Repaying and Forgiving Federal Student Loans
- Congress is preparing to update the Higher Education Act, last fully reauthorized in 2008, which includes loans, grants, institutional aid, and related programs.
- Many observers of higher education have concerns about college affordability, completion rates, accountability, and borrowers’ ability to repay loans.
- Borrowers face a complex federal loan repayment system that offers a number of repayment plans and forgiveness programs that each have different rules and terms.
When Congress considers reforming the Higher Education Act, it may address concerns about the federal loan repayment system, college costs, the federal financial aid process, and ways to ensure students’ investments are worth it. There are 43 million borrowers who owe the federal government a combined $1.4 trillion in student loans. As of March 2018, more than half of borrowers had less than $20,000 in debt. Also at that time, 45% of borrowers were repaying their loans, 17% were in default, and the rest were still in school or not repaying for some other reason.
Repayment Status of Borrowers
Borrowers who do not graduate tend to default on their loans at higher rates than those who graduate. Among those who started repaying in the 2011-12 academic year, the default rates were 24% for non-graduates but only 9% for graduates. Students who leave school without a degree to help them advance in the job market and earn more can struggle to manage even smaller loans. One researcher from the Urban Institute told the Senate Health, Education, Labor, and Pensions Committee, “Default rates are highest for those with the lowest levels of debt.”
Loan repayment and forgiveness
Over the years, Congress and the president have added multiple loan repayment and forgiveness programs under the Higher Education Act. Some repayment plans structure payments so borrowers pay off their debt to the government within 10 to 25 years. Other plans are intended to provide a safety net for borrowers who have a lot of debt relative to their income. Borrowers in these income-driven plans pay their debts for a set amount of time, and the government forgives any remaining loan balance after that. Under one program, new borrowers pay 10% of their monthly discretionary income, and the government forgives any balance that is unpaid after 20 years. An older version of this plan for people who first borrowed before July 2014 has less generous terms: payments are set at 15% of income, with forgiveness after 25 years.
Additional programs link forgiveness to where a borrower works. Borrowers can apply for the Public Service Loan Forgiveness program after they work for 10 years in government or for tax-exempt nonprofit organizations and make 120 monthly payments in a qualifying plan. Another program for teachers who work five years in low-income schools offers varying levels of forgiveness, based on what subjects they teach. In 2018, the government forgave about $387 million of loans under this program.
considerations for lawmakers
Some critics have characterized the federal loan repayment system as “dysfunctional” and unnecessarily convoluted for borrowers. The various repayment plans have different eligibility rules, payment structures, and repayment time frames. In recent years there has been bipartisan interest in ideas to simplify and reduce the number of options.
Congress also will have to weigh the cost to taxpayers as it considers loan repayment reforms. Yet it has limited information on some newer programs, under which few borrowers have begun to have their debts forgiven. Income-driven repayment plans have become much more popular recently, and borrowers in these plans typically have larger loan balances than borrowers enrolled in other plans. The Government Accountability Office reported in November 2016 that “current [income-driven repayment] plan budget estimates are more than double what was originally expected for loans made in fiscal years 2009 through 2016.” Factors such as participation, loan balances, borrowers’ job choices, and their earnings will drive the ultimate costs.
There are similar concerns that the Public Service Loan Forgiveness program may cost a lot more than originally estimated. The program’s costs are unclear because the first borrowers did not become eligible to apply for forgiveness until October 2017. The Congressional Research Service noted last October that estimating the costs is complicated by the fact that borrowers apply for forgiveness only after they fulfill the program’s requirements.
costly, poorly targeted ideas
Some Democrats have offered proposals that potentially would spend large sums of tax dollars, but it is not clear that they would address the reasons why so many borrowers have trouble repaying their loans. One plan would make income-based repayment more generous by basing the monthly payment on a smaller share of income. Others dispense with repayment and simply cancel some or all federal student debt. A Brookings Institution scholar estimated that under one proposal the bottom 20% of borrowers, by income, would receive 4% of the benefits, and the top 20% of borrowers would receive 27% of the benefits. He described the plan as “regressive, expensive, and full of uncertainties.”
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