Moneybox

Here Are Four Ways to Handle Debt Forgiveness That Even Mushy Centrists Might Like

Alexandria Ocasio-Cortez waves into a supporter's phone.
Alexandria Ocasio-Cortez wants to forgive Americans’ student debt. Here a few ways to do it without wasting cash on the wealthy.
Rick Loomis/Getty Images

Canceling all of America’s student debt in one big jubilee is a popular idea on the left. It is also, as David Leonhardt points out in a New York Times column this week, a pretty regressive idea. That’s because just under half of the country’s outstanding student loan balance is held by the highest-earning 25 percent of households in which the adults are age 25 or older. About a quarter belongs to the top 10 percent of households, whose incomes top $144,720. This partly reflects the fact that the heaviest borrowers tend to be graduate and professional degree students who are en route to a well-paid career. According to the most recent Department of Education data, grad schoolers currently take out about 39 percent of all student loan dollars, even though those borrowers make up just 16 percent of recipients. If you forgave all student loans indiscriminately, you’d end up handing a windfall to a lot of corporate lawyers, MBAs, Google engineers, and surgeons with six-figure balances they could otherwise pay back without sweating their bank accounts.

I’ve been writing and tweeting my heart out about this point for a couple of years now. However, I also recognize that our student loan program, and the country’s broader system of funding higher education, is a rolling disaster that has plunged millions of young adults—and especially black Americans—into financial hardship. Significant student debt forgiveness could be part of a grand restart in which Washington rips up the old higher-ed finance system and starts fresh, perhaps with some kind of tuition-free college program, accreditation reforms to weed out scam schools, sane loan limits, and a better approach to managing repayment. (Even in countries with free college, students still often take out loans to pay living expenses.) Beyond that far off possibility, there are already multiple student-loan forgiveness mechanisms in place that badly need to be fixed, and left-leaning politicians could get to work on now.

So, with all of that in mind, here are four ways to approach student debt forgiveness that would be less horribly skewed toward helping anesthesiologists and M&A attorneys. The first two are narrow, technical things Democrats could start working on now. The other two are more like moonshots, the types of policies you might imagine having a shot under President Bernie.

Option 1: Make sure borrowers who were cheated by shady for-profit schools can get their loans forgiven

This one is a gimme. Predatory for-profit college companies like Corinthian and ITT convinced droves of students to take on debt so they could pursue worthless degrees before federal intervention forced the schools to close. Other former students claim to have been scammed by schools still in operation. (Full disclosure: Slate is owned by Graham Holdings Co., which is the corporate parent of for-profit educator Kaplan.) Victims of outright fraud are supposed to be eligible for student-loan forgiveness through the federal borrower defense to repayment rule. However, the Trump administration has been doing everything in its power to stonewall applicants and limit the relief they can receive.

Under Secretary Betsy DeVos, the Department of Education tried to stop a version of the borrower defense rule that was issued under the Obama administration from going into effect and proposed a replacement with a stricter forgiveness formula that would only relieve portions of a borrower’s debt, saving the government (and costing ex-students) some $12.7 billion. Last month, a federal judge ruled that DeVos’ delay tactics were unlawful and forced her to implement the Obama-era rule for the time being. But her stingier rewrite could still go into effect by 2020.

That is, unless Congress steps in. Rather than leaving it up to regulators, Democrats could try to pass legislation forcing the Department of Education to implement borrower defense the way Obama’s team envisioned it, instead of DeVos’ more meager version. Republicans might not be on board, but progressives could try to force the language into a budget bill. That’s the advantage of controlling the House.

Option 2: Make sure the student loan forgiveness programs we already have actually work

Today, the federal government offers student borrowers two main paths to getting their loans forgiven. First, there’s Public Service Loan Forgiveness, or PSLF, which wipes away borrowers’ debts if they go to work in the nonprofit or government sector for a decade. The Consumer Financial Protection Bureau has estimated that a quarter of the whole U.S. workforce is employed in jobs that could qualify for this program. (That includes my wife, who’s banking on it to retire her voluminous law-school debt.) Honestly, this program shouldn’t have to exist. It’s basically a workaround for the fact that U.S. taxpayers refuse to pay their teachers, public defenders, and various other civil servants nearly enough to afford the educational credentials they need in order to do their jobs. But until Americans understand that you get the government you pay for, it’s a necessary kludge.

For those not in public service, the government offers various income-driven repayment options that clear debt once you’ve made payments for a couple decades. The most recent is Revised Pay as You Earn, or REPAYE, which caps what borrowers owe each month at 10 percent of their discretionary income, and makes them eligible for forgiveness after 20 years.

