How $ 165 billion in defaulted student debt affects forgiveness calculations
American student debt has swollen for decades, but this year lawmakers appear to be more serious than ever about canceling student debt – sparking bold proposals and vigorous debate on the potential impacts and costs.
One variable often missing from these conversations: the billions of dollars in student loans that may never be repaid.
In March 2020, the CARES law established a pause on federal student loan payments. In April 2020, Pew estimated that 20% of student loan borrowers were in default – generally defined as having gone at least 270 days without making payments. And over a million student loans are in arrears every year.
Sarah Sattelmeyer, director of the Pew Student Borrower Success Project, says the data suggests that some 165 billion dollars the value of federally administered student loans is currently considered to be in default – and that total may increase once the pause on federal student loan payments expires.
Brookings estimates that by 2023, nearly 40% of borrowers are expected to default on their student loans.
Although the federal government and third-party providers often collect the majority of debts owed, through important tools at their disposal (like the ability to seize wages, Social Security benefits, and federal tax refunds), it’s likely that any student loan forgiveness policy would include forgiving some debt that would never be collected anyway.
“There should be a large discount on student loans,” says Kevin Walker, student loans expert and editor of CollegeFinance.com. “It is something that would be good for the borrowers, and for the country, and also for the treasury because default rate on student loans are very high and therefore a lot of costs are already going to be incurred by the US government, the taxpayer. “
He continues, “Finding a way to provide relief for individual borrowers, knowing that much of this expense for relief would already be incurred over time due to defaults, makes perfect sense. just the amount to forgive. “
There are currently two student loan forgiveness proposals in play.
lodge and Senate Democrats urged President Biden to “broadly” write off up to $ 50,000 in federal debt by decree, an approach Senate Majority Leader Chuck Schumer possesses repeated many times Biden is expected to take during his first 100 days in office.
Biden, however, should call on Congress to write off only $ 10,000 in student loan debt.
“$ 50,000 for everyone would reduce the outstanding debt from $ 1.7 trillion to $ 700 billion,” said Megan Coval, vice president of policy and federal relations at the National Association of Student Financial Aid Administrators “And so that comes with a price tag of around $ 1,000 billion.”
“Forgiving $ 10,000 in federal student loan debt per borrower would cost $ 377 billion and eliminate all federal student loan debt for about a third of borrowers,” said higher education expert Mark Kantrowitz.
Another factor often considered by lawmakers is the amount that federal student loan programs would lose if borrowers did not continue to repay their loans, as well as the interest on their loans.
Josh Mitchell, a Wall Street Journal reporter and author of the upcoming book “The Debt Trap: How Student Loans Became a National Catastrophe” points out that the Congressional Budget Office provides estimates to lawmakers on the cost of policies, often referred to as CBO. Goal.
It is often said in Congress that the Education Department “is going to make a lot of money” on outstanding student debt that could be used for other programs such as Pell scholarships, he said.
“So if you suddenly cancel [student debt]Does it boil down to the accuracy of the projections? “asks Mitchell.” I don’t think Congress really accepted the bad debt amount on their books. And therefore, they always pretend to make a lot of money with it. “