Past Student Loan Forgiveness Failure

I do not expect President Biden to actually use executive powers to eliminate large chunks of student loan debt, although it appears from news reports that he’s strongly considering it. One in five Americans has student loan debt, and our $1.6 trillion collective balance is higher than our total credit card debt balances.

I neither expect it, nor do I favor it. My objections, briefly summarized:

  1. Debt cancellation favors higher income folks, as high debt correlates with high income. 
  2. It seems poorly targeted for eliminating inequalities. 
  3. It is complicated by the obvious political perceptions of unfairness: People who already paid off their debts, people who never took out debt in the first place, and people who will take out debt in the future all have a potential complaint. That’s a lot of constituencies who may feel broad debt forgiveness is unfair to them. 

To state the obvious: When one in five Americans suffer under the burden of student loan debt, four in five do not. 

The future “fairness” perceptions around debt forgiveness depends on whether forgiveness feels societally “earned.” A case can be made that public sector workers – think military, police, fire, educators – deserve a shot at forgiveness following a period of service. That feels less controversial.

Interestingly, programs already exist – in theory – for this type of public sector worker student loan forgiveness, primarily the Public Service Loan Forgiveness created in 2007 and the Temporary Expanded Public Service Loan Forgiveness program passed in 2018. The promise of the program was that borrowers who made ten straight years of on-time payments – and worked for ten years in public sector jobs – would have their remaining loan balances forgiven. The second program was passed by Congress in 2018 to make up for failures of the first program. Then the second program failed.

A study by the General Accounting Office (GAO) from 2019 attempted to explain why only 1 percent of applicants to the Temporary Expanded Public Service Loan Forgiveness Program received forgiveness. 

The OMB found the application process confusing to the point of impossible. They cited the Education department’s outreach as insufficient. The department’s own website did not provide information on debt forgiveness. Private sector servicers were not obligated to provide information about loan forgiveness. These all likely contributed to the failure of the program.

Michael Lewis – author of Moneyball, Liar’s PokerThe Big Short and The Undoing Project among others – is probably our country’s best financial journalist.1 His podcast “Against The Rules,” offered an explanation on the failure of public sector loan forgiveness, even before that OMB report was issued. 

In Lewis’ second podcast episode, which first aired in April 2019, he explored the ways in which giant student loan-servicing company Navient steered borrowers away from qualifying for loan forgiveness.

Specifically, Navient encouraged borrowers to take advantage of forbearance if they experienced hardships. Unfortunately, forbearance meant that borrowers could no longer qualify for public service loan forgiveness at the end of ten years. The ten-years-of-payments clock would restart, a fact apparently not mentioned or emphasized by Navient employees.

In addition, Navient’s call center workers were highly discouraged from spending enough time to walk consumers through the complex steps they needed to follow. Lewis points out that Navient was paid per account, and would lose accounts if borrowers qualified for forgiveness. Also, spending too much time on the phone with borrowers cut into Navient’s profitability.

Technically, yes, public service sector workers could apply for loan forgiveness, but Navient’s own financial incentives were to not offer the best advice to borrowers. 

navient
Not a great reputation!

If you enjoy making yourself angry at a big consumer finance institution, you’ll want to listen to the podcast. These types of perverse incentives also probably explain a big part of why so few public sector employees qualified for loan forgiveness. 

One obvious conclusion we could make is that if President Biden pursues loan forgiveness for public sector workers, or more universally, we should hope he either replaces or makes massive improvements to this failed program.

Like a lot of what happens with consumer finance, the issue is not so much that it is impossible to avoid traps and to properly navigate borrowing. The real issue is that the burden of doing the right thing has been shifted entirely to an unsophisticated consumer. Could that consumer do all the right things? Maybe. But it’s unlikely. Specifically, as we’ve seen, it’s about 1 percent likely.

As a starting point, I’m usually in favor of “personal responsibility” when it comes to our finances. We should learn what we can, and try our best to solve our own problems. 

But when less than one percent of people qualify for an extraordinary benefit like loan forgiveness, it’s not right to make personal responsibility the watchword for navigating consumer finance. Instead, it’s probably a case for better design of the program. And better regulation. And for putting the burden of success on the companies and governments – who understand the products best – rather than on consumers, who understand financial products poorly.

Tony Isola, a money manager and consistently astute commentator on bad financial products, recently dubbed the student loan servicers the “murder hole of consumer finance.” That’s a pretty good turn of phrase.

The Trump administration extended the pause on mandatory student debt payments, initially passed through the April 2020 CARES Act, until January 31 20201. A $1.6 trillion debt reckoning is upon us.

A version of this post ran in the San Antonio Express News.

Please see related post

The Burden of Understanding Should Be On The Companies

See related book reviews of Michael Lewis books:

The Big Short

Liar’s Poker

The Undoing Project

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  1. Oh, stop it. You’re too kind. But, really, Lewis is the best.

Student Loan Forgiveness – Not Holding My Breath

This past summer, during two different personal financial consulting sessions for two separate 30-somethings, I was struck by something both clients said about their student loans balances. One carried $120,000 in debt, the other about $40,000. I worried about their sizable student loan. They did not. 

Both said, in effect, “I’m not going to pay off my student loans early because if Biden wins my loans will probably be taken care of.” 

I was stunned. That is not at all what I expected to happen this past summer. Biden won, but it is still not at all what I expect from his administration. 

Biden

An estimated 44 million Americans carry an estimated $1.5 trillion in student loan debt. The student loan debt burden is higher than credit card debt. Since the pandemic-relief CARES Act passed in April 2020, borrowers have had the option to defer student loan debt payments without interest accruing until December 31, 2020. Absent further action, student loan payments become due again in a few weeks. This backburner financial concern just became a frontburner issue.

Despite its newfound urgency, the apparent belief by some in a future student loan jubilee – far more widespread than I had previously imagined – seems misguided. 

The belief doesn’t come from nowhere, however.

As President-elect, Joe Biden raised hopes on this front, specifically by calling for up to $10,000 in student loan debt forgiveness for graduates who pursue public service. His campaign also called for specific income-adjusted payment plans. He has proposed that if you make less than $25,000 per year, you could defer payments without accruing interest. Above $25,000 in income, borrowers could pay 5 percent of “discretionary income” toward debt, with a promise of forgiveness 20 years from now after full payment compliance. The income-calculation math already begins to sound quite complicated with this second proposal regarding disposable income-adjusted payment plans. 

Besides complicated math, the politics is complicated too. How would such a bill pass? Could it be achieved through executive order, or would Congress need to pass a law?

We can easily imagine what people on different sides of the political aisle say in this debate. Trump’s Education Secretary Betsey DeVos bashed the idea as a “truly insidious notion of government gift giving.” 

student_loan_debt_burden

On the other side, leading Democratic Senators such as Chuck Schumer and Elizabeth Warren have argued that President Biden has the authority to cancel up to $50,000 in student loan debt through executive action. 

One part of thinking about generous student debt forgiveness is whether it efficiently achieves what I understand is the goal Schumer and Warren seek. They want to level the economic playing field. They want a student debt policy that would tend toward economic equality.

Enter, data. Economists at the University of Chicago argue in a November 2020 whitepaper “The Distributional Effects of Student Loan Forgiveness” that student debt forgiveness mostly does not achieve that goal of greater equality.

The benefits of universal student loan forgiveness, of the type Schumer and Warren advocate, would skew mostly to upper income people. 

The economic effect of universal student loan forgiveness is what economists call “regressive,” meaning it benefits higher earning folks far more than lower earning folks. The economists estimate that debt forgiveness like this would be almost six times more beneficial to borrowers in the top decile of earners than borrowers in the lowest decile of earners.

Why is that? The biggest reason is that higher student loan totals actually correlate with higher incomes. So on average, the people who get the biggest benefit from large student loan forgiveness are, on average, higher earners. This basic finding should at least give us pause that the Schumer and Warren proposals are an effective means of achieving their goal of reducing inequality.

In addition, intuitively, we can see that people who do not attend any college – frequently, lower earners – would receive none of the $10,000 to $50,000 benefit advocated among Biden’s supporters.  

I understand if you are reading this while feeling broke and needing $40,000 in loan forgiveness, that debt forgiveness does not feel personally regressive to you. It would in fact feel really good. I get it. But public policy isn’t about your specific situation. It is, at best, about achieving collective goals through fairness and efficiency. 

We already have in place certain programs for student loan forgiveness. The current version of loan forgiveness for public sector employees is something called the Temporary Expanded Public Service Loan Forgiveness. 

The Government Accountability Office (GAO) issued a report last year which says that Secretary Devos’ department appears to have hewed closely to her personal beliefs, rejecting 99 percent of applications to this program. Clearly, that isn’t working in its current form.

The University of Chicago economists point out that expanding income-based student loan deferral and forgiveness could be accomplished through existing programs, although clearly under different leadership and expanded criteria for approval. Under scenarios they study, the benefits of loan forgiveness could be shifted down from top earners to middle earners under certain circumstances. It still remains the case, however, that folks who do not borrow for higher education – likely the same ones suffering at the bottom economic rungs of society – do not benefit from student loan forgiveness programs.

Considering the political side, it seems that universal or even generous student debt forgiveness is a lot more controversial than its proponents think it is. Unless it is framed carefully, higher education student loan forgiveness will make many people very angry. Recalling my conversations from this past summer, I got the sense that these borrowers considered debt forgiveness non-contentious. I doubt it.

Certain types of student loan forgiveness are not politically contentious. Military service veterans – and their children too – receive extraordinarily generous tuition waivers or educational subsidies. Military benefits like this are not controversial, although the financial benefit per person is somewhat staggering. My wife benefitted from a loan forgiveness program for her $180,000 of medical school debt, by qualifying for and pursuing a medical research career valued by the National Institute of Health. Certain types of work following education can seemingly transform our perceptions of socialistic “government gift giving” to patriotic “thank you for your service.”

It feels like the issue is not so much debt forgiveness as a concept, but rather whether forgiveness feels earned and societally useful. If Biden does pursue these policies, he will have to convince skeptics about the earned and societally useful part, as well as address the regressive nature of universal student debt forgiveness.

A version of this post ran in the San Antonio Express News.

Please see related post:

The Effective Nationalization of Student Loans

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College Costs Op-Ed in New York Times

student_loan_debtThe New York Times has a great Op-Ed today about the Expected Family Contribution (EFC) calculation, which I recently encouraged all parents with college-bound kids to check out.

My main take-away from looking at my own family’s EFC estimate on the College Board site was jaw-dropping because there is Just.No.Way.

Where would an ordinary (non-wealthy) family be able to come up with that kind of cash to pay for college? Every year? For just one kid?

The answer, of course, is that very few families can come up with that kind of money, so students and their families take out extraordinarily large student loans.

The New York Times Op-Ed explains the pernicious effect of the federal government-calculated EFC.  When all families receive a ‘government number’ it sets an artificially high floor for college tuition prices.

The Op-Ed also explains why some high-priced private universities may offer cheaper educational access to students than public universities, via the private universities’ generous financial aid packages.

The article also helpfully reviews some of the not-applicable, and not-generous, federal grant money available to families.

Finally, the Op-Ed recommends that Congress drastically cut the EFC by 75%, to reflect the fact that tuition cost hikes since 1980 have drastically outstripped inflation.

This proposal will not go over well in higher education circles, to say the least.  Fortunately for colleges and universities, according to the article, they have spent a half-billion dollars lobbying Congress in the past 5 years, the eighth-highest special interest category.

Please see related posts:

College Savings and compound interest

Interview with College Advisor Part I – The insanely rising cost of college

Interview with College Advisor Part II – is the 4-year college financial model broken?

One source of college costs: administrators!

New York Times on funding your 401K Account vs. 529 Account

And another NYTimes follow-up on the confusing issue of FAFSA – determining the expected cost of college.

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