Biden Administration Promotes New Changes in Student Loan Policies
Education Policy Brief #52 | By: Lynn Waldsmith | April 25, 2022
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Being debt-free will soon be a dream come true for tens of thousands of borrowers, now that the Dept. of Education has announced it is taking steps to overhaul the federal student loan system. In addition, millions of borrowers will move one step closer to reaching that same dream.
Too many choices, complicated terms, misinformation from servicers – these are just some of the problems that have plagued federal student loan borrowers for years.
“Student loans were never meant to be a life sentence, but it’s certainly felt that way for borrowers locked out of debt relief they’re eligible for,” U.S. Secretary of Education Miguel Cardona said this month. “The Dept. of Education will begin to remedy years of administrative failures that effectively denied the promise of loan forgiveness to certain borrowers enrolled in IDR (Income-Driven Repayment) plans. These actions once again demonstrate the Biden-Harris administration’s commitment to delivering meaningful debt relief and ensuring federal student loan programs are administered fairly and effectively.”
The Education Dept. has previously taken action to cancel the debts of borrowers working in public service jobs, borrowers who become permanently disabled, and those who were defrauded by their college. In total, the Biden administration says it canceled $17 billion of debt for 725,000 borrowers.
Federal Student Aid (FSA) estimates the new administrative changes will result in immediate debt cancellation for at least 40,000 borrowers under the Public Service Loan Forgiveness (PSLF) Program. Several thousand borrowers with older loans will also receive forgiveness through IDR. And more than 3.6 million borrowers will receive at least three years of additional credit toward IDR forgiveness.
Forget credit card debt or car loans. Student loan debt is the second largest form of debt in the United States behind home mortgages, with the total exceeding $1.7 trillion. More than 40 million Americans are in debt for their education, and up to a quarter are in delinquency or default. The average balance is more than $30,000.
President Biden recently extended the payment pause on federal student loans again until September. During the pandemic, the pause has been prolonged six times over 24 months and spanned two presidencies. The Biden administration is facing great pressure regarding student loan forgiveness from members of his own party. During the 2020 campaign, Biden backed the forgiveness of $10,000 in student loan debt. Forgiving $10,000 for all borrowers with federally-backed loans would cost roughly $371 billion and erase the loans of about a third of all borrowers.
But several prominent Democrats, including Sen. Elizabeth Warren (D-MA) are urging him to enact broad-based cancellation of up to $50,000 via executive action, as opposed to legislation passed by Congress. In a recent letter sent to Biden and signed by Warren and other Dems, the argument made is that student loan forgiveness would boost the economy.
“Canceling a meaningful amount of student debt will provide long-term benefits to individuals and the economy, helping families buy their first homes, open a small business, or invest in their retirement,” the letter states.
In fact, according to a report released this month by Bankrate.com, 74 percent of Gen Z borrowers and 68 percent of millennials who took on student loan debt for their higher education delayed a major financial decision as a result of their debt. That’s significantly higher than it has been for older generations: About 54 percent of Gen X and 42 percent of baby boomer borrowers said they have delayed a major financial decision due to their student loan debt. Yet despite the financial burden of student loan debt, the new report shows that 59 percent of those say that higher education has improved their career opportunities or earning potential.
Rep. Ayanna Pressley (D-MA), another Democrat who signed the letter to Biden, argues that student loan forgiveness is “a matter of racial and economic justice” because of the disproportionate burden on borrowers of color.
But interpreting the data is complicated and controversial. According to the Brookings Institution, for example, nearly one-third of all student debt is owed by the wealthiest 20 percent of households, while the lowest 20 percent of income groups hold only 8 percent. It’s important to not only look at the amount borrowed however, but lifetime earning potential. Borrowers with advanced degrees, for example, stand to earn more wealth over time. Thus, borrowing for the exorbitant costs of medical or law school is more than made up for by the six-figure salaries that one can expect down the road.
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New research from the New York Fed concludes that tying student loan forgiveness to income requirements would help the largest number of debtors. The Fed researchers estimated the cost of two federal loan forgiveness proposals, one for $10,000 and another for $50,000. They found that limited forgiveness and placing income caps on who would be eligible would “distribute a larger share of benefits” to low-income borrowers while also reducing the cost of forgiveness overall.
“In general, we find that smaller student loan forgiveness policies distribute a larger share of benefits to lower credit score borrowers and to those that live in less wealthy and majority minority neighborhoods (relative to the share of balances they hold),” the report says. Increasing the forgiveness amount, “increases the share of total forgiven debt for higher credit score borrowers and those living in richer neighborhoods with a majority of white residents.”
In a recent interview, White House Press Secretary Jen Psaki said that canceling federal student loan debt is “still on the table”. However, some wonder, is it fair to offer student loan forgiveness when many people have paid off their student loans in good faith? Critics of canceling student loan debt make a compelling argument of fairness. And, it can be argued that simply canceling student loan debt does not get at the root of the problem itself — that the cost of higher education continues to go up.
For the most recent school year, the average cost of tuition and fees for a full-time undergraduate student at a four-year public in-state school was $10,740, according to the College Board. For out-of-state students, the cost was more than $27,000 while the average cost of a private nonprofit education was more than $38,000.
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U.S. Dept. of Education announcement to fix failures in student loan programs:
Letter to President Biden from prominent Dems re payment pause and cancellation of student loan debt:
New York Fed/Equifax Consumer Credit Panel research on student loan forgiveness: