Relieving the Burden of Student Loan Debt

By Brian Backstrom

Reports that President Joe Biden is considering forgiving some student loan debt for borrowers below a designated earned income level is helping shift the focus from reducing the dollars of debt to relieving the burden of this debt. Higher-income wage-earners are better able to repay the loans they took out, the President’s approach seems to say, acknowledging that all student loan debt need not be viewed as the same.

The political pressure to relieve some of the $1.6 trillion in outstanding federal student debt[1] hit a fevered pitch nationally during the 2019 Democrat party primary campaign for president. Massachusetts Senator Elizabeth Warren was among the most vocal in calling for student debt forgiveness and proposing wiping out up to $50,000 in student debt across the board for every borrower. With Joe Biden’s election in November 2020, the pressure to enact broad student loan forgiveness continued. Biden himself had proposed eliminating $10,000 in debt per borrower while on the campaign trail, and advocates and Members of Congress alike have since continued to make the clarion call to the President to offer some sort of relief.

President Biden enacted a series of targeted debt-relief measures from the beginning of his presidency through April 2022, a span of 16 months, that are providing a total of at least $17.8 billion in student loan debt relief to approximately 725,000 borrowers. These initiatives include loan forgiveness for borrowers who are totally and permanently disabled, those who attend a school that closes while they are enrolled or shortly after they graduate, those who attended a school that was involved in financial misconduct, and those caught in technicalities of the Public Service Loan Forgiveness program.

Biden Administration’s Targeted Student Debt Relief Efforts

$17.8B
TOTAL RELIEF

725,000
BORROWERS

$7.8B
TARGETED RELIEF

400,000
BORROWERS

Borrowers who are totally and permanently disabled (currently estimated to be providing $7.8 billion in relief for more than 400,000 borrowers, including $1.3 billion in reinstated loan forgiveness for 41,000 of these borrowers who had their repayments restarted only because they had not responded to requests for earnings reports).

$1.2B
TARGETED RELIEF

107,000
BORROWERS

Borrowers who attend a school that closes while they are enrolled or shortly after they graduate (triggered by the closure of ITT, this program is currently estimated to have provided $1.2 billion in immediate relief to approximately 107,000 borrowers).

$2.0B
TARGETED RELIEF

105,000
BORROWERS

Borrowers who attended a school that was involved in financial misconduct regarding student loans, with determinations made on such schools in March 2021, June 2021, July 2021, and February 2022 (total of approximately 105,000 borrowers; estimated $2.0 billion in relief).

$6.8B
TARGETED RELIEF

113,000
BORROWERS

Borrowers caught in technicalities of the Public Service Loan Forgiveness program. An October 2021 overhaul of the program, which allows certain nonprofit and government employees to have their federal student loans cancelled after 10 years of monthly payments, allowed approximately 22,000 borrowers previously denied forgiveness immediate relief from $1.7 billion in debt, and an additional 27,000 to receive relief of an additional $2.8 billion upon verification of employment. In April 2022, the Biden Administration announced additional administrative reforms to the Public Service Loan Forgiveness program, calculating that student loan debt relief under these combined measures currently totals $6.8 billion for 113,000 borrowers.

The US Department of Education continues to process new claims and requests for relief through these initiatives. In April 2022, the US Department of Education announced reforms designed to fix longstanding problems in two popular programs originally designed to relieve the burden of student loan debt: the Public Service Loan Forgiveness program and Income-Driven Repayment (IDR) programs. Plagued for years with complex qualification rules that led to substantial portions of program applicants being denied and building on earlier fixes (referenced above), the reforms addressed concerns by borrowers that loan administrators were pushing them into programs that actually increased their debt burden, such as forbearance, that unnecessarily or improperly added interest costs to their outstanding debt.[2]

The COVID-19 pandemic added complexity to the discussion and spurred further government action on debt relief. In March 2020, with the onset of the pandemic, President Donald Trump announced that all borrowers could take a “pause” from repaying their student loans for 60 days and that no interest would be charged during that period of relief. The suspension of payments was initially extended with Congress’s adoption of the coronavirus relief CARES Act package, then by President Trump to the end of his term in office. The pause was then renewed repeatedly by President Biden, with the latest extension—the sixth—suspending all required student loan repayments and associated interest through August 31, 2022. In all, each student loan borrower, regardless of income, has been granted a two-and-a-half-year hiatus from their monthly repayment installments.

