Matt Taibbi has an article in the latest issue of Rolling Stone called Forgiving Student Debt Alone Won’t Fix the Crisis. It’s a good argument that doesn’t get enough attention. Every semester that clicks by is another semester where thousands of students are issued loans to cover tuition, books, materials, and living expenses at colleges both expensive and affordable.
I agree with Taibbi and so many others that total or partial student loan forgiveness is a good idea. Where Taibbi’s article doesn’t go, and to his point politicians don’t either, is into what could be done to provide long term solutions. Here’s a short list of things that I, a lay-person who has learned a lot about this stuff, can think of that might help:
- Cut interest rates. Interest rates are set by Congress. The lowest interest rate for undergraduate student loans is about the same as a mortgage right now, but the interest rates for some loans are much higher. If Congress can set interest rates they can also cap them at some arbitrary rate. They could even set rates to 0.0% for some loans!
- Increase funding for non-loan aid mechanisms. I worked through college including a work study job that paid minimum wage and only allowed 20 hours per week. That was barely enough to cover meals in the cafeteria let alone cover room and board or any appreciable amount of tuition. Congress could dramatically expand this program if they wanted to, maybe ED could do it without them, I’m not a lawyer so I’m not sure.
- Stop collecting interest during deferrals and forbearance. It’s a really nice thing that borrowers can suspend payments when they can’t make them but your servicer can also put your account in forbearance without telling you and your automatic payment won’t go out and the interest will pile up.
- Limit balance growth to a certain percentage of the principle. If your on a long enough deferment, you can end up with more balance than you started with. This happened to me. I overpaid my loans while we were teaching in Korea, then went on deferment while in Hungary and couldn’t afford them. The result? My loan balance was just as high at the end of two years as it was when I left school.
- Set automatic cancelation for all borrowers regardless of payment plan or job and incentivize on time payments by moving that date up. If you paid your loans on time for 15 years, your balance is forgiven, no matter what payment plan, or how many deferments or forbearance. If you missed 1 to 5 payments in that 15 years, it’s 20 years. Something like that.
- Simplify the PSLF and other existing programs. The Public Service Loan Forgiveness Program is way too complicated. It’s not “10 years” as advertised, it’s 120 on time payments on a qualifying payment plan. If you’re off one of those plans for a month, but still make a payment, it won’t count toward PSLF.
- Limit the total amount the can be borrowed.
- Give students amortization schedules and other tools to simulate the effects of switching jobs or payment plans. It’s very hard to get a straight answer about when the 20 year loan forgiveness date hits, and what you have to do to qualify for it.
- Allow students to chose their own loan servicer.
- Set up federal refinancing programs to allow borrowers in good standing an opportunity to cut interest rates in the future. There’s currently no way to refinance a loan short of taking it private.
- Allow student loans to be discharged in bankruptcy.
- Increase the amount of student loan interest payments that can be written off on income taxes. Currently you can write off 100% of interest paid on a mortgage but for student loans, there’s a limit of $2,500. I don’t know for sure, but I’m willing to guess most borrowers pay more than that in interest during the first years of repayment when their earnings are lower and their principal is higher. Since the interest payment is going to the government, that’s ostensibly a double tax on low income earners. This one feels like a no-brainer to me! I bet we could even get Ted “HULK SMASH TAXES” Cruz on board with this one.
Again, these are just twelve ideas I could come up with by thinking about this for like half an hour. I’m sure they’re expensive but I’m also certain these would work toward changing the federal loan program away from being a predatory regime rigged against the borrower.
Edit: I missed 11 and 12 in the original post.
I’m writing today to share a few thoughts on the nomination of Betsy DeVos for the post of Secretary of Education. After watching segments of her nomination hearing and reading her responses on a variety of issues I am convinced she is uniquely unqualified to fill this position. While she demonstrated a general lack of knowledge about the federal laws, including the Individuals with Disabilities Education Act (IDEA), and a flippancy toward existing whistleblower protection laws that ensure federal dollars are not being misused, her answers about student loans and higher education financial assistance were particularly troubling to me.
I am currently among the large and growing swath of Americans who carry a large sum of student loan debt. Student loans helped me buy books and pay for room and board for four years of undergraduate education but the bulk of my debt came from my decision to attend graduate school. When I graduated in 2013, I had amassed nearly $150,000 in debt to the Department of Education. Over the last four years, I have paid back about an entire year’s worth of tuition, and still owe the government more than $100,000.
The reason it felt safe to take out this much debt in order to attend school was precisely because of the federal programs available to help me pay them back. One of those programs is the Public Service Loan Forgiveness program, which helps students with sizable amounts of debt take jobs in non-profit and public service organizations, rewarding us for taking low-paying jobs that support our local communities while still staying on top of our debt. Another is the Teacher Loan Forgiveness program, which similarly rewards individuals who commit to teaching in K12 schools for at least 10 years. The most impactful, and complex, of the federal student loan benefits is the variety of repayment options. These, and especially the income based plans, ensure that borrowers with high amounts of debt can take risks and live their life without risking default. My wife and I were able to afford the house we just bought because of the lessened debt burden we bear as a result of being part of these programs. We are able to consider having a child because these programs ensure that if we do, we’ll have enough in the bank to continue to support our family.
Some might look at these programs and see them as ways of getting out of paying a debt we owe, but they are not. These programs do the opposite: They make repayment possible. Public servants like myself only earn debt forgiveness if they make 120 on-time, regular payments on their loans. If I qualify for this program, the amount forgiven will be small compared to the amount of interest I have repaid on my loan to the Department of Education. The repayment programs still obligate the borrower to pay some money every month, it’s just capped to a percentage of their family income. For many like myself, these programs are the only means of survival. Without them, we would have to put on hold large, potentially risky decisions like taking a low paying job, starting a business, or starting a family.
Not only did Ms. DeVos never take out loans for her education, she doesn’t know anybody who did. She grew up a kind of wealthy most people can hardly even imagine, so did her children, her friends, and family. She doesn’t know any Pell Grant recipients, and in her testimony on the Hill this week, did not demonstrate she recognizes the importance of ED’s role in helping people who aren’t billionaires afford college. These programs are not perfect but they are helping millions of Americans, young and old, afford higher education. We need a leader in the Department of Education who will work with us borrowers to improve these programs and keep us from default. In her testimony yesterday, Ms. DeVos demonstrated she is not aware of these programs, and cannot, or will not, have the empathy with borrowers required to make thoughtful decisions about the future of these programs.
The Secretary of Education does not need to be intimately familiar with every one of the Department’s programs. But the Secretary does need curiosity, thoughtfulness, and empathy for the individuals who are impacted by the Department every day. Her testimony demonstrated a lack of all three. For these reasons, I urge you to vote against her confirmation.
Thank you for taking the time to read this letter.
I have fortunately been able to make on-time repayments for my federal student loans every month since they went into repayment. So, I was only a little confused when I got a letter in the mail from my loan servicer telling me that a “delinquency forbearance” had been placed on my loans.
It turns out that it is standard practice to put a customer’s loans into forbearance when they request a change in repayment terms. When I called this morning to ask what the forbearance was all about I was told they do this in order to “keep the account current,” while the change is processed.
Here’s the problem with that. To a borrower, a forbearance might seem like an innocuous month off from paying your loans. Extra money in your pocket for a month is always good, and you changed your repayment presumably to get a lower rate so on the surface it seems like a good deal. It is, until you look up what it actually is and what happens during a forbearance period.
Not a deferment
There are two ways of delaying payment on student loans: deferment and forbearance. deferments are used to pause repayments for really specific reasons when it doesn’t make sense for you to be repaying your loans. For example, if you go back to school you can request a deferment on your existing loans. You can request one for up to three years if you are experiencing prolonged unemployment. One awesome part of deferments is that depending on your loan, the government might pay your interest for you. That means if you end up unemployed for three years after you graduate, you can stop payment on your loans and not worry about interest piling up and capitalizing.
A forbearance is much different.
With forbearance, you may be able to stop making payments or reduce your monthly payment for up to 12 months. Interest will continue to accrue on your subsidized and unsubsidized loans (including all PLUS loans). – studentaid.ed.gov
That last sentence is key, and according to the letter I got, not only does it accrue, but if you don’t pay it during the forbearance period, it capitalizes. Let’s say, like the average med student, you have $166,000 in student loan debt after you graduate (your principle) and you ask and are granted forbearance for a year right as your repayment begins. At 7.5% interest, your loan will earn $34.10 in interest every day during that period for a total of $12,446.50 for the year. And if you don’t pay it before the end of the year, it will capitalize – added to the $166,000 principle. So now your post-graduation debt is $178,446.50. This means once you go back into repayment, your payments might be higher than you planned.
Even if the forbearance period is shorter than a year, it could still be long enough to accrue enough interest to cancel out a monthly payment you already made. When a loan servicer signs its customers up for an automatic forbearance to “keep the account current” while they process repayment requests, they’re signing us up for a whole lot more than a month off of paying our loans.
On top of all that, the interest rate award for enrolling in autopay is suspended during forbearance, so you will be earning interest at a slightly-higher-than-normal rate. It’s like rubbing salt in the wound.
Borrower’s have rights
According to the Department of Education’s materials, the borrower must request a forbearance or deferral. The “automatic” in an automatic forbearance means the servicer is obligated to grant it if the borrow meets the requirements. And that’s the way it should be. If a borrower cannot make payments, these are good options, but that’s a decision the borrower needs to make. A loan servicer should never be able to impose a damaging financial decision on a borrower, and they certainly shouldn’t penalize those who are making good on their payments.
As for the servicer’s need to keep the account “current,” if stopping payment for a month is truly necessary in order to apply a new payment plan, it should be a deferment, not a forbearance. Having a variety of payment plans is valuable because it gives us options that can meet our current financial needs. Since other methods of adjusting loans aren’t available to federal student loans – refinancing, discharging, etc. – it’s vital that these options be useful and not harmful to borrowers. Penalizing borrowers with capitalized interest is no way to reinforce these as good options.
Here’s the thing. Student loans are the worst and the system is incredibly opaque. There’s no consumer choice in the matter: I’m stuck with the servicer ED assigned to me. I have no idea if my monthly payment is going back to the Department of Education, my university, or simply lining the coffers of the the servicing company executives. The autopay system is such a disaster that for the first nine months of repayment I went into my account every day to make sure my payment was scheduled, went through, and the next month’s was queued up properly. Sometimes I even double paid accidentally. In a system so thoroughly stacked against the borrower, we don’t need more opportunities to fail.