How would student loan forgiveness really work?

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Nearly 18 months into President Biden’s term, his administration continues to grapple with whether and how to grant blanket forgiveness to the more than 40 million people who hold nearly $1.6 trillion in student loan debt.

Since running for office in 2020, the president has consistently said he wants to erase up to $10,000 in debt for each borrower, preferably through congressional legislation rather than executive action. So far, Congress has failed to act, and Biden’s campaign proposal remains just that, with little indication from the administration if or when executive action will be announced. The White House has refuse that any plan is imminent, although news reports in The Washington Post and The Wall Street Journal indicate otherwise.

These reports outline a plan consistent with the president’s initial target amount, perhaps with an income cap to limit who will be eligible. Such a measure would erase the debt of nearly a third of borrowers and halve the debt by another 20%.

It is unclear whether this will be enough to satisfy Democratic activists, that grow for greater quantity be forgiven and warn that the party could suffer in the midterm elections in the fall without such a bold policy. Republicans, on the other hand, may seek to present loan forgiveness as an expensive gift to college graduates who are already economically secure. “With his polling numbers down, President Biden is trying to buy off voters with a massive student loan forgiveness,” Rep. Virginia Foxx of North Carolina said in a press release. Foxx is the top Republican on the U.S. House of Representatives Education and Labor Committee.

In addition to political considerations, any plan is likely to run into many logistical and legal hurdles, including whether the president has the power to cancel loans and whether the government and third-party loan servicers can handle the process efficiently. The US Department of Education did not respond to a request for comment.

While much of the loan forgiveness discussion has focused on how much debt to forgive, Congress must strengthen student aid and reform policies that punish students when their degrees don’t pay off. not, said Sameer Gadkaree, president of the Institute for College Access. and Success. For example, he said, Congress should adopt the president’s proposed free college program and make student loans eligible for discharge in bankruptcy.

“The loan forgiveness conversation underscores the flaws in the system that relies too heavily on debt and the economic hardships that some borrowers have faced,” Gadkaree said. “We did not initiate this conversation.”

Who should benefit

A proposal to forgive student loans would make more sense if it was part of a larger discussion about how to fund a college education, said Matthew M. Chingos, who directs the Center on Education Data and Policy at the Institute. Urban Institute.

Instead, Chingos said, the current debate focuses on whether the president should choose a somewhat random amount for cancellation, without discussing who should get loan forgiveness and without taking action. to prevent future students from ending up with intractable debts.

Yet, while there is no specific economic argument for limiting loan forgiveness to $10,000, it would be an easy way to erase all student debt for a plurality of borrowers.

About a third of those with student loan debt owe less than $10,000. More than half of borrowers owe less than $20,000 and three quarters owe less than $40,000. Only 7.3% of those with student loan debt have balances over $100,000.

Younger borrowers are also more likely to have their entire student loan balance wiped out by blanket cancellation. More than half of borrowers aged 24 or younger owe $10,000 or less. Borrowers aged 62 and over are the second largest group who would see all of their debt erased under such a plan, with 36% of them having balances of $10,000 or less.

If the White House settles on a $10,000 forgiveness limit per borrower, many other policy choices would have to be made, such as whether debts accrued by parents or graduate students would be included in the relief plan.

If the Biden administration was considering who might benefit most from loan cancellation, Chingos said, it should look to people who took out Parent Plus loans to pay for their children’s education but have little hope. to repay the debt. This situation gives the impression that the program is a predatory lender, he said, so the government should consider eliminating the entire amount, not just $10,000.

In contrast, he said, people who borrowed for higher education, under the Grad Plus program, should enjoy their degree with a higher salary.

“Everyone agrees that we should cancel the debt of people who can’t pay,” Chingos said. “Now the debate is about giving some forgiveness to people who should be able to pay.”

Who would be eligible

In addition to limiting the amount to be forgiven, the White House could also consider limiting who is eligible. News reports have indicated that the administration may limit loan forgiveness to people earning less than $150,000 a year.

Limiting student aid based on income is a key part of the federal government’s approach, said Scott Buchanan, executive director of the Student Loan Servicing Alliance, an association representing the private companies that the federal government pays to manage loans. loans.

The conversation about loan forgiveness highlights the flaws in the system that relies too heavily on debt.

Pell grants, for example, are limited to low-income students, he said, as are the amounts and types of loans students are eligible for. Widespread loan forgiveness should follow this practice, he said, to use scarce federal resources to help those who need them most.

But an income cap of $150,000 would exclude very few borrowers, said Justin Draeger, president and CEO of the National Association of Student Financial Aid Administrators, and would save the government a lot of money. little money.

Applying such an income-based loan cancellation limit can also create bureaucratic hurdles, requiring an application from each borrower and verification of income by the Ministry of Education.

The government cannot automatically verify borrowers’ incomes, Draeger said, because Internal Revenue Service data cannot be shared with other agencies unless Congress directs otherwise.

While the means test for loan forgiveness is a political issue, Draeger said, the real issue is how the government is going to carry it out without placing a substantial burden on those who need it most. a loan forgiveness and thus prevent them from obtaining it.

When and how the policy could be rolled out

Previous efforts to cancel much more limited student loans have been plagued by complexity, confusion among borrowers and poor communication from departments. Policy experts warn that trying to extend forgiveness to tens of millions of borrowers could make these problems worse.

The Public Service Loan Forgiveness program, for example, was created in 2007 by Congress to provide relief to people working in nonprofit, nursing, educational and other jobs. When the first borrowers were eligible for the program, after 10 years of loan repayments, the ministry initially rejected almost all of those who applied for their debts to be forgiven.

In October, the department waived rules of origin in order to credit borrowers with payments that would have come out of normal regulation. Billions more in loan balances have been canceled since then.

Earlier this month, the department provided automatic relief amounting to nearly $6 billion in student loan forgiveness to some 560,000 borrowers who had attended Corinthian Colleges, a for-profit chain that closed its doors in 2015. Students had been allowed to request the cancellation of their loans through a regulation called “borrower defense to repayment”, but seven years after colleges closed, tens of thousands of requests n had not yet been approved.

Perhaps the biggest question for the administration now is whether it can create a widespread student loan forgiveness process in time for the fall election.

The Democratic Party’s progressive wing has called for the administration to cancel student loans and warned that some left-leaning voters may not support Biden’s party in the fall.

Meanwhile, student loan repayments are set to resume on September 1, more than 2.5 years after they were halted due to the pandemic.

This pausing and restarting of payments is equally unprecedented, and no one knows exactly how the Ministry of Education and loan servicers will be able to handle this change and all other changes in loan repayments, a Buchanan said.

“It’s going to take months to get it right,” he said, “and the department doesn’t have any more financial resources to do this work than it did before the pandemic.”

This creates a potential political problem for the White House, he said: “If the loan forgiveness is tied to political issues and they want it to happen before November, it will be difficult.”

Jacquelyn Elias contributed to this article.

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