Unfortunately, both of these programs suffer from major shortcomings. The management of PSLF has simply been a mess, which is distressing, given how many people have organized their financial lives and careers around it. The first wave of borrowers technically became eligible for forgiveness under the scheme last year, and through this June, Americans sent in almost 29,000 applications. Of those, more than 99 percent were rejected. Nobody is entirely sure why the rejection rate has been so astronomically high, but it’s clear at this point that many people mistakenly thought they were following all of the program’s complicated rules properly in order to qualify, when in fact they were not, because their servicer never explained the requirements correctly. I’ve received dozens of emails from people who made years of payments before finding out they either needed to be in a different repayment plan or consolidate into a different kind of loan, among other problems.

As for REPAYE: Right now, anybody who gets their loans canceled after the 20-year timer tolls could face a potentially massive tax bill, because the IRS considers debt forgiveness to be income. (This issue doesn’t apply to PSLF.) Perversely, a lot of people might not be able to afford having their loans wiped away.

Thanks to Democrats, Congress has already created a $350 million pool to help people who were rejected from PSLF on technicalities, but the amount of money is almost certainly too small and rules too stringent, which is why the vast majority of applicants to this backstop program are being denied. With their House majority, the party could push for more funding and more lenient requirements, and try to fix the bureaucratic flaws that have turned PSLF into a morass. They could start by making it easier for borrowers to know for certain that they’re on track for forgiveness. As for REPAYE, they should just fix the tax glitch.

Option 3: Forgive $20,000 for every student’s debt

OK, it doesn’t have to be $20,000 exactly. But the idea here would be to forgive up to a flat amount of loans for every borrower, so that you help the most troubled population of debtors without handing out those outsize windfalls to solidly upper-middle-class professionals.

One deeply underappreciated fact about the student-debt crisis is that the biggest borrowers aren’t necessarily the ones who end up in the most financial duress. More than half of student debtors who default have balances of less than $10,000, for instance. That’s because many of them dropped out of school, and as a result, never got decent counseling on how to manage their loans or earned enough to make paying them back feasible, no matter what repayment plan they picked. Private-sector college attendees were especially prone to end up in this scenario: Among borrowers who started school in 2004, more than 46 percent of those at for-profits defaulted within 12 years, compared with about 12 percent at public four-year schools.

One moral argument you could make in favor of this approach is that it would forgive the debts of students who may not have been outright defrauded by for-profit colleges but who were lured into pursuing effectively worthless degrees or programs they couldn’t realistically complete. The federal government is deeply complicit in those borrowers’ misfortune: Our national policy wedded a loan program that included zero underwriting with years of lax regulation of the for-profit sector. (Even now, the Trump administration is trying to delay any implementation of the long-awaited gainful employment rule, which is supposed to freeze the scammiest vocational programs out of federal aid eligibility.) Across-the-board forgiveness at a fixed dollar amount would also help out the many millennials who borrowed too much to attend traditional colleges they weren’t able to graduate from. (Our dropout rates are … not great.)

So why $20,000? I mean, you can pick a number that you think would do the greatest good at the lowest cost, but that’s roughly the median debt load of a borrower who began repayment in the 2013–14 academic year, the most recent figure available from the College Board. You’d be forgiving the typical borrower’s loans but not someone who decided to debt-finance their way through a couple years at Columbia Business School.

Option 4: Forgive college debt but not grad school debt

This one is straightforward. It’s also a moonshot that at least gestures toward dealing with the regressiveness problem. I’ve heard lots of strong arguments for why college should be free. I have yet to hear many strong arguments for why grad school should be free, except insofar as it might incentivize people to go into lower-paying but socially necessary fields. Those tend to be in public service—which is the argument for making sure PSLF works as advertised. If you believe education debt is an economic scourge upon a generation, canceling undergraduate debt might be the best way to make progress toward remedying it without wasting public funds on budding 1 percenters that might better be spent on the truly needy.

This approach won’t satisfy everybody; people who borrowed too much for a journalism grad program before setting out into the financial hellscape of online media, for instance, wouldn’t find themselves suddenly free and in the clear. But unless you believe a critical mass of Democrats are about to embrace Modern Monetary Theory,1 we’re going to be working in a world of limited resources for the foreseeable future. Even idealists sometimes need to make trade-offs.

Update, Nov. 20, 10:18 AM: A few readers have asked why I didn’t include making it easier to discharge student loans through bankruptcy on this list. I probably should have, especially since I’ve written about it before! Somewhat unexpectedly, the Department of Education has sent signals that it might ease up the “undue burden” standard that makes it nearly impossible for most borrowers to get relief in court. But Congress could certainly still step in.

1 MMT is a branch of heterodox economics beloved by the left, which essentially argues governments that print their own currency don’t need to collect taxes in order to spend and should be less conservative about deficits. (They have some good points.)