The national debate around student loan forgiveness has shifted into high gear. Last month, Sen. Chuck Schumer called for the elimination of up to $50,000 of student loan debt, joining a chorus of activists for debt forgiveness. Not to be outdone, Secretary of Education
just extended a pandemic-inspired moratorium on student loan payments. President-elect
is facing high expectations to pursue broad-based student loan relief as soon as his first day in office.
But policymakers and pundits from both parties are currently ignoring a much more fundamental point: The majority of student loans were never going to be paid back in the first place. The government should not treat all borrowers equally. Policymakers should forgive the debt of borrowers who will never be able to pay it back.
The debate about loan forgiveness has exposed fault lines both between and within parties. Conservatives have decried the proposal as a regressive gift to the rich and well-educated who owe the most in student loans. Meanwhile, within the Democratic party, progressives are pushing for much broader relief while centrists favor a more modest plan. Even the American public is split on the issue.
Basic notions of fairness indicate that we should be able to reach a bipartisan solution. Most everyone agrees that Beverly Hills plastic surgeons or Wall Street bankers making seven figures can easily pay back their student loans, while all but a heartless few think the person working two low-paying jobs to just get by should be forced to repay. Fortunately, total forgiveness or the status quo aren’t the only options.
Even in “good” times, most borrowers were not paying down their loans. According to the most recent data from the New York Fed, over 50% of loans are in some form of negative amortization where borrowers are not paying enough each month to cover the interest due on their loans, let alone reduce the principal. As of 2018, 20% of borrowers were making no payments at all, according to the U.S. Department of Education, while millions of other lendees were late.
Recent estimates suggest that there is approximately $400 billion of student loans that will not be repaid under any circumstances. The entire sub-prime housing market bubble that caused the 2008 recession cost lenders $535 billion. The difference is that while banks have a simple (if painful) mechanism to repossess the home and sell it for a loss, student loans are nondischargeable in bankruptcy. When a student loan goes bad, the federal government tries to force payment on that debt until the person is old enough to get social security—and then starts garnishing social security checks. So the roughly 20 million Americans who have no hope of repaying their loans also cannot “hand back” their education. Instead, they are stuck with an impossible mountain of debt.
And that debt has consequences. As they face mounting interest every month, too many Americans are putting off buying homes or struggling to qualify for an auto loan because of student loans—setting back the entire engine of U.S. economic progress.
The federal government is subjecting tens of millions of borrowers to a fate worse than the worst bank repossessors of the 2008 mortgage crisis. So the policy question is not should we be writing off student loans. The right question is how to immediately write off student loans for the 30 to 50 percent of Americans who clearly have no chance of paying off their debt, and for whom student loans have become a financial albatross that is destroying any hope of a normal financial life.
An effective student debt plan would prioritize those borrowers first. And we already have the tools and data to do it. The federal government needs to immediately evaluate its student loan portfolio like a bank would. Anyone who clearly has no chance of paying back their loan should have it immediately forgiven, and every future borrower should get a better deal.
How would this work in practice? As it turns out, many of the policy levers to make such a change are already in place. The federal government offers several income-driven repayment plans. The Income-Based Repayment scheme allows borrowers not to pay unless they make above a certain minimum, and they never pay more than 15% of their monthly discretionary income (10% if they are a newer borrower.) There is also plenty of data to help identify the borrowers unlikely to repay—one simple proxy, for instance, could be anyone who has a loan amount more than one times their annual income.
The benefits of immediate debt forgiveness for anyone currently in negative amortization or who has debt in excess of their annual income has obvious benefits along with enrolling all future borrowers in an income-based plan. It limits debt forgiveness to a clear subset of the population that is struggling the most. It creates a system in which no future borrower is forced to pay more than they’re able: Everyone can make reasonable payments based on their economic circumstance. The government, assuming it accounts for its expected losses appropriately, comes out even. And there is no mass elimination of debt, which research shows would clearly favor wealthier and better-educated Americans.
This should, of course, just be the beginning. The Department of Education should modify the Income-Based Repayment program by eliminating negative amortization from these plans so that borrowers never see their balance go up. It should also promise full and immediate debt relief to those who have no hope of ever paying back their loans. The current IBR policy should also be changed to not only forgive principal after 20 or 25 years, but also to not require borrowers to pay taxes on the forgiven debt, which they currently must do. This is about better aligning incentives and removing the often-lifelong shackles of student debt.
And no conversation about student loan forgiveness has come close to addressing the real problem, which is that the cost of higher education is too high. For now, the focus needs to be on getting relief to the borrowers who need it most.
Daniel Pianko is co-founder of University Ventures.