The Quandary Surrounding Student Loan Forgiveness
It is easy to understand why there is so much support for “student loan forgiveness” among the roughly 15% of US residents who are still carrying it. That sentiment may be especially evident among those holding nearly half that debt — doctors, lawyers, and others with advanced degrees, who used student loans to rack up lucrative credentials, according to Forbes contributor Frederick Hess.
But for the other 85% — among them the taxpayers doling out much of the repayment burden — frankly, the idea may be about as appealing as flushing a stack of $20 bills down the commode.
Across several proposed scenarios, here is what we’re looking at according to Fed economists blogging after the release of last month’s New York Federal Reserve Bank report on the issue.
Those Fed economists — Jacob Goss, Daniel Mangrum, and Joelle Scally — say most proposals emerging since the 2020 election cycle center around blanket federal student loan forgiveness (typically $10,000 or $50,000), or loan forgiveness with certain income limits for eligibility. The ability to put a finger on even close to the suspected amount owed collectively for outstanding and defaulted student loans is problematic, however.
That is — it appears — because there is no reliable way to capture the entire population holding that debt, and no way to parse the total debt between those owing federal and commercial bank loans (or both). So the New York Fed went ahead and analyzed federal loan data exclusively.
Therein lie the most eye-popping financial implications of the details, to follow.
By calculating the dollar value of just the federal loans that would be forgiven under proposed policy — Direct loans disbursed by the federal government; through the Family Federal Education Loan (FFEL) program and subsequently consolidated into the Direct program or sold to the federal government; and loans from either the Direct or FFEL program in default — the Fed team calculated the total outstanding balance due as of December 2021 was $1.38 trillion.
For emphasis, we restate: $1.38 trillion.
Scoping each proposal, the Fed economists started with the possibility of limiting forgiveness to a maximum of $50,000 per borrower — which they estimate would cost $904 billion and would forgive the full balance for 29.9 million or 79% of the 37.9 million federal borrowers.
That would equate to an average of $23,856 per borrower, a handsome chunk of change by any stretch. Adding insult to financial injury, the Fed blog states this threshold would also forgive 77% of all federal student loans that were delinquent or in default prior to the pandemic.
The economists say another idea to forgive $10,000 per borrower would wipe out $321 billion in fed only loan debt; eliminate the entire balance for 11.8 million borrowers (31.1%); and would erase 30.5% of pre-pandemic delinquencies or loan defaults, equaling $8,478 in forgiveness on average for each borrower.
We do not purport to speak for 70% of Americans who would be left paying off the costs of any fed forgiveness, to say nothing of the billions (more likely trillions) in losses that may be written off by private lenders — but at best, these ideas seem half-baked — and at worst, a bad plan any way you stack it.