. The bulk of the wars over the last century were funded in large part by tax increases and war bonds, the analysis notes. But as the U.S. entered these wars in the early 2000s, the Bush administration actually cut taxes. That meant funding for the wars had to come from another source, in this case financing.
This approach shields “the public from knowing what the true cost of the war is because they’re not feeling the pinch now,” Peltier said. “That displaces the cost to future taxpayers.”
Debt relief for service members after a long wait
One group of Americans that has disproportionately shouldered the cost of war will get some financial relief they’ve been entitled to for years.
More than 47,000 current or former active duty service members will see the interest on their federal student loans waived retroactively, the Department of Education announced last week. Members of the military deployed to areas that put them in imminent danger have had the right to have the interest waived on their student loans for years, but only a small fraction have actually accessed that benefit.
In 2019, the Department waived interest on loans for just 4,800 servicemembers, the agency noted in its announcement. Now through a data matching agreement with the Department of Defense, the Department of Education can identify borrowers eligible for the benefit and automatically waive their interest.
“ More than 47,000 current or former active duty service members will see the interest on their federal student loans waived retroactively. ”
Though the relief will be a boon for servicemembers it comes after years of borrowers struggling to access it. Between 2008 and 2014, when thousands of soldiers were serving their country in harm’s way during the post-9/11 wars in Iraq and Afghanistan, just 633 borrowers had their interest waived, Kay Hagan, a former Democratic senator representing North Carolina noted in 2014.
“This is a critically important benefit which recognized, on top of the other military consumer protections, that if you were deployed to some of the most dangerous places in the world, we shouldn’t let the interest accrue on your student loans,” said Seth Frotman, the executive director of the Student Borrower Protection Center. “For nearly a decade that promise was illusory.”
Frotman, who worked as a senior advisor to Holly Patraeus, assistant director for servicemember affairs at the Consumer Financial Protection Bureau and later as the CFPB’s student loan ombudsman, has been advocating for the interest benefit to be automated for years.
He pointed to red tape and missteps by student-loan servicers — who have been accused of making it harder than necessary for borrowers to access benefits they’re entitled to — as the reasons why such a low number of servicemembers had their interest waived previously.
The challenges servicemembers and veterans face accessing consumer protections can often serve as a warning sign for broader issues in a market. That service members paid interest they didn’t owe for years is one indication of the challenges student-loan borrowers broadly face accessing relief they’re entitled to.
For example, public servants, including service members and veterans, have struggled to have their loans cancelled under the Public Service Loan Forgiveness program, which allows borrowers to have their federal student loans discharged after 10 years of payments.
“ There’s some indication that in the future, fewer borrowers will have to raise their hands to receive benefits that they are already entitled to under the law. ”
There’s some indication that in the future, fewer borrowers will have to raise their hands to receive benefits that they are already entitled to under the law.
Earlier this month, the Biden administration automatically discharged the debt of more than 323,000 borrowers with severe disabilities, using a data match with the Social Security Administration to identify the borrowers eligible for relief.
Previously, these borrowers had to go through an application process to access the total and permanent disability discharge they’re eligible for.
Despite these steps, Frotman and others are pushing the agency to address other problems plaguing the student-loan industry — like challenges borrowers face accessing PSLF — through automating benefits when the government knows who is eligible, before the coronavirus-era pause on student loan payments and collections ends in February.
“Once payments get turned back on, unless they fix these programs and do so in a way that’s swift and efficient, I just have real concerns that people are going to get bills on debt they don’t have to pay,” Frotman said.
When a philanthropic pledge is actually a loan
Last year, following the murder of George Floyd, large companies made well-publicized financial pledges aimed at curbing racial injustice. A little more than a year later, the Washington Post followed up on those promises.
What they found is that of the roughly $50 billion major firms pledged to various causes last year, a small fraction is actually gifts. Instead, about $42.5 billion of the financial commitments are in the form of investments or loans the companies stand to profit from, a large share of which are mortgages.
Many of these promises aren’t straight up charity, but this isn’t surprising, given companies’ incentives: to do good, or at least appear to be doing good and not to lose money, said Mehrsa Baradaran, a professor at the University of California Irvine School of Law and an expert on banking, financial inclusion and the racial wealth gap.
“I don’t think that there’s anything cynical happening,” said Baradaran, the author of The Color of Money: Black Banks and the Racial Wealth Gap.
Increasing access to mortgages for Black homebuyers, as some of these companies have pledged to do, can indeed help Black households build wealth, and also be profitable for the companies offering them, Baradaran said. But whether the mortgages turn out to be a boon to Black families will depend on many factors, including the terms of the loan like the interest rate, she said.
“ Even though the practice of redlining is now illegal, evidence suggests that Black households still face discrimination in their quest for homeownership. ”
“The wariness that some are meeting these announcements with is rooted in experience and history,” Baradaran said. That history includes, as Baradaran notes, the subprime mortgage crisis in which lenders targeted these communities with predatory loans.
Of course it also goes back nearly a century to the New Deal, when, as part of a program to increase home ownership, the federal government refused to insure mortgages made to homeowners in Black neighborhoods, effectively shutting those consumers out of the market. Lenders continued the practice for decades, depriving Black households of the key asset to wealth building in America with implications that still linger today.
Even though this practice, known as redlining, is now illegal, evidence suggests that Black households still face discrimination in their quest for homeownership. An investigation published this week by The Markup, a nonprofit newsroom covering technology, found that across the country Black borrowers were 40% to 80% more likely to be denied a home loan than white borrowers who appeared the same on paper, due to opaque mortgage underwriting algorithms.
The analysis notes that in the past, the home lending industry has criticized these types of analyses for not taking into account certain factors, like how much debt an applicant has as a percentage of their income (that Black applicants may have a higher debt to income ratio is a legacy of systemic racism that’s impacted Black households ability to build wealth).
But what the Markup found is that among high earning borrowers, Black families with less debt were rejected more often than their white counterparts with more loans.
