Student Loan Forgiveness

There are presently 44 million Americans with $1.3 trillion in student loan debt. This student loan crisis is affecting a startling number of people, whose lives are being crushed under the weight of tremendous financial burden. The ripple effect of this crisis is manifesting itself in the economy.

Student Loan Crisis Affecting Economy

As tuition rates rise to an obscene yearly amount and students flock to the government or private entities for monetary advances, lives are altered and the US economy as a whole is disrupted. In the last few years, student loan debt has shown a dramatic increase in debtors over the age of 60. This balance owed is forcing these borrowers to stay in the workforce for longer than they might have otherwise, occupying jobs that younger workers might have been vying for.

In the past six years, home ownership has declined markedly each year. This decrease is attributed to college graduates who instead of buying homes, are wading knee-deep in bad credit and bills. According to a National Association of Realtor’s survey more than 70% of those wanting to buy a house are unable to do so because of the circumstances that student loan debt has put them in. Less home buying leads to less home building which in turn means fewer jobs available.

Traditionally, young adults have been the principal drivers of U.S. economic growth however, as evidenced by the home buying decline, young people are too bogged down in debt to boost the economy. Another economic consequence of student loan debt is the worsening of the already existent class divide. High school students who are looking to further their education might get thrown off by the even higher cost of a degree with the loan payments factored in. These students who choose to halt their education after receiving a high-school diploma will face a higher unemployment rate and lower earnings. The national burden of student loan debt introduces a significant headwind to the growth of the U.S. economy.

Student Loan Forgiveness as a Solution

Student loan forgiveness poses as a solution for student loan debt in that the borrower pays less than what they owe, that their debt has been “forgiven.” According to the Federal Reserve and the Education Department, federal student loans comprise 92% of outstanding loan debt in the United States.

There are currently four repayment plans in place for federal student loans through which a debtor’s loans can be at least partially forgiven. These repayment plans are Income Based Repayment (IBR), Income Contingent Repayment (ICR), Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE). The idea that student loan forgiveness is making a heavy impact on the student loan scourge is untrue. Of the $1.3 trillion in outstanding federal student loan debt, only 23.9% ($308 billion) of it is being repaid through one of these four programs.

Repayment Plans with Forgiveness

Income Based Repayment is a program that only takes on borrowers who have a high debt-to-income ratio. Direct loans can be repaid through IBR and any remaining balance will be forgiven after 20 years. Income Contingent Repayment is a program through which any direct loan is eligible. This includes loans to parent borrowers, with the stipulation that they are consolidated with a direct consolidation loan. With this repayment plan, the remainder of what is owed will be forgiven after 25 years. The Pay As you Earn program demands their applicants to have both a high debt-to-income ratio and a direct loan. With this plan, any remaining debt will be forgiven after 20 years. Revised Pay As You Earn is available to anyone with a direct loan, excluding borrowers who have parent PLUS loans. REPAYE allows for the loans to be forgiven in 20 years for an undergraduate and 25 years for any postgraduate. An important detail to note in regards to these repayment programs is that the forgiveness isn’t automatic nor should it be expected. A debtor must apply for it once he or she has reached the 20 to 25 year mark. Ironically enough, even after forgiveness is factored in, stretching out your payments through one of these programs could potentially cost you more than it would to go with the standard 10-year repayment plan.

Public Service Loan Forgiveness

Another more recent option is the industry-specific Public Service Loan Forgiveness Program, or PSLF. Eligibility for this requires working in either a non-profit organization or a public service job for at least 10 consecutive years, and paying 120 qualifying loan payments. Those who are eligible for this program are promised a cancellation of all remaining direct federal loans. Public service jobs include social work, child care, library services, public interest law, and also those with jobs serving the disabled or the elderly. In addition to PSLF there are loan forgiveness programs for National Health Service Corps, Nursing Education, and teachers.

Student Loan Collections

When a student loan is defaulted it means that the borrower has failed to repay the loan as the initial terms suggested. Violating terms and conditions of the loan, fraudulently obtaining a student loan, or going too long without making a payment (loan goes into default after you’ve gone nine months without making a monthly payment) are all circumstances that would meet the requirements for a defaulted loan.

Defaulting on a student loan has severe consequences including legal action, credit damage, and collection activity. Student loan collections is sometimes referred to as the “penalty box” of loans. Once you’re in this penalty box the balance of your loan is due immediately, this immediate balance is often referred to as acceleration. There can also be loan collections fees varying from anywhere between 18 to 40% of your outstanding balance. If your loans remain in default, wages can be held and income tax refunds can be taken to repay debt. Often debt collectors use aggressive tactics such as reaching out to you on a daily basis. As daunting as loan collections sounds, there is a way out. These escape routes include loan rehabilitation, student loan consolidation, disability forgiveness, and the rare cases in which there is a discharge of student loans with bankruptcy.

Debt is an obstacle for 70% of students graduating with a bachelor’s degree. Our society has become desensitized by the normalcy of debt. In 2016 about 8 million borrowers have stopped making payments on more than $137 billion in educational debts. This means that one out of every six people who have any federal student debt haven’t made a payment on their loans for at least nine months. The amount of defaulted federal student debt has increased considerably in the last year and the consequences will undoubtedly continue to be exhibited in the US economy.