The call for permanently wiping out some level of debt renewed as each deadline approached and the latest scheduled September 1st restart of required payment is no exception. Political pundits speculate that President Biden will use the deadline for the end of the repayment pause to announce some form of student debt forgiveness, especially with the national midterm elections approaching. The “who” of borrowers and “how much” of relief offered are yet to be determined, but a package of broad student loan debt forgiveness well may be on the horizon, and the President’s tipping of his hand that instituting an income threshold to qualify for debt forgiveness may indicate that he intends to focus on relief of the burden, rather than just a reduction in dollars owed.

There are several new and previously proposed innovative strategies to lessen the burden of student debt that are rooted in fairness, support the student loan program’s mission of helping students get to and complete a program of higher education, and/or provide alternatives to federal student loan financing. Consider the following:

STRATEGY 1
Cap required monthly loan repayment amounts at a set percentage of monthly take-home pay.

In 2019, former Secretary of Education and US Senator from Tennessee Lamar Alexander proposed that the required monthly student loan debt repayment amount be capped at 10 percent of borrower’s take-home income. What is particularly appealing about this plan is that it addresses the real problem—the financial impact of one’s debt burden—in a neutral way with respect to whether a student went to a more expensive private or more affordable public school, whether a parent or student tried to save for college, what type of employment the borrower sought and took after college, or any other personal choices. Those discretionary choices and actions are removed from the equation, and the repayment policy is one that simply says, “student loan debt will never exceed more than X percent of your monthly budget.”

Income-Driven Repayment (IDR) programs were envisioned to offer the option to borrowers of something similar. But, as a recent report published by Brookings notes, while about one-third of all students who borrow directly from the federal government are enrolled in some form of IDR, complicated eligibility rules, a multitude of varied and confusing options,[3] and overly bureaucratic application processes continue to fail many who try to access the programs. While the Biden Administration’s planned changes to these programs takes a step toward fixing these issues, further simplifying the rules and plans as proposed by Sen. Alexander, plus automatically enrolling each student loan borrower into such a program from the outset of repayment, would help limit and equalize the burden of student loan debt for all borrowers.

STRATEGY 2
Pair an income means-test qualification for loan forgiveness with a “burden-test.”

President Biden’s consideration of a means-test for loan forgiveness—reportedly those who earn $125,000 or less per year would be eligible for the elimination of up to $10,000 in outstanding student loan debt—could be paired with a schedule of graduated relief to make this initiative more progressive. Acknowledging that $10,000 in debt to a borrower earning $125,000 likely is less burdensome than that same amount of debt to someone earning half as much, forgiveness of the full $10,000 could be offered to borrowers with annual household earned income of, say, $75,000 or less, with $7,500 in relief available to borrowers with annual income between $75,000 and $100,000, and $5,000 in forgiveness for those between $100,000 and $125,000. A graduated schedule of income-qualified loan forgiveness would help clarify this initiative’s focus on burden relief.

STRATEGY 3
Provide more immediate relief and further clarify rules on public service loan forgiveness.

More than 90 percent of requests for public service loan forgiveness are denied, with applications turned down for very basic reasons: because borrowers haven’t made the required 120 monthly (10 years) repayments; because they do not have loans eligible for forgiveness (only federal student loans can be forgiven); or because they have not shown they have qualifying public service employment. While these disapprovals may be reasonable, the high rate of denials is evidence that confusion exists around eligibility and participation requirements. In addition, requiring borrowers to pay off the first 10 years of their outstanding debt and then forgiving the last 10 years of the loan does not relieve the debt burden for new public service workers, people who often start out at lower salaries and thus are the most in need of assistance. And, as structured, the program only acts as an incentive for prospective employees who anticipate that they will spend at least 10 years in public service.

Both issues could be addressed by changing the structure of the Public Service Loan Forgiveness program to forgive half of borrowers’ monthly payments from the moment repayments begin for people in qualifying jobs. While recent actions by the US Department of Education are designed to clarify some of the program’s rules and corrective action to some previously denied applicants has been taken, modifying the program to forgive half of each monthly payment for public service employees from the outset would provide more immediate relief to more borrowers. New public service workers would see relief from being required to pay only half of their repayment amount, and prospective employees would see an incentive to enter public and nonprofit service without needing to commit the next 10 years of their career to that track. This monthly debt relief also reasonably would be provided only for as long as borrowers remain in public service, with payment reverting to their original amount upon separation from a qualifying job.[4] If borrowers are automatically enrolled in an income-driven repayment plan from the beginning, this also would eliminate the need to check on and enforce the current requirement that anyone seeking to qualify for public service loan forgiveness be first enrolled in an IDR plan.

