How to Ease Student Debt? More Compassion, Less Forgiveness

This blog was initially published by Future Ed at

Student borrowers in America owe $1.7 trillion and counting. These debts adversely affect the life choices of millions of borrowers. It looks like a third or more of the 45 million borrowers with outstanding loans will be unable to repay fully their obligations.

This is a crisis by any reasonable standard. To address it, many organizations and politicians are calling for large chunks of student loans to be forgiven. Senator Elizabeth Warren wants $50,000 to be cancelled, President Biden supports cancelling a more modest $10,000. Many proponents of large-scale loan forgiveness also argue that it would help stimulate the lagging economy.

But the Warren plan would favor graduate students, future lawyers and others with larger debts but greater earning power. Moreover, forgiving debt of whatever magnitude across the board would be unfair to the millions of borrowers who have fully repaid their loans in the past. It would also be unfair to the many people in this country who have not gone to college but whose taxes would subsidize those who borrowed to go to college and then did not have to repay. Forgiving debt now also will likely lead to more future borrowing if tomorrow’s students believe their debts will also be forgiven.

As for stimulating the economy, the huge amount of outstanding student debt predates current economic woes; large-scale loan forgiveness now would be a very expensive, inefficient and inequitable way to spark the economy.

To deal with the staggering student debt it’s important first to recognize two realities. First, debt forgiveness has been part of the federal student loan policies for many years — for instance, forgiving loans for certain kinds of public service, and basing repayment on a borrower’s income after graduation. Our current crisis suggests that these programs have largely failed to stem the flood of non-payments.

The other reality to recognize is that historically this country’s treatment of student borrowers has been more punitive than restorative. Hard-pressed student borrowers, for example, have legally been prevented from declaring bankruptcy. And the government has often been lax in preventing voracious loan collectors from going after the millions of students who borrowed to attend flagrantly low-quality schools.

A far better remedy would be to for the federal government to deal with the issue of student debt more compassionately than has been the case in the past. This would entail identifying why borrowers accumulate debts in the first place including how much of their current debt is a function of unpaid interest being added to principal. This assessment could be accomplished by having borrowers meet in person or online with certified loan counselors in a process similar to the health-care triage function. Counselors would place borrowers in one of the following three categories and tailor repayment plans to their circumstances.

1. Borrowers who attended institutions and schools of poor quality. The largest category of loan defaulters attended schools of poor quality where the federal government failed to exercise due diligence by allowing them to borrow in the first place. While most attended for-profit schools offering short-term training, many not-for-profit institutions also provide education and training of dubious value. Making matters worse, delinquent borrowers are often hounded for repayment while many of the poorly performing schools continue to operate.

The accumulated debts of students who borrowed to attend substandard programs should be fully forgiven and the slate wiped clean. Meanwhile, the poorly performing schools should be shuttered to prevent this kind of default from happening in the future.

2. Students who attended legitimate programs but whose repayment obligations exceed their ability to repay. Many borrow to pay tuition and related living expenses that their prospective incomes can’t justify. Or their actual incomes did not meet what might have been expected in their field of endeavor. In either case, borrowers in this category should be able to refinance all their loans by consolidating their student debt under a repayment schedule based on their income after graduation. Currently, the federal government offers a hodgepodge of confusing income-contingent repayment plans that are often costly to either the government through overly generous subsidies or cash-strapped borrowers or both.

We need a new, single income-contingent repayment scheme that is reasonable in cost to both borrowers and taxpayers. Taking a lesson from the international experience with student loans, income-contingent payments should be tied to payroll withholding, unlike the income-tax based system traditionally used in the U.S. And hard-pressed borrowers should be eligible for loan forgiveness in 20 or 25 years, so they don’t bear debt burdens well into middle age.

3. Borrowers who can afford their student loan repayment obligations. The third group of borrowers are those not having significant trouble paying back their loans. Although not so frequently discussed, this group of holds perhaps half of outstanding debt. These borrowers, too, should have the option to refinance their loans into the new income-based repayment schedule, or they could continue with their amortized payments until their loan is repaid. Borrowers not having trouble with their repayments, though, should not be eligible for long-term loan forgiveness.

How much will all this cost? Not so much. The cost of cancelling the loans of defrauded borrowers are roughly 5 percent of forgiving up to $50,000 for all current debtors. In addition, under federal accounting rules, expected losses are built into estimates of long-term federal budgetary costs when the loans are initially made. As a result, the additional costs attached to proposals to cancel debts of defrauded borrowers are substantially less than the current value of their debt.

The current debate would move the treatment of student loan debt from largely punitive to full scale forgiveness. The better course is to stop in between at greater compassion recognizing that the costs of compassion are much less than the costs of full-fledged forgiveness. Moreover, whatever additional costs are incurred in loan cancellation and forgiveness as described here can be fully offset by to reducing excessive reliance on borrowing in the future. But that’s a topic for another day.

Alexander Pope famously wrote: To err is human, to forgive divine. In the case of student loans, compassion now is called for more than forgiveness.

Art Hauptman has been a public policy consultant specializing in domestic and international higher ed finance issues for nearly a half century.

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