A More Nuanced Approach to Student Loan Forgiveness
It seems as if we are moving inexorably towards student loan forgiveness of some sort, be it $10,000, $50,000 or some number in between. As currently discussed, these are one-off lump sums that would apply to borrowers with some targeting based on household income. The obvious problem, of course, is what happens the following week? One-off loan forgiveness responds to the stock of student loan debt without addressing the flow.
Stepping back, this is a problem of the affordability of higher education. Any lasting approach to student loan debt needs to address the root problem through a combination of increased public support for colleges and universities, reduced tuition, and increased grant funding.
But, back to loan forgiveness…
Media attention has focused on millennial generation student loan borrowers and not without reason. Lost in the discussion, however, are retirees with student loan debt. According to AARP, in 2015 2.8 million people aged 60 and over had student loan debt; more than 100,000 had their Social Security payments seized to pay delinquent student loan debt. Some of this is Parent Plus loan debt (loans taken by parents on behalf of their child), but a great deal represents debt taken on as adults after the traditional college age, returning to school to advance their career prospects.
The median balance of a retirement-aged American’s 401(k) savings is a mere $58,000. Can we imagine a student loan forgiveness package that directs extra attention to low and moderate wealth borrowers aged 60 years and older? A $40,000 student loan debt at age 30 is unfortunate; at age 60 it may be tragic.
Broadening our scope, a recent article from the Federal Reserve Bank of Philadelphia highlights that Americans over the age of 55 are increasingly indebted at rates much higher than we have seen historically. Student loan debt is only a portion of this of course. Then again, some parents forgo PLUS loans and instead finance their child’s education through other types of borrowing such as home equity loans or perhaps even (indirectly) credit cards. Call this “shadow” student loan debt.
Consider this idea: If a “base” student loan forgiveness amount is $10,000, a pre-retiree borrower (someone between 55 years old and their Social Security full retirement age) could receive $15,000, freeing up cash flow to add to their retirement savings. An already retired person could have their debt completely extinguished, subject to an income limit.
There are existing loan forgiveness programs that presumably will continue even after a one-time debt jubilee. The Public Service Loan Forgiveness (PSLF) program is perhaps the best known (for all the wrong reasons, unfortunately). However, any borrower under an income-based repayment program can apply for forgiveness of the remaining balance after 20 or 25 years (depending on the particulars of the loan). Strengthening these programs by making eligibility easier presents an opportunity to address one of the main shortcomings of current proposals i.e., their one-off nature.
The Student Borrower Protection Center released a paper last year on Federal Family Education Loans (FFEL). These are loans made before 2010 under a now defunct program under which the loans were underwritten and held by private banks but guaranteed by the federal government. $248 billion of these loans are still outstanding; these borrowers did not benefit from a pause in payments under CARES and its successor Acts. Tragically — and it is that — many borrowers cannot benefit from the “usual” loan forgiveness after 20 years because they began their repayment under the “wrong” payment program. While they could still now enter into an income-based repayment program, under current law this would “restart the clock” on their loan; years of previous payments would not count towards forgiveness.
Whether FFEL or PSLF, it is a mystery to me what public purpose is served by not crediting payments towards forgiveness that were made under the “wrong” repayment scheme. There is a clear opportunity for a new student loan forgiveness legislative package to address this flaw which would, by the way, provide forgiveness in a more systemic way than the current one-off proposals.
Any student loan forgiveness package needs to look beyond lump sum forgiveness and address the complexities of the existing loan forgiveness programs that have left millions unable to receive dismissal of their balances even after years of payments. These are borrowers who may have repaid all or much of the principal amount borrowed and continue to owe only due to capitalized interest.
Nuance matters. There is an opportunity to use the current energy around the problem of student loan debt to craft a program that not only delivers one-off relief, targeted sensitively to populations that are most burdened by student loan debt, but that as well makes the good intentions of existing forgiveness programs a practical reality.