The Fine Print in Student Loan Forgiveness

There are several encouraging “extras” in Biden’s August announcement of $10,000 student loan forgiveness.

#1. The income-based payment rate for undergraduate loans will drop from 10 percent of discretionary income to just five percent.

#2. The Department of Education will raise the amount of income considered non-discretionary. (This is an allowance applied before income-based payments are even calculated.)

As a result, borrowers earning under 225% of the federal poverty level will likely not have to make a monthly payment  at all. Even those earning more than $50,000 right after graduating would face trivial payments.

#3. Under proposed rules,  the government will cover the unpaid monthly interest for people in IBR’s. As a result, student debtors on income-based repayment plans won’t see their loan balances go up due to negative amortization.

The new rules will wipe out all remaining debt after just 10 years for many borrowers.

#4. As part of a “Fresh Start” initiative, the 7.5 million student loan borrowers who are in default will be able to return to repayment without a past-due balance.

Borrowers currently in default will have the opportunity to improve their credit records, shield themselves from any collection activity the government may be able to take against them — including wage garnishment — and restore their eligibility for further federal student aid.

#5. The administration has extended the repayment moratorium on all loans until Dec. 31. This pause on repayments not only has allowed individuals to forego making any payments since March 2020, but stops any interest from accruing at the same time.

As a result, each month federal taxpayers are losing $5 billion in accrued interest that will not be recouped.

(Since I do not believe the government should ever charge interest to its citizens, this does not bother me.)

How much will all this cost? Less than the Republicans claim, that is for sure. According to the Heisenberg Report of 8-23-22, the only near-term effects on Treasury cash flows will come from the subtraction of $35 billion in student loan payments. The impact on taxpayers outstanding will be felt gradually. We are reducing future repayments to Treasury that would have taken place over many years – or in many cases, might not have occurred at all.

(My only complaint re: the new program is debt forgiveness up to a joint income of $250,000. This is blatant vote-buying, and an inequitable favor to urban professionals. I can join the Republican protests against this particular feature.)

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