Editor's Note: Since the writing of this article, the federal student loan payment pause has been extended into 2023 as the Supreme Court decides whether the Biden-Harris Administration’s Student Debt Relief Program can proceed. The U.S. Department of Education announced loan repayments may resume as late as 60 days after June 30, 2023.
Student loans are a significant issue in the United States, where consumers have more than $1.7 trillion in total student loan debt. More than two-thirds of members of the class of 2019 graduated with federal and private student loans, owing an average of nearly $30,000 per borrower.
Broken down by degree levels, the debt increases. Graduate students who receive a degree leave school with an average of $66,000 in debt. Law students are saddled with an average of $113,300. And medical students, $223,700.
The numbers are staggering, and forgiving or eliminating student loan debt has been a concept broached by several people in the political arena. Sen. Elizabeth Warren, for instance, has suggested that the next US president cancel up to $50,000 of outstanding federal student loans per borrower.
“Canceling student loan debt will relieve a huge burden on families during COVID-19 and beyond, close the racial wealth gap, and boost our economy,” a press release from Warren’s office reads.
President-elect Joe Biden has suggested that Congress immediately forgive student loan debt up to $10,000 for all borrowers. He has also proposed forgiving all student loans for those who attended public colleges or historically Black colleges and universities and earn less than $125,000.
But Biden’s student loan proposals depend on Senate approval, which is far from a sure thing. Though he is being pushed to bypass Congress and use executive authority to cancel billions of dollars in student loan debt, such a sweeping action would almost certainly face a legal challenge.
Who’s in Favor?
More than half (54%) of Americans say student debt is a “major problem” for the country, according to a poll from Politico and Morning Consult. And 58% of registered voters say they would support a plan eliminating all existing student loan debt—and a plan to make public colleges, universities, and trade schools tuition-free, according to a poll from Hill-HarrisX.
In late November, 238 organizations sent a letter calling for Biden and Vice President-elect Kamala Harris to cancel federal student debt when they take office. Signers included the American Federation of Teachers, the Children’s Defense Fund, and the NAACP.
“Before the COVID-19 public health crisis began, student debt was already a drag on the national economy, weighing heaviest on Black and Latinx communities, as well as women,” the letter reads. “That weight is likely to be exponentially magnified given the disproportionate toll that COVID-19 is taking on both the health and economic security of people of color and women.
To minimize the harm to the next generation and help narrow the racial and gender wealth gaps, bold and immediate action is needed to protect student loan borrowers, including Parent PLUS borrowers, by cancelling existing debt.”
Proponents of canceling student loan debt point out that the government is partially responsible for this debt crisis. Because many states slashed higher education funding after the 2008 recession, tuition at both public and private colleges has gone up steeply, and many students have been forced to take out even more in loans.
Unfortunately, the increase in student loan balances hasn’t gone hand in hand with a bump in post-college salary. The result is a national situation where borrowers owe increasingly more in student loans but don’t have the paycheck to aggressively tackle their balances.
This has been especially harmful for Black students, who are more likely to have to take out student loans to go to school and who face a biased job market when they leave school, according to the Economic Policy Institute.
Data shows that within six years of starting college, 32% of all Black borrowers who had started repayment defaulted on their student loans, compared to only 13% of white borrowers.
Although the government has created income-driven repayment options that seek to keep monthly student loan payments affordable, signing up isn’t without its downsides.
Since these income-driven plans often lengthen loan terms, borrowers may pay significantly more interest on their loans over time. Also, any forgiven balance at the end of their loan term is typically treated as taxable income.
Why Isn’t Forgiving Student Loan Debt a Slam-Dunk?
There are several reasons why forgiving student loan debt may not be a straightforward positive. The first is that according to U.S. tax laws, debt that’s forgiven is a taxable event. Under income-driven student loan repayment plans, for instance, if you make consistent, on-time payments for the life of the loan (20 or 25 years, depending on when you borrowed), any balance remaining at the end of your loan term is forgiven—but whatever’s forgiven is considered taxable income.
“If you forgive $10,000 of somebody’s debt, you’re not handing them $10,000, so how are they going to pay that tax?” asks Sandy Baum, a nonresident senior fellow for the Center on Education Data and Policy at the Urban Institute. “There are bills in Congress to change that, and it would make sense to change that, certainly, but right now the law says it’s taxable.”
