On Tuesday, the Biden administration announced its plans for large-scale reforms to student loan forgiveness programs. As a result, the Department of Education estimated at least 40,000 people will receive immediate forgiveness for their loans.
According to Forbes contributor Adam S. Minsky, an attorney who specializes in student loans, many students use income-driven repayment (IDR) plans to repay loans. Two of the most popular types of IDR plans are Income Based Repayment (IBR) and Revised Pay As You Earn (REPAYE).
Plans of this nature are designed to set monthly payments towards debts for students based on their income. They also grant the student forgiveness for any outstanding balance after 20 or 25 years, depending on the plan.
Yet, instead of guiding students into income-based repayment plans, many providers directed students towards “forbearance,” Minsky wrote. This allows students to avoid making payments for up to 36 consecutive months, but that time does not count towards the 20- or 25-year terms for IDR plans.
To address this problem, Federal Student Aid announced it would implement a one-time change counting certain forbearance terms towards the forgiveness period.
Specifically, FSA said it will count “forbearances of more than 12 months consecutive and more than 36 months cumulative toward forgiveness.” In other words, students will be years closer to forgiveness even if they did not make payments towards their debts.
In addition, the Department of Education said it will count IDR payments towards forgiveness terms even if the payments came before federal loan consolidation, Minsky wrote; previously, consolidating loans would “restart the clock” on repayment terms.
These adjustments along with some additional smaller changes will result in immediate forgiveness for at least 40,000 Americans and some form of additional credit towards forgiveness for another 3.6 million, Minsky wrote, citing the Department of Education.
“We expect these figures to only grow,” Under Secretary of Education James Kvaal said during a call with the media on Tuesday, according to Minsky.
Are these changes to student loan forgiveness a good idea?
Yes: 0% (0 Votes)
No: 0% (0 Votes)
While it is understandable that the federal government wants to rectify situations in which students were wrongly guided towards forbearance, these reforms will have a negative impact on many unrelated Americans.
Even if the students entered into forbearance periods because of bad advice, the fact remains that they did not make payments on their loans during those periods. By counting them towards forgiveness, the federal government is absolving the students of responsibility for their debts.
Yet the government cannot change the fact that these debts are still outstanding. If the students do not pay the debts, the government will be on the hook for those loans.
As a result, Americans who do not have student debt would likely have to foot the bill via taxes. There is nothing just about forcing Americans to pay for the personal financial decisions of others who are completely unrelated to them.
And there are even more, less direct impacts, two scholars at the Foundation of Economic Education, a conservative think tank, wrote in a scathing commentary piece published in January 2021.
Antony Davies, an associate professor of economics at Duquesne University, and James R. Harrigan, managing director of the Center for the Philosophy of Freedom at the University of Arizona, laid out “unintended consequences” Americans could face under widespread student loan forgiveness.
The two noted that the government softening the burden on student borrowers has historically led to increased tuition and fees from universities.
As an example, before the federal government guaranteed or subsidized student loans, tuition and fees were about 18 to 19 percent of family income, Davies and Harrigan wrote. The government started guaranteeing student loans in 1965 and subsidizing them in 1973, and by 1978, tuition and fees were steadily rising.
Today, tuition and fees represent a whopping 45 percent of family income, Davies and Harrigan wrote. By further softening the burden on students who have taken out debt, the Biden administration could send tuition even higher for future students.
“When the government makes it less painful for students to borrow, whether by guaranteeing, subsidizing, or forgiving loans, it takes away some of the pain of student borrowing, which makes it easier for colleges and universities to raise tuition,” Davies and Harrigan wrote.
In two paragraphs at the end of the piece, they summed up the problem with student loan forgiveness perfectly:
“In the end, there are three big winners in this scheme. Universities will be able to raise their prices even more, because students will, all of a sudden, have extra money to pay. Students who took on gargantuan levels of debt will be able to force their fellow citizens to pick up the tab. And finally, politicians will buy votes by appearing to be magnanimous with other people’s money.
“The big losers are future students, who will see tuition spike yet again, working-class Americans who suddenly find themselves stuck paying for other people to go to college, and taxpayers in general who will be — as always — left holding the bag.”
While the desire to help students who were wrongly guided towards forbearance is not inherently wrong, the problem cannot be magically fixed by forgiving large debts. As usual, the Biden administration is demonstrating an inability to understand the long-term consequences of its actions.