Is the Forgiveness of All Student Loans Feasible?

Richard PallardyBy:  Richard PallardyBy: Savingforcollege.com

Is the Forgiveness of All Student Loans Feasible?

Richard PallardyBy:  Richard PallardyBy: Savingforcollege.com

Wouldn’t it be great if student loan debt could just be wiped out? According to recent proposals, federal forgiveness of student loans, public and private, would simultaneously assist debtors and stimulate the economy.

In light of the worsening student debt crisis, the idea holds broad appeal. Acknowledgment of the student debt problem is widespread. The forgiveness of the debt preventing graduates from economic participation seems like a reasonable solution to many. After all, the significant amount of cash tied up in debt obligations could conceivably be spent in more productive ways.

One 2017 survey found that nearly 42% of those queried thought that student loan forgiveness was a good idea.

Student loan forgiveness, of course, comes with its own suite of problems. Through which channels would forgiveness of student debt be facilitated? How would government forgiveness of loans affect the national debt and GDP? Which demographics would most benefit? And what about the thousands of debtors who responsibly repaid their debt prior to the institution of a forgiveness program?

The issue has divided politicians, and, especially, economists. The effects of a program that would forgive outstanding student debt are an open question. Understanding the statistical nuances of the student debt crisis is essential to knowing how best to address it. Some experts have emphasized that other programs might better address the indebtedness that dogs most college graduates, such as a revised version of Income-Driven Repayment plans or increased funding of Federal Pell Grants.


Can You Ever Forgive Me?

In addition to the obvious financial burden of student debt, critics of the current system have bolstered their case for student loan forgiveness by citing a moral component to the problem. They claim that forcing students to go into thousands of dollars of debt in order to obtain an education is unethical, a betrayal of the principle of equal access to education.

New York University professor Andrew Ross, an organizer for the Occupy Student Debt Campaign referred to it as “morally unsustainable” in a 2011 interview.

If it was unsustainable then, it’s even worse now: total student loan debt outstanding stood at an astronomical $1.57 trillion at the end of 2018, according to the Federal Reserve. Nearly 45 million Americans hold debt in this category, which is exceeded only in magnitude by mortgage debt.

Besides scrubbing that moral stain from fabric of American life, proponents of student loan forgiveness argue that erasing this massive debt category would have positive implications for the economy.

The Federal Reserve estimates that average monthly student loan payments are at around $200-300. Proponents of debt forgiveness contend that this money, if freed up, would stimulate the economy by allowing students to make purchases that they their debt burden currently prevents them from making.

Millennials have been noted for their financial conservatism: fewer are buying homes and cars, and spending on luxury items is down. So is entrepreneurship. Even marriage and childbearing have taken a hit. Some of this slow down has been attributed to excessive student loan debt.

The theory is that the stimulus provided by debt forgiveness will jump start the finances of the indebted millennial generation, ultimately earning the government more in income and sale tax revenue.

Advocates of this approach answer criticisms that it will disproportionately benefit upper and middle class borrowers, who hold most debt and are most able to handle it without assistance, by claiming that debt forgiveness reinforces the notion that education is a public good. They further argue that aiming high — rather than proposing more conservative solutions — is a tactical move that creates a starting point for negotiations.

While there are no real legal obstacles to such an approach, it would have to pass in both chambers of Congress and be ratified by the president — a significant challenge.


The Levy Institute Report

A February 2018 report from the Levy Economics Institute at Bard College made waves with its long-form case for student loan forgiveness. The report has served as a flashpoint for both supporters and critics of such an approach.

Among the report’s disputed claims were:

  • Cancellation of both federal and private student loans would increase the GDP by $86-108 billion a year.
  • Debt cancellation would create up to 1.5 million jobs in the next ten years and thus reduce unemployment by up to 0.4%.
  • Implementation of the program would increase the deficit ratio by 0.29-0.37 percentage points.
  • Interest rates set by the Fed would rise a modest 0.5% at most and would likely fall quickly.

The paper proposes several ways that the government could handle the cancellation. For federal loans, the federal government could take on the U.S. Department of Education’s loan portfolio. It could then cancel loans all at once or could do so incrementally as payments came due. For private loans, the government could similarly purchase the debt and cancel it at once or it could assume payments on them.

The Federal Reserve could also purchase the U.S. Department of Education’s loan portfolio and cancel it all at once or do so on a monthly payment basis. The same approach could be taken to the forgiveness of private loans.


Current Campaigns and Legislation

The Occupy Student Debt Campaign, which emerged as a plank of the Occupy Wall Street movement in the wake of the 2008 financial crisis, ultimately fizzled. It had aimed to garner 1 million signatories to a pledge, after which those who committed to the movement would stop making payments on their loans.

It didn’t come close, presumably due to the unrealistic risk that such a tactic would present to those participating. Even the mass scale of such a protest would be unlikely to prevent the massive hits participants would take on their credit reports.

However, plenty of initiatives have sprung up in its place. Programs such as Rolling Jubilee buy up debt in much the same way as collection agencies, but then simply forgive it.

And politicians have taken up the drum beat too.

Green Party candidate Jill Stein, who ran for president in 2016, was an advocate. And 2020 Democratic presidential candidate Wayne Messam proposed student loan forgiveness as part of his platform.

Freshman congressmen Alexandria Ocasio-Cortez of New York and Ilhan Omar of Minnesota have both informally expressed support for the idea.

Several policymakers have proposed versions of loan forgiveness during the 2017-2018 session of Congress, but the legislation was not enacted.

  • The Student Security Act, introduced in the House in April 2017 by Republican Thomas A. Garrett, Jr. of Virginia, proposed forgiveness of federal student loans under the condition that beneficiaries agree to delay their eligibility for Social Security insurance benefits.
  • The Students Over Special Interests Act, introduced in the U.S. House of Representatives in May 2018 by Democrat Jared Polis of Colorado, formally introduced the idea for legislation. It garnered19 co-sponsors, suggesting that the notion has at least some political traction, although the co-sponsors were all Democrats.
  • The Strengthening Loan Forgiveness for Public Servants Act, introduced in June 2017 in the Senate by Democrat Eric Swalwell of California, proposed a generous expansion of the Public Service Loan Forgiveness program, offering loan forgiveness in two year increments, with the full amount paid after ten years. The legislation had 13 co-sponsors, all Democrats.
  • The PROSPER Act, introduced in December 2017 in the House by Republican Virginia Fox of Virginia, proposed repealing the Public Service Loan Forgiveness program for new borrowers. The legislation had 21 co-sponsors, all Republicans.
  • The Aim Higher Act, introduced by Democrat Bobby Scott of Virginia in the House in July 2018, targets the Income-Based Repayment plan. By reducing the definition of discretionary income for borrowers with income up to $140,000 and capping accrued interest at 50 percent of the original principal balance, most borrowers would have their payments significantly reduced. Many participants would essentially just cover the interest on their loans and have the remaining principal balance forgiven after 20 years of repayment. The legislation had 86 co-sponsors, all Democrats.

Can’t Do It

Opponents to wiping the slate clean for borrowers cite the moral obligation of that debt burden. They believe that repayment is an ethical as well as a legal issue and disparage the prospect of a free ride for what is essentially a snapshot of the borrowing population. That is: the many borrowers who successfully repaid their loans already would not benefit and neither would future borrowers, at least not directly.

They also contend that the figures cited by advocates of loan forgiveness don’t add up. For one, the supposedly alarming increase in default rates has more to do with changes in how they’re calculated than any actual increase in borrowers skipping out on their debt.

Cohort default rates in the early to mid-1990s were double what they are now — around 10.8%. And they were measured over a two year period, whereas as currently, they are measured over a three year period. Thus, the default rate figure is potentially inflated.

Further, any sort of stimulus provided by a loan forgiveness deal would be restricted to the relatively small subset of borrowers who are actively repaying their loans. A little over half of federal student loans are currently in repayment.

Students still enrolled in college and not yet paying on their loans would benefit in the long run, but their current spending would not change. So, too, borrowers in forbearance and default would not increase their spending as a result of such a program; they’re already not making payments.

Opponents also charge that a forgiveness program would disproportionately benefit upper and middle class borrowers. Nearly half of the outstanding federal student loan debt is held by the top income quartile, as highlighted by a 2018 Urban Institute report. And nearly a quarter is held by the top ten percent.

This is likely due to the fact that these borrowers are more likely to have attended graduate school and thus racked up substantial loans. Graduate student loans make up almost 40% of the money lent each year, but only 17% of the borrowers. The additional earning power provided by advanced credentials make it significantly more likely that these debt holders will be able to pay off their loans without assistance.

Conversely, only 10% of student loan debt is held by the lowest income quartile. Many of the holders of this debt never finished school or only completed a two-year degree. Default rates are much higher in this subset of borrowers despite the fact that they typically owe less. College dropouts are four times more likely to default than college graduates. Of borrowers in default on their federal student loans, two-thirds are college dropouts.

Thus, the benefits of a forgiveness program would be concentrated among those who need it least.

Student loan forgiveness also does not increase the number of qualified students enrolling in college or the number of students graduating from college. It provides a benefit to students who have already parted ways with their college.

Further, the program would cut into the GDP and the federal budget, particularly if private loans were also forgiven. And the stimulus effects predicted by freeing up this cash for borrowers are far from certain. The logic assumes that that cash will be spent with maximum efficiency and maximum potential impact, feeding the market, but in fact it might be saved or used to pay down other debt.


Alternatives

Some have proposed a more measured approach to student loan forgiveness: forgiving, say, the first 10 or 15 thousand in debt, or only forgiving undergraduate loans, thus helping hard-hit borrowers while not providing undue assistance to those in higher income brackets who don’t need it.

But, not all graduate students will be wealthy. Social workers often pursue graduate degrees, such as a MSW, but have total student loan debt that often exceeds their annual income. Limiting loan forgiveness to undergraduate debt would hurt these borrowers. Perhaps adopting a means test on loan forgiveness would be more appropriate.

Others would prefer to see efforts at remediating the student debt crisis focused elsewhere. Increases to Federal Pell Grant funding might better serve low-income students. Such increases would ensure the enrollment of greater numbers of students and see them through to graduation with lower debt burdens. Their credentials would then translate into higher paying jobs and thus stimulate the economy.

And allowing bankruptcy discharge for student loans, almost impossible under current laws, would provide a safety net for those being crushed by their debt. Shoring up defense to repayment laws, currently under threat by the Trump administration, would allow borrowers who had been scammed by their colleges to discharge their debt.

The refinement of Income-Driven Repayment plans to make the discharge of loans at the end of the repayment period tax free might also target assistance to those most in need.

Though Democratic enthusiasm for student loan forgiveness is high, this sort of fine-tuning appears more likely to clear the necessary political hurdles in the near term.


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