The Problem With Student-Loan Forgiveness

Students often don’t understand their repayment options, and current policies can create bad incentives.

Students protest the rising costs of student loans for higher education on September 22, 2012 in the Hollywood section of Los Angeles, California. Citing bank bailouts, the protesters called for student debt cancelations. 
National Journal
Sophie Quinton
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Sophie Quinton
April 21, 2014, 1:25 p.m.

If you have stu­dent loans, chances are you wish there was a way to make them dis­ap­pear. And in a way, there is: The fed­er­al gov­ern­ment now of­fers three re­pay­ment plans that lower monthly pay­ments and will — even­tu­ally — for­give re­main­ing debt. A sep­ar­ate plan for­gives loans for people who take cer­tain pub­lic-ser­vice jobs. 

Some of these op­tions, however, are so new that nobody knows how well they’ll serve bor­row­ers. Even when it comes to well-es­tab­lished re­pay­ment plans, many stu­dents don’t truly un­der­stand their op­tions. And some ana­lysts say that policy ad­just­ments are needed to en­sure that stu­dents don’t get too com­fort­able tak­ing on debt and in­sti­tu­tions don’t get too com­fort­able char­ging high prices.

“A lot of stu­dents will take out loans be­cause they hear that if you’re in a cer­tain job it gets paid off. That’s not al­ways the case,” says Lauren Ell­cessor, 28, a coun­selor at the Edu­ca­tion­al Op­por­tun­ity Cen­ter in Nor­folk, Va. The fed­er­ally fun­ded cen­ter helps mostly low-in­come, minor­ity, and first-gen­er­a­tion col­lege stu­dents fig­ure out their high­er-edu­ca­tion op­tions. Some cli­ents ar­rive with debt from pri­or col­lege de­grees — or at­tempts at de­grees — and false hopes.

“I get the quote: ‘I’m here to get Obama’s plan to get rid of my stu­dent loans,’ ” Ell­cessor says. It’s not that easy, she tells cli­ents. To qual­i­fy for fed­er­al loan for­give­ness, bor­row­ers need to make on-time pay­ments for years, some­times dec­ades. Un­der cur­rent rules, bor­row­ers need to have debt at a cer­tain level re­l­at­ive to their in­come to enter in­come-driv­en re­pay­ment. Eli­gib­il­ity de­pends on when bor­row­ers first took out loans and the kinds of fed­er­al loans they carry.

In­come-driv­en re­pay­ment has been an op­tion for hold­ers of fed­er­al dir­ect loans since 1994. But the idea really star­ted to gain mo­mentum in the mid-2000s, when it be­came clear that more and more stu­dents were de­pend­ing on loans to pay for col­lege. Ad­just­ing monthly pay­ments for lower-in­come earners pro­tects bor­row­ers from de­fault, while even­tu­al loan for­give­ness of­fers a light at the end of the tun­nel.

“Some form of in­come-based re­pay­ment should be the only re­pay­ment op­tion in the stu­dent loan pro­gram,” says Jason Del­isle, dir­ect­or of the Fed­er­al Edu­ca­tion Budget Pro­ject at the New Amer­ica Found­a­tion. People have the op­tion to pay more each month if they choose — a good choice for some bor­row­ers be­cause they save money over­all by pay­ing more of the prin­cip­al and less in­terest. But re­quired pay­ment should re­flect what bor­row­ers can af­ford, Del­isle says. 

At the mo­ment, stu­dents have to choose to enter in­come-driv­en re­pay­ment. Fig­ur­ing out the best choice can be daunt­ing even for the sav­vi­est bor­row­ers. The plan with the largest en­roll­ment, with about 1.2 mil­lion bor­row­ers, is called in­come-based re­pay­ment. Cre­ated by Con­gress in 2007, it’s avail­able to people whose loan pay­ments would be great­er than 15 per­cent of their dis­cre­tion­ary in­come un­der the stand­ard re­pay­ment plan. Monthly pay­ments are capped at that level, and re­main­ing loans are for­giv­en after 25 years.

