Home > News > Will Student Loan Forgiveness Programs Be Capped?

Comments 2 Comments

The Brookings Institution just threw another log on the smoldering student loan problem.

In a recently published report by its Brown Center on Education Policy, the institution sets out to estimate what the various government relief strategies for student loans might end up costing taxpayers.

The news isn’t good.

The BCEP estimates that the price for these programs is likely to be much higher than originally thought, especially if many more borrowers seek to take advantage of them. To drive that point home, the center’s admittedly back-of-the-envelope calculation suggests that a universally adopted Pay As You Earn relief plan alone could end up spilling $14 billion in red ink each year.

To be fair, it is hard to project the long-term costs for programs that are subject to fluctuating influences — such as future earnings (on which the relief plans are based), the rate of inflation for higher education costs, relief-plan enrollment levels and other factors. Still, the center manages to propose some tough solutions to the legitimate concerns it raises.

The Pitfalls of Forgiveness

The government has established a variety of relief programs in an effort to help student-loan borrowers who are struggling to make ends meet. For example, the Income Based Repayment and PAYE plans each reduce monthly payments by extending the repayment durations of the original 10-year terms that are par for the course.

There’s also an added benefit.

Unpaid principal balances are forgiven after 25 and 20 years for the IBR and PAYE plans, respectively, and after 10 in the case of the Public Service Loan Forgiveness program. The think tank believes this benevolence engenders “moral hazard” by encouraging students to borrow to the hilt with the expectation of dodging what remains of the entire bill later on. It’s also concerned that all this would do little to reverse the spiraling cost of higher education.

The center recommends replacing the “forgiveness” feature with favorable tax policies that inspire students to choose careers in public service and increasing Pell Grant funding to support the financially underprivileged. The Obama administration has also weighed in with a proposal of its own to cap the amount of debt that would be eligible for forgiveness at $57,500—all ideas that deserve more discussion and debate.

Can the Government Afford to Forgive?

What the report doesn’t take into account, however, are three important considerations: two that are relegated to the End Notes section and one that isn’t even mentioned.

Note 8 acknowledges the rancorous back-and-forth on the matter of federal student-loan profitability. Although a reasonable case can be made for taking into account certain market risks that are attendant to longer-term financings, there are offsets to that which should to be factored into the analysis.

Take, for instance, the fact that the government is, at this time, taking noteworthy advantage of the yield curve by borrowing short and lending long: selling one- to three-month Treasury Notes to fund the student loans it then prices based upon 10-year rates, plus upcharges.

Sure, there’s no guarantee these massive spreads will persist throughout the repayment durations of these loans. But then again, there’s nothing to prevent the government from hedging its funding costs at any time (as financial institutions routinely do) or, even, to sell all or part of its student-loan portfolio next week or next year in order to lock in the gains. As long as Congress resists revisiting the interest rate legislation it passed last summer that could lead to a huge increase in costs to student borrowers, the mega profits that continue to make headlines could be used to defray the cost of the relief programs. (Programs which, ironically, may be all the more necessary if and when those higher interest rates kick in for borrowers.)

The second consideration—current tax policy—is mentioned in Note 14. As it now stands, the IRS views forgiven debt the same as it does fresh income: eminently taxable. Therefore, should a student borrower remain enrolled in any of these relief programs long enough to realize the aforementioned end benefit (forgiveness), he should also expect a knock on the door from the taxman. More to the point, these prospective revenues weren’t taken into account by the BCEP study either, even though these too could be used to counterbalance costs.

Making Underperforming Schools Accountable

As for the forgotten consideration, isn’t it about time that the government asked for its money back from the schools that failed to produce outcomes that justify the expense? Much has been made of a plan to punish those colleges and universities with high cohort-default rates (post-graduation loan defaults) and even sub-par completion rates (roughly half of all college students end up earning a degree). But that’s on the come. What about the taxpayer dollars these schools have already banked? Wouldn’t it make sense for the feds to claw some of that back?

With all that in mind, here’s the real question worth contemplating: To what extent would any of these relief strategies even be necessary if loan interest rates were fairly set, repayment terms were appropriately lengthened, and higher education institutions were held financially accountable for their results?

Now that would be a study worth undertaking.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its affiliates.

More on Student Loans:

Image: Alex Slobodkin

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • Marie Louise

    No one forced students to take out a loan or to chose a major that won’t allow them to pay off their debts within any reasonable length of time. Here’s a hint: http://studentdebtcenter.org/services/student-loan-forgiveness

  • http://www.urbandictionary.com/define.php?term=Arel Harry R. Sohl

    Hmmmm. Were salaries or bonuses capped on Wall Street after Main Street poured in literally Trillions of $ to save their asses?

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team