About the Student Loan Forgiveness Price Tag...

04/23/19

Senator Warren's student loan forgiveness proposal has a lot of scolds moaning about the immorality of debt forgiveness, the unfairness to those who paid their debts, and complaining about the price tag. It's pretty obvious that none of those folks know anything about how the federal student loan system works. If they did, they'd know the we crossed the debt forgiveness Rubicon long, long ago. There is already enormous debt forgiveness baked into the federal student loan program.

The only real difference between Senator Warren's proposal and the existing forgiveness feature in the student loan program is whether the forgiveness comes in a fell swoop or is dribbled out over time. Given the federal government's infinite time horizon, the difference is really just an accounting matter. It's not a matter of principle in any way, shape, or form.  

Most student loans are federal student loans and are under existing law eligible for substantial loan forgiveness.  My Georgetown colleague Jake Brooks has explained in a terrific paper about why education costs keep rising:

By 2018, 90% of all student lending is directly from the federal government, and all of those loans (and most earlier loans) can, using one of the [Income-Driven Repayment] programs, be paid back on an income-contingent basis, typically as 10% of discretionary income for 20 years, followed by forgiveness of the remaining loan balance.

Put another way, instead of having a front-end ability-to-repay requirement for student loans, we have it on the back-end with income-driven repayment and debt forgiveness. Debt forgiveness is already a fundamental feature of the federal student loan system. The real question is why all federal student loan borrowers aren't in Income-Driven Repayment programs and benefitting from loan forgiveness. Borrowers ought to be placed in IDR by default, but that would require ED having automatic access to their tax returns, which it doesn't. This strikes me as a very easy fix --make tax return sharing a condition of obtaining a student loan and then have IDR be the default setting.

Now you might ask what's the benefit from an immediate debt forgiveness, rather than a delayed one.  The answer, I think, is psychological. Consumers feel weighed down by the stock of their debt, even if they won't actually have to repay a large chunk of it.  Immediate debt forgiveness removes this notional stone from consumers' necks.  

In any case, I don't know an easy way to calculate the total potential forgiveness amount under the current system if everyone did take advantage of IDR.  Maybe it's as simple as considering all federal student loan debt potentially forgivable.  In any case, even adjusting it to reflect the 20 years of IDR payments, I suspect it isn't so different from the price tag of Senator Warren's proposal.  If all we're quibbling about is the size and the timing of debt forgiveness, however, that seems a very different debate than the uninformed sanctimoniousness of critics who aren't aware that we're already in a world with a lot of potential debt forgiveness.  

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