Even Jason Furman, a Harvard professor who was President Barack Obama’s chief economist, thinks forgiving student loan debt is a lose-lose game. On Nov. 15 he tweeted: “Student loan debt forgiveness likely has a multiplier close to zero. Forgiveness is taxable. If this negative cash flow effect outweighs interest savings (it) would even be net negative.”
The second issue pundits raise with this plan is that it’s being sold as a stimulus: If the government forgives people’s student loan debt, they’ll put money back into the economy, the thinking goes. But forgiving debt isn’t the same as handing people a check. And, Baum argues, the government could be targeting the wrong audience.
“If you want the biggest stimulus, you’re going to give it to people who are going to spend most of it, which is lower-income people,” Baum says. “It’s not people with a lot of student debt, who are most likely to be employed. A lot of people who went to college have jobs.”
Then there’s the idea that forgiving student loan debt could free up money that cash-strapped consumers can spend elsewhere.
Student loan borrowers are “having to make choices between paying their student loan and paying the rent,” Biden said on Nov. 16. “It should be done immediately.” But thanks to COVID-related legislation that was extended by executive order, federal student loan payments have been suspended — and interest set to 0% — through Dec. 31. (The current administration did not respond to our question of whether it would extend the suspension into 2021.)
In fact, an analysis from Moody’s suggests that although forgiving student loan debt could provide a stimulus much like a tax cut, there are other potential issues with making this move, including:
• Canceling student loan debt could add between $86 billion and $108 billion a year to the GDP over a 10-year period. Less aggressive measures to forgive some loans and restructure payments for others could amount to $120 billion over a decade.
• It might encourage future borrowers to borrow more in student loans, with the hope that their future debts will be forgiven also.
• It could have little effect on wealth inequality, since about two-thirds of outstanding debt currently sits with the top 50% of earners.
Last, the federal government so far isn’t planning to forgive student loans that borrowers hold with private lenders, which account for about $132 billion of outstanding student loans, according to MeasureOne.
What Are the Alternatives?
Instead of targeting only student loan borrowers who qualify for relief, the government could provide a stimulus check to all Americans, and Americans could decide for themselves how to use it.
Even if someone has $10,000 in outstanding student loans, Baum suggests, they might prefer to use a check to put a down payment on a house or pay off high-interest credit card debt.
“If you gave people a choice, in the end they might pay the rent or do something else with it,” Baum says. “If you want to help people the most, you actually give them more flexibility about how to spend the money.”
Then there’s the higher education system itself. Canceling or forgiving student loan debt may provide only temporary relief as long as tuition levels continue to rise. There are other facets of Biden’s plan that, if implemented, may more effectively address student debt as a systemic issue, including:
• Make two years of community college free for all students.
• Make public colleges and universities tuition-free for all families with incomes under $125,000.
• Double the maximum value of Pell Grants.
• Create a new forgiveness program for those working for schools, the government, and other nonprofit entities, in which borrowers receive $10,000 in student debt relief for every year of national or community service, up to five years.
Tackling Your Student Loan Debt
There’s no telling when or if some form of more long-term relief might appear for student loan borrowers. If you’re struggling under the weight of your student debt, there are strategies that might help:
• Alternative payment plans: Federal student loans come with a variety of repayment options, one of which might suit your situation.
• Direction of overpayments: If you make extra payments on your student loans, you may instruct your servicer to apply them to your principal, rather than the next month’s payment plus interest.
• “Found” money: If you receive a work bonus or tax refund, applying it to your student loans can help reduce your balance faster.
• Refinancing: Refinancing student loans (private and/or federal) into one new loan with a private lender could lower your monthly payment and interest rate, and make it easier to manage payments. (Just know that refinancing federal student loans with a private lender means losing access to federal repayment and forgiveness programs.)
Recommended: Can Refinanced Student Loans Still Be Forgiven?
The Takeaway
There is no quick fix for student loan debt, which will take further discussion from stakeholders on all sides.
“There are a lot of people with loud voices who vote and who are educated middle class who don’t really want to have to pay back student loan debt, and they’d be really excited about” proposals to forgive the debt, Sandy Baum, of the Urban Institute, says. “But there are other ways to go about it.”
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SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.
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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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