What to Know About Debt Forgiveness
In the years since then presidential candidate Bernie Sanders introduced the idea of widespread debt forgiveness into the mainstream, it’s become a common rallying cry among younger, progressive voters. Here’s a breakdown of the existing options and new proposals.
Existing Loan Forgiveness Options
Bankruptcy discharges: It is much harder to get rid of student debt via bankruptcy than other consumer debts. That’s been especially true after 1998, when Congress changed the law to stop allowing student debt to be discharged after seven years in repayment. Instead, borrowers have been required to prove that paying the debt “will impose an undue hardship on you and your dependents.” How judges interpret “undue hardship” varies, though most courts require borrowers to show they have tried to pay, are unable to pay, and will not be able to pay in the future. But the tide may be turning in favor of a more consumer-friendly rule for student debtors filing for bankruptcy. In some recent high-profile decisions, judges have begun to rule in favor of borrowers, including in a New York case in which a debtor successfully discharged more than $200,000. And recently, a panel of judges and lawyers convened by the American Bankruptcy Institute recommended that discharges be allowed again after seven years of payments.
Public Service Loan Forgiveness: Created at the end of George W. Bush’s presidency, the Public Service Loan Forgiveness program was supposed to entice graduates into lower-paying but necessary public sector jobs. After 10 years of monthly payments, borrowers working in qualifying jobs can have their remaining Direct loans forgiven tax-free.
But three years after the earliest participants became eligible for forgiveness, the program has been plagued with problems. A combination of rigid rules, sloppy loan servicing, and confusing communication about program guidelines in its early years led to 99% of initial applicants being rejected. When Congress temporarily expanded the program to help frustrated borrowers, the problems persisted. Again, 99% of initial applicants were rejected. The program has been the focus of multiple lawsuits against the government and its contracted loan servicers, including one in which the Education Department settled earlier this year.
The latest data shows some modest improvements: 1.5% of PSLF applicants and 4.5% applicants to the temporary expanded program have successfully had their loans forgiven. Some experts predict approval rates will increase in the coming years because enrollment ballooned starting in 2010, and consumer groups began focusing on helping borrowers navigate the system.
Income-driven repayment forgiveness: Designed as a way to make student debt repayment more manageable, enrollment in income-driven repayment programs has grown considerably in the past decade, as the number of plans grew and the terms became more generous. There are now five separate income-driven repayments plans, which offer forgiveness after 20 or 25 years of payments. Nearly half of the volume of federal loans is being repaid through income-driven plans. Researchers predict a significant amount of debt could ultimately be discharged this way — much of it from students who borrowed for graduate school. One recent estimate from the Congressional Budget Office projects loans made between 2020 and 2029 will cost the government $200 billion in forgiveness. Unlike Public Service Loan Forgiveness, borrowers granted forgiveness under income-driven repayment will have to pay taxes on the amount forgiven, unless Congress changes the law. A borrower with about $50,000 forgiven could owe more than $13,000 in taxes.
Proposed Loan Forgiveness
Student debt has become a mainstay in major political platforms, so much so that the best way to address the nation’s growing student loan burden became a dividing line between far-left and center-left candidates during the 2020 Democratic primary. Proposals range from universal forgiveness of all $1.6 trillion of student debt to more limited plans, including a proposal from Massachusetts Sen. Elizabeth Warren that would eliminate up to $50,000 in debt for borrowers earning less than $100,000, with higher earners receiving proportionally less forgiven. Presidential candidate Joe Biden’s latest pitch is similar: forgiveness of debt for low- and middle-income borrowers who attended public colleges or private historically black colleges. He also favors expanded forgiveness available through income-driven repayment plans.
The two parties’ stances appear to track public opinion. Nearly 80% of Democratic voters said they supported cancelling up to $50,000 in student debt, compared with just 30% of Republicans, according to a 2019 Quinnipiac poll.
Advocates of student debt cancellation say it will spur economic activity, and there is some evidence to support that claim. A recent study of 10,000 borrowers who had private loans wiped out found those borrowers were more likely to move and change jobs, and their income grew by about $3,000 over three years. Another paper from economists who worked on the Sanders campaign found that eliminating student debt could boost the country’s gross domestic product by more than $86 billion a year.
Yet critics of widespread forgiveness say it funnels limited financial resources to graduate-degree holders, who tend to command higher wages, and wealthier Americans, who are more likely to have debt because they attend college at higher rates and enroll in more expensive colleges. They also question the fairness of taking tax money from people who paid off their student loans or didn’t attend college to pay off the student debt of others.
And there’s one major issue that all sides agree on: Forgiving student debt doesn’t solve the underlying causes of the country’s ballooning debt loan — namely rising college costs and limited financial aid. What happens for students in college now or those who enroll in the future? Will their debts be forgiven?
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