Then there’s the more gen­er­ous plan the Obama ad­min­is­tra­tion cre­ated, called Pay as You Earn. In­ten­ded to help more-re­cent gradu­ates battered by the re­ces­sion, it caps pay­ments at 10 per­cent of dis­cre­tion­ary in­come and for­gives re­main­ing loans after 20 years. There’s also the 1994 op­tion, called in­come-con­tin­gent re­pay­ment, and a totally sep­ar­ate loan-for­give­ness op­tion for pub­lic ser­vants. Un­der that pro­gram, also signed in­to law in 2007, bor­row­ers with gov­ern­ment or non­profit jobs who com­plete a dec­ade of pay­ments — in­come-driv­en or not — have their re­main­ing debt for­giv­en after 10 years.

Al­though these op­tions have been around for a while, not many people know about them. “Un­til the last couple of years, there was vir­tu­ally no out­reach about avail­able in­come-driv­en plans and the ap­plic­a­tion pro­cess was bru­tal,” writes Lauren Ash­er, pres­id­ent of the In­sti­tute for Col­lege Ac­cess and Suc­cess, in an email.

There have been some im­prove­ments, Ash­er says. The Edu­ca­tion De­part­ment has made the on­line ap­plic­a­tion pro­cess much sim­pler. Last year, the agency star­ted send­ing emails to bor­row­ers who may be strug­gling to make pay­ments to let them know it’s pos­sible to al­ter their pay­ment struc­ture for more man­age­able debt re­pay­ment. 

In Nor­folk, when the Edu­ca­tion­al Op­por­tun­ity Cen­ter of­fers work­shops for bor­row­ers in de­fault, few show up, likely be­cause people are em­bar­rassed. Al­though in­sti­tu­tions re­quire stu­dents to com­plete en­trance coun­sel­ing — of­ten provided on­line — be­fore tak­ing out a loan, many stu­dents don’t really un­der­stand what they’re get­ting them­selves in­to, Ell­cessor says. 

Mean­while, some re­search­ers have raised con­cerns that cur­rent re­pay­ment op­tions might dis­pro­por­tion­ately be­ne­fit gradu­ates of very ex­pens­ive pro­grams rather than bor­row­ers with lower in­comes. This is par­tic­u­larly pro­nounced when it comes to gradu­ate school. While un­der­gradu­ates can’t take out more than $30,000 in fed­er­al loans, gradu­ate stu­dents can take out as much money as they like.

Un­der Pay as You Earn, law­yers with over $100,000 of debt can be earn­ing $70,000 a year, qual­i­fy for in­come-driv­en re­pay­ment, and end up hav­ing the ma­jor­ity of their loans for­giv­en, Del­isle and coau­thor Alex Holt found in a 2012 re­port.

Del­isle wor­ries that too-gen­er­ous policies might give in­sti­tu­tions a reas­on to keep prices high. “You’ve es­sen­tially got a tool to make your stu­dents price-in­dif­fer­ent,” he says. Beth Akers and Mat­thew Chin­gos of the Brook­ings In­sti­tu­tion have pro­posed get­ting rid of loan for­give­ness al­to­geth­er.

There is no Obama plan for mak­ing stu­dent loans dis­ap­pear. In fact, Pres­id­ent Obama’s 2015 budget pro­posed tweaks that would make loan for­give­ness less gen­er­ous, in­clud­ing lim­it­ing for­give­ness un­der the pub­lic ser­vice pro­gram to $57,000 and ex­tend­ing re­pay­ment peri­ods to 25 years for bor­row­ers with debt above that level.

As more people from all back­grounds pur­sue col­lege, the im­port­ance of cre­at­ing clear and prag­mat­ic re­pay­ment op­tions has nev­er been great­er. “It’s not go­ing to be the op­tim­al choice for every­one,” Ash­er says of in­come-driv­en re­pay­ment. “But it’s cru­cial that it be a choice, and be a choice that’s easy to un­der­stand.”

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