Student Loan Forgiveness
Student loan debt has become a crisis in the United States, with over 45 million borrowers owing more than $1.7 trillion in student loans. The average student loan debt for graduates is over $30,000. This massive debt burden is preventing many Americans from buying homes, getting married, having children, or saving for retirement.
In response, there have been growing calls for student loan forgiveness from politicians, economists, and borrowers themselves. But what exactly is student loan forgiveness, how would it work, and what are the arguments for and against it? This comprehensive guide will explain everything you need to know about student loan forgiveness.
What is Student Loan Forgiveness?
Student loan forgiveness is a program that forgives all or part of student loan debt after the borrower makes payments for a certain period of time or meets other criteria. The goal is to reduce the burden of student debt to stimulate the economy and help borrowers better manage their finances.
There are a few main types of student loan forgiveness programs:
- Public Service Loan Forgiveness (PSLF) – Forgives loans for borrowers working full-time for federal, state, local, or tribal governments or certain nonprofits after 120 qualifying monthly payments.
- Teacher Loan Forgiveness – Forgives up to $17,500 for teachers in low-income schools or educational service agencies after 5 consecutive years of service.
- Income-Driven Repayment (IDR) Forgiveness – Forgives any remaining balance after 20-25 years of monthly payments in an IDR plan.
- Borrower Defense to Repayment – Forgives loans for borrowers whose colleges misled them or violated state laws.
- Total and Permanent Disability Discharge – Forgives loans for borrowers who become totally and permanently disabled.
- Closed School Discharge – Forgives loans for borrowers whose school closed while enrolled or shortly after.
In addition, the federal government can pass new laws or executive actions to forgive student loans more broadly. For example, during the COVID-19 pandemic, federal student loans were put into automatic forbearance with 0% interest. Additional forgiveness programs may be created to stimulate the economy or address the student debt crisis.
The Case for Broad Student Loan Forgiveness
There are several common arguments made in favor of broad student loan forgiveness beyond the existing programs:
1. It Would Stimulate the Economy
Proponents argue broad student loan forgiveness would pump billions of dollars back into the economy almost immediately. One estimate found canceling student debt could boost GDP by $86 billion to $108 billion per year. Borrowers would have more disposable income to spend on housing, cars, starting small businesses, or consuming goods and services. This would create jobs and tax revenue.
2. It Would Help Struggling Borrowers
Student debt is disproportionately held by lower-income households and people of color. Black students in particular face much higher debt burdens and defaults rates than White students. Forgiveness would help counter racial inequality and help borrowers climbing out of poverty. Even limited forgiveness of $10,000 could eliminate debt entirely for 15 million borrowers.
3. Student Debt is Dragging Down Major Milestones
Surveys find student debt is causing millennials to delay home ownership, marriage, and having children. This has negative social impacts like declining birth rates and home ownership. Forgiveness could remove these obstacles for borrowers.
4. Borrowers Were Sold False Promises
Many argue student borrowers were told to follow their dreams but not properly warned of the consequences. Colleges market the income benefits of degrees but don’t reveal their true costs and job prospects. Forgiveness could help those who feel misled or lied to by institutions.
5. Cost Could Be Offset By Cutting Bloated College Budgets
Forgiveness critics argue costs to taxpayers would be exorbitant. But proponents say these costs could be offset by reducing inflated budgets at public universities and colleges. Too much is spent on fancy amenities and administrators’ salaries rather than instruction.
6. Current Programs Don’t Go Far Enough
While programs like PSLF exist, they often have low approval rates due to complex rules and administration issues. Millions see forgiveness as an empty promise. Widespread forgiveness would be more efficient and dependable.
7. Precedent With Other Bailouts
The government has forgiven debts or handed out relief packages to banks, corporations, and entire industries in times of crisis, setting precedent. Many argue regular Americans deserve the same treatment.
The Case Against Broad Student Loan Forgiveness
Despite some strong arguments in favor, there are also reasonable concerns about broad student loan forgiveness:
1. Who Pays for It?
Without cuts elsewhere, forgiveness would come at a major cost to taxpayers – $1.6 trillion for wiping all federal loans. This strains government budgets and may require tax hikes, leaving taxpayers footing the bill for other people’s loans.
2. Is it Fair to Those Who Repaid?
Handouts for some and not others may seem unfair. Many graduates worked hard and made sacrifices to repay their own loans. Forgiveness could be seen as rewarding financial irresponsibility.
3. Does it Solve the Root Problem?
Critics argue forgiveness is a one-time fix that doesn’t address the underlying issue of college affordability. Costs would balloon further and more debt would accrue without structural reforms.