STRATEGY 4
Focus relief on undergraduate loans.

Nearly 47 percent of outstanding federal student debt is held by graduate student loan borrowers, though they make up only about 16 percent of the total number of borrowers. While they hold more debt both in total and per person, students earning advanced degrees are more likely to work at higher-paying and professional jobs, including in professions such as doctors and lawyers, and typically are far better positioned financially to pay off their student loans—even with the larger balances that come with graduate school borrowing—than are those who graduate and begin working with an undergraduate degree. In fact, professional and doctoral degree-holders on average will earn more than $30,000 per year more than those with a bachelor’s degree, and some of the specialized professions will pay significantly higher salaries.[5]

Prioritizing debt burden relief to students who borrow to complete their undergraduate education would match a policy priority that focuses on getting students to and through a two-year or four-year college.

Still, many graduate school borrowers also have undergraduate debt: on average, about 14 percent of the total student loan debt held by graduate school borrowers is from undergraduate student loans. Relief targeted to debt incurred as an undergraduate student need not exempt such debt simply because it is held by graduate student borrowers.

STRATEGY 5
Waive interest while continuing one’s education.

To incentivize students toward continuing their education and earning advanced post-undergraduate degrees, the federal government could suspend all interest charges on outstanding student loan balances while a student is enrolled in a degree- or certificate-granting program. This would be a simple step that ensures future loan repayment amounts are not inflated by years of accruing interest.

STRATEGY 6
Incentivize students to return to school.

Students who take out loans but then fail to complete college may be the most burdened by student loan debt. They are, on average, lower-income earners than their peers who graduate college and they are among those most likely to default on the student loans they have.[6] A report by Pew found that “borrowers who owe the least—often less than $10,000—and may not have completed their programs of study default at higher rates than those with larger balances.”

Student loan forgiveness programs can be designed to incentivize those who have not completed their undergraduate education to do so. This would help relieve the burden of student debt to those most in need, and meet the student loan program’s primary mission of helping students get to and through college. One such option would be to offer students who reenroll in college forgiveness of their first year or two of student loans if they successfully complete their undergraduate degree. (SUNY’s Re-Enroll to Complete initiative, summarized below, is undertaking this effort without the benefit of a paired loan forgiveness incentive.)

STRATEGY 7
Stimulate (and regulate) income-sharing arrangements.

Innovative arrangements known as Income Sharing Agreements (ISAs) are similar to federal income-driven repayment plans, except without the loan. First sprouted in the tech sector, particularly in coding schools where programs were not eligible for federal aid, companies would recruit students who took prescribed coursework and would cover the costs or provide education for the student. The student would then complete their certificate or degree, and commit a small portion of their income over a set number of years to the company as repayment. If a student doesn’t land a job that pays enough or doesn’t find a job, the requirement to repay is suspended.

Over the past few years, a handful of colleges have established their own ISA programs, offering students a route around federal student loans and tying repayment directly to the job they land after graduation. Clarkson University, Purdue University, and University of Utah are among the institutions that have established ISA programs.[7] The US Department of Education recently clarified that ISAs are to be classified as private loans and some worry that, as such, predatory lending practices could sprout. As colleges and universities move more boldly into this relatively new education-financing sector, the institutions themselves—particularly public universities and state systems, and those university-based ISAs already established—would do well to ensure their ISAs structure is fully and properly regulated such that the programs offered provide advantages to federal student loans, not just alternatives, for participating students.

State Student Loan Relief Programs

Nearly every state in the country offers at least one student loan relief program, and some such as Minnesota offer more than a dozen. Almost all of these programs are offered as an incentive for graduating students to work in a particular targeted profession: public defenders, rural health services providers, nursing instructors, etc. In New York, the state sponsors seven such profession-targeted loan forgiveness programs and the creative Get On Your Feet Loan Forgiveness Program, an initiative that provides immediate debt relief to new college graduates. For students who graduate from colleges located in New York who then go on to work in the state, earn less than $50,000 per year, and are enrolled in one of the federal income-driven repayment programs, Get On Your Feet will pay up to the first 24 monthly loan repayments. New lower-income workers are thus provided a two-year break from any student loan debt. It is one of the few state-level broad-based student debt-relief programs in the nation and it provides about $1 million to $2 million in debt relief each year.

Nearly every state in the country offers at least one student loan relief program.

