Summary
- The Biden administration is checking to see if it has the authority to make a $ 10,000 lump sum for every federal student loan.
- More than 60 percent of federal student loan holders have tolerated their loans since the third quarter of 2020, up 47.8 percentage points from the previous quarter, while currently only 1 percent of all borrowers make regular payments.
- A $ 10,000 lump sum waiver would reduce outstanding federal student loan debt by $ 380 billion, but more than half of that relief would benefit families in the top 40 percent of income, while the bottom 40 percent would benefit just a quarter of that Would get discharge.
- Flat rate lending would also introduce moral hazard into the state student loan system and likely inundate the system with poorly written and potentially fraudulent loans.
introduction
In the second quarter of 2021, more than 60 percent of federal student loan holders are lenient. Most of these students went into forbearance in the third quarter of 2020 when the Trump administration allowed federal student loan borrowers to suspend principal and interest payments in the face of the pandemic. President Biden has expanded that policy, even initially signaling his support for a $ 10,000 student loan allocation proposal as part of his administration’s response to the COVID-19 recession. The government has since withdrawn that pledge due to uncertainties about the president’s authority to provide a lump sum loan, but the government is currently conducting a legal review to see if the president has authority to do so.
Meanwhile, through more targeted and less controversial mechanisms, the Biden administration has canceled approximately $ 2.8 billion in outstanding federal student loan debt for approximately 90,000 borrowers. While this debt relief is a relatively small portion of the total outstanding student debt so far, it has sparked speculation about what further relief the Biden administration will ultimately grant and when. This analysis examines the impact of a $ 10,000 lump sum waiver for every federal borrower. However, while the cancellation of $ 10,000 outstanding student debt for all holders would reduce the total outstanding debt by $ 380 billion – nearly 25 percent – it would be very regressive. More than half of this relief would be realized by the 40 percent of families with the highest income in terms of income, while the bottom 40 percent would receive only a quarter of the relief. In addition, any form of flat-rate lending would inundate the already ailing student loan system with a range of new deterrent incentives.
Student loan defaults during the COVID-19 pandemic
Federal student loan repayment was initially suspended under the Coronavirus Aid, Relief, and Economic Security Act (CARES), a $ 2.2 trillion stimulus bill in response to the economic recession caused by COVID-19 , which was adopted on March 27, 2020. In particular, CARES suspended amortization and interest payments on outstanding federal student loans and set zero percent interest rates on outstanding federal student loans. CARES also stopped the collection of defaulted federal student loans. These suspensions were not mandatory; Borrowers were able to make payments during this time. The Trump administration extended these federal student loan suspensions two more times through January 31, 2021. One of the Biden administration’s first steps was to extend these federal student loan suspensions again through September 31, 2021, which is now the current resumption date for federal student loans and interest payments.
In the past year, many borrowers took advantage of the option to suspend repayment of federal student loans. The proportion of holders of direct federal student loans in deferral rose from 9.6 percent in the second quarter of 2020 to 57.4 percent in the third quarter of 2020. The proportion of repayment holders fell from 45.8 percent to just 0.8 percent in the third Quarter of 2020.
Figure 1: Distribution of federal direct loans by status[1]
It is beneficial for these borrowers to take a deferral as they can temporarily waive the repayment in the hopes of obtaining forgiveness from the Biden administration without facing penalties. As of the second quarter of 2021, over 57 percent of federal student loan holders are still in forbearance. A little more than one percent makes regular payments.
Forgiveness under the Biden administration so far
The Biden administration initially signaled its support for a lump sum award of $ 10,000 for all federal student loan holders. The administration has since withdrawn this obligation due to uncertainty about legal authority. Meanwhile, amid increasing calls for blanket forgiveness, the government has put in place more targeted mechanisms that are less controversial or controversial. The most important one is “Borrower Defense,” which enables the Department of Education to redeem loans for students who have been defrauded or misled by their college. This mechanism also enables loan repayments for students who have attended a school that has violated state or federal law.
The government has so far canceled $ 2.8 billion in student debt for approximately 131,000 borrowers in three tranches:
- $ 1 billion for 72,000 borrowers through borrower defense;
- $ 1.3 billion for 41,000 borrowers with total and / or permanent disabilities; and
- $ 500 million for 18,000 students defrauded by the ITT Technical Institute, including defending borrowers.
Overall, this waiver amounts to less than 0.002 percent of federal student loans outstanding ($ 1.6 trillion total in Q2 2021) and just over 0.003 percent of borrowers (51.6 million student debt holders in Q2 2021) .
What a $ 10,000 forgiveness looks like
Below is a table of the current federal student loan portfolio by borrower outstanding balances. A $ 10,000 blanket forgiveness would completely eliminate credits for 14.8 million holders in the first two categories (bold and underlined), while reducing them down to amount for each holder in the following categories. Overall, a $ 10,000 lump sum waiver would reduce total federal student debt by $ 380 billion, 24 percent of the $ 1.6 trillion of total federal student loan debt outstanding.
Table 1: Federal student loan portfolio by borrower debt from the second quarter of 2021[2]
Higher income families have a disproportionate share of outstanding student debt. According to the Federal Reserve’s table below, more than half of the outstanding student debt is held by families in the top 40 percent of the income distribution, while the bottom 40 percent of the income distribution holds only about a quarter of the total federal student loan debt. Of the approximately $ 380 billion in canceled debt under the $ 10,000 lump sum relief, more than half would be realized by families with the top 40 percent of income. The bottom 40 percent would only realize a quarter of the $ 380 billion awarded.
Figure 2: Distribution of student debt by income quintile[3]
Moral danger
The granting of lump-sum loans would also pose a moral risk in the student loan system. Students would go to college with the idea of repeating previous forgiveness programs. This assumption would reduce their incentive to repay loans on time. If enough students had this perspective, the entire federal credit system would be inundated with poorly written and potentially fraudulent loans. And since taxpayers support federal student loans, the forgiveness means taxpayer-funded checks will be made available to every borrower.
Conclusion
The current pause for repaying federal student loans is expected to end on September 30, 2021. The Ministry of Education is considering extending the break again until next year. If it did, most federal student loan holders would likely stay well into next year. The Department of Education is likely to continue to offer more targeted debt relief through options like borrower defense. These combined measures will increase expectation that the Biden administration will eventually provide comprehensive student debt relief.
Lump-sum student loan forgiveness would be a very regressive policy. It would reward the richest students and families. Furthermore, it would do so in a backward-looking manner and would do nothing to improve access to higher education as current and prospective students would still have to pay the same tuition fees as before.
A better approach is to build on income-based repayment options. These options limit the monthly payments for borrowers and do not accrue interest. You also have built-in forgiveness options that do not encourage moral hazard. Such efforts would increase students’ ability to repay their loans while avoiding the problems associated with blanket forgiveness.
[1] Note that the percentages do not add up to 100% as other payment categories have not been included for simplicity. These categories are “at school”, “grace” and “other”.
[2] https://studentaid.gov/data-center/student/portfolio
[3] https://www.federalreserve.gov/publications/files/scf20.pdf
source https://collegeeducationnewsllc.com/assessing-the-impact-of-blanket-student-loan-forgiveness/
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