Student loan forgiveness must be targeted and limited to protect taxpayers
The idea of forgiving student loans heated up during the 2020 presidential campaign, when Bernie Sanders and Elizabeth Warren offered dueling plans. Now President Joe Biden is signaling that he is ready to respond with meaningful forgiveness to all but the wealthiest debtors.
The accumulated debt is huge with $1.7 trillion owed, up from $250 billion in 2004. Some 46 million people owe an average of $37,000. But only 13% of Americans have student loans and less than 1% owe more than $100,000.
Repayment can be difficult, if not impossible, especially for borrowers who did not get the degree, career and income they were looking for, those who have encountered hardship, and those working in low-paying but crucial jobs.
But canceled federal student loans would have to be paid for by taxpayers, many of whom have avoided college because of cost, or chosen cheaper public universities or community colleges that don’t need loans, or worked a second job to avoid or repay loans. Asking them to pay for other people’s loans seems unfair, especially because so many people who didn’t participate or borrow have less wealth than those who would benefit.
THE CASE OF CANCELLATION
Since 1990, tuition and average fees for higher education have increased by 130% – after inflation. This is partly due to the arms race on campuses for increasingly luxurious housing, restaurants and facilities. At private and for-profit colleges, part of the rise reflects reckless student borrowing. But in public colleges and universities, the share of these schools’ revenue coming from students has doubled since 1988, while the share of state and local governments has fallen by 35%.
Many 18 year olds are not financially savvy. Neither do many parents who only want the best for their children. Large loans can hamper a college graduate’s progress for decades and cannot be discharged in bankruptcy.
Many borrowers are trapped by paying interest rates well above those for homes and cars. Many more may find college unaffordable if rates continue to rise.
The federal government’s two main programs to provide relief to debtors have been widely criticized as ineffective. Three million student borrowers are eligible to apply for the Civil Service Loan Forgiveness Scheme, but just over 200,000 have applied. Most are rejected, often wrongly, by program administrators — for-profit companies that often fail to properly track reimbursements and issue forgiveness.
Most borrowers are eligible for the REPAYE scheme, which limits payments to 10% of discretionary income, defined as 150% of the poverty line. A single person would pay 10% of their income above $19,320. The program also cancels the balance for regular payers after 20 to 25 years. But it’s also in shambles, as the private loan managers who run it often fail to keep up with repayments, deny deserved forgiveness and drive borrowers away from plans.
With student loan repayments and interest frozen from March 2020 through August, loan holders have already gotten a big break.
About half of the money owed is for higher education, and these borrowers should have been better informed of the risks. Much of that borrowing paved the way for big earners, with 71% of professional degree holders owed an average of $199,000.
Much of what is owed is for room and board. Should we also reimburse those who did not attend college for food and lodging? Much of the debt was generated when students rejected affordable options like public rather than private schools or trips to dormitories.
Broad cancellations or reductions of this debt mean repayment through taxes for small business owners, seniors, struggling families and those who have avoided loans.
Worse still, canceling that debt would do nothing to fix a system in which millions more students are asking to borrow money that they will struggle to repay.
The blanket student loan waiver is unbearable. Failure to provide already authorized targeted assistance is unacceptable. What’s needed:
- Proper auditing and monitoring of schools has made it possible to accept federal student loan money.
- Keep interest rates low for student loans, regardless of market conditions, and reduce them for older high-interest debt.
- Make schools accountable by penalizing them when their borrowers drop out or do not repay.
- Make student loans dischargeable through bankruptcy.
- Improve the marketing of existing programs that limit monthly payments to affordable levels based on income and cancel loans over time for government officials and other essential workers earning lower wages.
- Teach financial literacy in high school and explain the dangers to borrowers.
- Restore appropriate state and local support to public universities to make them affordable, and to community colleges to make them free.
Student loans, intended to improve lives, should not ruin them. But neither should the excesses of the unwise or the debts of the rich be imposed on those who spent and borrowed only what they could afford.
EDITORIAL BOARD MEMBERS are experienced journalists who offer reasoned, fact-based opinions to encourage informed debate on the issues facing our community.