US student debt has grown for decades, but this year, lawmakers appear to be more serious about student debt forgiveness than ever – generating bold proposals and a vigorous debate about potential impacts and costs.
One variable often missing from these conversations: the billions of dollars in student loans that may never be repaid.
In March 2020, the CARES Act put a pause on federal student loan payments in place. In April 2020, Pew estimated that 20% of student loan borrowers were in default – usually defined as having spent at least 270 days without making payment. And more than one million student loans are in default each year.
Sarah Sattelmeyer, director of Pew’s successful student borrowers project, says the data suggests that about $ 165 billion in student loans administered by the federal government are currently considered to be in default – and that that total may increase when the payment pause is delayed. federal student loans expire.
Brookings estimates that by 2023, almost 40% of borrowers are expected to default on their student loans.
The “cost” of deferred debt
Although the federal government and third-party suppliers often recover most of the debt, thanks to the significant tools at their disposal (such as the ability to garnish wages, social security benefits and federal tax refunds), any policy of debt forgiveness is likely. Student loans would include forgiving some debts that would never be collected in any way.
“There must be ample forgiveness of the student loan,” says Kevin Walker, a student loan specialist and editor at CollegeFinance.com. “It is something that would be good for the borrower, and for the country, and also for the treasury because the default rates on student loans are very high and many costs are already borne by the United States government, the taxpayer. “
He continues: “Finding a way to provide relief to individual borrowers, realizing that much of that expense would already be incurred over time through defaults, makes a lot of sense. The difficult part is figuring out what the right amount to forgive is.”
Two main proposals
There are currently two proposals for student loan forgiveness at stake.
House and Senate Democrats urged President Biden to “widely” forgive up to $ 50,000 of federal debt through executive order, an approach that Senate majority leader Chuck Schumer has repeatedly reiterated that Biden should adopt during his first 100 days in office.
Biden, however, is expected to ask Congress to forgive only $ 10,000 in student debt to borrowers.
“$ 50,000 for everyone would decrease to $ 1.7 trillion to $ 700 billion outstanding loan debt,” estimates Megan Coval, vice president for federal policies and relations at the National Association of Student Financial Aid Administrators. “And that comes at a price of about $ 1 trillion.”
“Losing $ 10,000 in federal student loan debt per borrower would cost $ 377 billion and eliminate all federal student loan debt for about a third of borrowers,” estimates higher education expert Mark Kantrowitz.
Bad debt in books
Another factor often considered by lawmakers is how much federal student loan programs would lose if borrowers did not continue to repay their loans – as well as the interest on their loans.
Josh Mitchell, reporter for the Wall Street Journal and author of the upcoming book “The Debt Trap: How Student Loans Became a National Disaster”, points out that the Congressional Budget Office provides legislators with estimates of how much policies can cost, usually known as CBO score.
Congress is often told that the Department of Education “will make a lot of money” from outstanding student debt that could be used for other programs, such as Pell Grants, he says.
“So, if you suddenly cancel [student debt], it all comes down to how accurate are the projections? “Mitchell asks.” I don’t think Congress actually agreed on the amount of bad debts in its books. And therefore, they still pretend they are making a lot of money from it. “
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