4. Will it Really Stimulate the Economy?
Not everyone agrees forgiving loans would provide a major boost to the economy. Graduates may instead opt to save or pay down other debts instead of spending disposable income.
5. Colleges May Hike Tuition Further
If students know loans will be forgiven, colleges may increase tuition costs even more in response. This could make affordability issues worse long-term.
6. Opens the Door to More Handouts
Some worry loan forgiveness would lead to expectations of wiping out other forms of debt like mortgages, credit cards, or medical debt. This could balloon government spending on bailouts.
7. Borrowers Have a Responsibility to Repay
Students take loans voluntarily and get the benefits of education funded upfront. Easing that responsibility to pay back money they agreed to could encourage irresponsible borrowing.
Key Student Loan Forgiveness Proposals
There are a range of student loan forgiveness proposals that have been put forward recently. Here are some of the major ones:
Bernie Sanders Plan
Senator Bernie Sanders during his presidential campaigns proposed forgiving all $1.6 trillion in federal student loans. He proposed funding this by placing a small speculation tax on Wall Street trading.
Elizabeth Warren Plan
Senator Elizabeth Warren proposed forgiving up to $50,000 in federal loans for borrowers earning under $100,000 per year. It would be phased out for higher earners. She proposed an “Ultra-Millionaire Tax” to fund it.
Joe Biden Plan
President Biden’s campaign plan was to forgive $10,000 in federal undergraduate student debt for borrowers earning under $125,000 per year. No funding plan has been announced.
Certain Republican legislators have proposed expanded income-driven repayment plans to forgive loans after 15-20 years for undergraduate debt and 30 years for graduate debt. Payments would be capped at 10% of discretionary income.
There have been a few bipartisan bills like the Student Loan Forgiveness Act introduced to forgive varying amounts of student debt and make college more affordable going forward. None have gained enough support yet to pass.
Debate is ongoing over how much forgiveness should be provided, who should qualify, how to pay for it, and whether broad forgiveness is good policy overall. Compromise legislation proposed amounts tend to range from $10,000 to $50,000 in forgiveness.
How Student Loan Forgiveness Could Work
If the federal government did pass major student loan forgiveness, here is a look at how it might work:
- Congress would need to pass a new law giving the Department of Education authority to forgive Federal Direct Loans up to a certain amount per borrower. This would likely only apply to federal loans, not private loans.
- The Education Department may create an application process, but to reduce administrative costs may instead opt for automatic forgiveness based on data it has on borrowers.
- Borrowers would likely need to meet certain criteria based on income, debt levels, or other factors to qualify. Forgiveness may be phased out for higher earners.
- Taxpayers would fund the costs either through deficit spending or budget cuts elsewhere. Progressive legislators propose new taxes on the ultra-wealthy or Wall Street.
- Forgiveness would likely happen incrementally – for example, starting with $10,000 immediate forgiveness. Additional amounts may be forgiven over time.
- Interest capitalization and collections on eligible loans would likely be suspended while policy rolls out. Forgiven amounts would be removed from borrowers’ balances.
- Credit bureau records would be updated to show the forgiven debt. This could help improve some borrowers’ credit scores.
- Future student borrowing would still need to be addressed via college affordability legislation. Limits on annual and total borrowing may be enacted.
While simple conceptually, executing mass student debt forgiveness would be a major logistical challenge. Rules would need to be clear and comprehensive. Borrowers would need to be informed if they qualify. Loan servicers would handle cancellation of debt and updating of records.
How Much Student Loan Forgiveness Could Help the Average Borrower
Let’s look at how different forgiveness amounts could impact a typical borrower:
- Owed: $32,000
- Monthly payment: $330
- Years to pay off: 20
- Total interest: $15,560
- Owed: $22,000
- Monthly payment: $225
- Years to pay off: 15
- Total interest: $9,810
- Owed: $7,000
- Monthly payment: $75
- Years to pay off: 5
- Total interest: $1,714
- Owed: $0
- Monthly payment: $0
- Years to pay off: 0
- Total interest: $0
As you can see, just $10,000 in forgiveness would significantly speed up payoff time and reduce interest costs. Forgiveness of $25,000 or more could eliminate debt entirely for many borrowers. This “breathing room” can make loan payments more affordable month-to-month for those who still owe.
Keep in mind, these figures are just examples. Actual savings would depend on each borrower’s debt amount and interest rate. But for many, even limited forgiveness of $10,000 could potentially cut payoff time in half and save thousands in interest.