Although not exactly a loan forgiveness program, the State University of New York’s Re-Enroll to Complete initiative is actively and effectively reducing the burden of student loan debt. From March 2018 to September 2021, 76,200 students who officially withdrew from a SUNY institution with federal student loan debt were contacted during the six-month grace period the federal government gives before monthly repayments begin, encouraging these students to reenroll and, hopefully, earn their degree. On average, college graduates will earn more, making their student loan debt more manageable, and they are less likely to default on their required student loan payments.

Conclusion

When people borrow money, including to pay for college, a reasonable condition and expectation is that paying those loans back is part of the deal. If society values getting more students to college and through college, student loan debt makes doing so much more difficult and government can play a role in lessening the burden of this debt in several important ways:

Help families avoid student debt in the first place by making college more affordable. One way is to create a tuition prepayment plan for public schools, for example. (See the Rockefeller Institute’s commentary on college tuition prepayment plans here.)

Ensure that existing avenues for financial aid are fully tapped. In a January 2022 analysis, the National College Attainment Network calculated that nearly half—46 percent—of graduates of the class of 2021 did not complete the foundational Free Application for Federal Student Aid (FAFSA) form, and the average amount of financial aid left on the table by Pell Grant-eligible students is estimated to be $4,477, totaling $3.75 billion in unclaimed financial aid For students who haven’t completed the FAFSA, colleges could evaluate their financial eligibility and the federal government could modify the program to ensure that Pell Grants can be retroactively applied to students who qualify but didn’t claim it.

Help develop creative ways that students and families can save for and pay the costs of college. Forty-nine states and the District of Columbia offer state-run tax-advantaged investment plans designed to help families save and pay for college, known commonly as 529 Plans. Investments grow tax deferred and withdrawals are tax free if they are used for qualified education expenses, and provide an attractive option for many families saving for future education expenses. (New York State offers a top-rated 529 Plan.) Still, a 2021 report by SallieMae notes that the share of families using funds invested in a 529 Plan account to pay for some costs of college grew from 21 percent in the 2018-19 school year to 37 percent in 2019-20. For low-income families that find it particularly hard to begin saving for their children’s college, many states are offering subsidized child investment account programs where 529 Plan accounts are created for them and capitalized with a small amount of seed money (see Rockefeller Institute’s report on SCIAs here.) And,

Create options that keep the burden of repaying student loans manageable, including programs for forgiveness of all or portions of outstanding debt that focus on the true burden created by student loan debt and targeting relief to those most in need, such as the ideas presented here.

While one-time loan forgiveness surely will help those currently holding student loan debt, it will do nothing to alleviate the burden for the incoming classes of students who face the same financial challenges…

After a two-and-a-half-year pause in requiring payments on outstanding student loans, the nation waits with interest to see what plan for relief from the real burdens of student debt is announced by the Biden Administration in advance of the September 1st restart on monthly loan repayments. While one-time loan forgiveness surely will help those currently holding student loan debt, it will do nothing to alleviate the burden for the incoming classes of students who face the same financial challenges that led to the country’s student debt crisis in the first place. For that, long-term programmatic reforms in college affordability, college completion supports, and loan repayment programs is needed.

ABOUT THE AUTHOR

Brian Backstrom is director of education policy studies at the Rockefeller Institute of Government.


[1] Another $156 billion in outstanding private loans brings the total amount of student loan debt nationally to $1.762 trillion as of the first quarter of 2022; private student loan debt is approximately 11.5 percent of the total.

[2] There are other federal student loan forgiveness programs, too, including a Teacher Loan Forgiveness program that offers up to $17,500 in student loan forgiveness and others that apply in the instance of the death of the borrower, when fraud from identity theft occurs, etc.

[3] Included among the options are the Pay As You Earn program, the Revised Pay As You Earn Program, the Income-Based Repayment Plan, and the Income-Contingent Repayment Plan; some of these programs having options or alternative qualifications within them.

[4] Some administrative lag time may be reasonable, too, having monthly relief applying only upon proof of employment in an eligible job, for example.

[5] Individuals who earn graduate degrees and then take positions of public service, which often pay less on average than comparable private-sector positions, could be eligible for Public Service Loan Forgiveness on their entire outstanding balance.

[6] Citing work by the Association of Community College Trustees and President Barack Obama’s Council of Economic Advisors, the Center for American Progress notes that “49 percent of those who defaulted [on their student loan repayment had] dropped out of college.”

[7] Colorado Mountain College and Messiah College are among other higher education institutions offering their own ISAs directly to students.

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