Public Opinion on Student Loan Forgiveness
Many recent polls show a majority of Americans support some level of student loan forgiveness:
- A 2022 Morning Consult survey found 65% of all voters support forgiveness of $10,000 or less. Even 45% of Republican voters supported this.
- A 2022 Data for Progress poll found broad support for forgiveness, with 45% even supporting wiping all student debt entirely.
- An early 2021 Vox/Data for Progress poll found 60% of likely voters backed $50,000 in debt cancellation.
- Even a CNBC poll finding lower overall support still saw 35% in favor of wiping all federal debt.
Support does tend to be higher among younger Americans who more recently faced college costs and Democratic-leaning voters. One divide is mass forgiveness versus more targeted relief – broader cancelling all debt draws more opposition.
But overall, majorities tend to back smaller forgiveness amounts of $10,000 to $25,000. Arguments that student debt worsens inequality and harms the economy resonate for many. Still, a divide on taxpayer costs does remain.
Potential Challenges for Broad Student Loan Forgiveness
If the federal government attempts mass student loan forgiveness beyond the current IDR and PSLF programs, it could face some legal and logistical challenges:
Opponents may file lawsuits challenging the executive branch’s authority to enact major forgiveness without legislation. This could tie up efforts in the courts. However, the Heroes Act gives the Education Department very broad powers over student loans during national emergencies like COVID-19.
Costs and Budget Implications
Finding $1+ trillion to fund mass forgiveness could require major reallocations and tax increases that face political opposition. Progressives want new Wall Street taxes, but passage is not guaranteed. Deficit spending is easier but adds to the debt.
There are over 40 million federal loan borrowers. Clearly communicating who qualifies, application processes, and when cancellation will happen is a major logistical challenge for the Department of Education. This could delay relief and create confusion.
Coordinating With Loan Servicers
Loan servicers handle administration of federal loans. To actually process forgiveness on borrowers’ accounts requires major coordination. After previous delays like PSLF denial issues, servicers may struggle with demand.
With trillions in aid, ensuring only eligible borrowers receive forgiveness will be crucial. Verifying incomes or having applications opens the door to potential fraud or abuse without adequate controls.
Updating Credit Bureaus
Widespread forgiveness could positively impact millions of borrowers’ credit scores by removing debt from their reports. But this requires coordination with credit reporting agencies to update after cancellation.
Overcoming these roadblocks will require detailed policy plans, strong legal justifications, robust communication, and oversight measures. Past problems implementing even existing programs shows how difficult fast and efficient forgiveness could be.
Alternatives to Broad Student Loan Forgiveness
Given the major costs and policy implications of mass cancellation, there are some alternatives proposed to provide student debt relief:
- Capping interest rates at very low levels to prevent balances ballooning over time, even if principal is repaid slowly. This takes pressure off borrowers.
- Streamlining existing IDR and PSLF programs to make qualifying and applying easier. Raise awareness so more borrowers use the options.
- Hold colleges accountable by cutting public funding and restricting federal aid for schools with bad outcomes. This could incentivize cost cutting and reforms.
- Increase Pell Grants and state higher ed funding so upfront costs are reasonable. Combined with family contributions, borrowing needs would be lower.
- Allow student debt to be discharged in bankruptcy to give a path to relief for struggling borrowers with no other options. Private student loans can already be bankrupted.
- Improve student loan counseling so borrowers understand costs and risks upfront before taking loans. Ensure students explore all alternatives for managing costs.
These measures focus on cutting interest costs, holding colleges accountable for prices, increasing affordable options to reduce debt in the first place, and helping the most at-risk. They provide targeted relief and reforms without the same tax costs or scale.
Key Takeaways: Student Loan Forgiveness Explained
A few key points to remember about the debate over student loan forgiveness:
- Current programs forgive federal loans for borrowers in public service, teachers, totally disabled people, defrauded students, and more after a set period of time.
- Progressives propose mass forgiveness up to erasing all student debt to stimulate the economy, advance racial equity, and help struggling borrowers.
- Critics argue broad forgiveness costs too much, is unfair to responsible borrowers, and does nothing to address the root problem of college costs.
- Americans tend to support targeted forgiveness of $10,000-$50,000 but are more divided on wiping all $1.6 trillion in debt.
- Challenges with cost, legality, and implementation could hamper any federal efforts for mass forgiveness beyond current programs.
- More limited reform ideas like capping interest rates, streamlining existing options, and increased grants are alternatives.
Student debt relief remains a hotly debated political issue. The stakes for borrowers and taxpayers are both very high. While challenges exist, some form of forgiveness still has growing momentum. But significant reform probably requires compromise between opposing viewpoints.