By Willy Staley  Updated on Thu Mar 22, 2012

Student Loan Forgiveness Act: Both Promising and Problematic

 

If you’re a young person, you may have noticed a petition making the rounds on various social networks calling for support of the Student Loan Forgiveness Act of 2012. The bill, introduced by Rep. Hansen Clarke of Detroit, Mich., aims to “make student loan repayment both simple and fair,” and it aims to do so by writing down a substantial portion of federal student debt by forgiving outstanding balances after a decade of payments at a certain percentage of income.

The bill presents itself as a way to stimulate the economy by offering near immediate debt relief to those who have been paying their bills for the last ten years, and future debt relief for those who are just beginning. Clarke’s bill proposes that anyone with federal student loans simply needs to pay back at least ten percent of their discretionary income every year for ten years and the remainder of their debt will be forgiven. It would also cap interest rates on federal loans and offer strong incentives to work in public service: teachers, firefighters, etc.

Clearly, the bill will be quite popular among young people, many of whom feel as though they had the rug pulled out from under then in 2008. (There is another proposed bill that aims to restore the bankruptcy provision for private student loans.)

The cost of going to college has increased well above inflation for the last couple of decades while the incentive to get a college education has gotten stronger, too. For those with crushing student debt graduating into this economy, life has not been kind.

Crunching the numbers

The Federal Reserve Board of New York released a report last Monday detailing the situation. The total outstanding student loans balance is $870 billion, by their estimates (by comparison credit card debt is $693 billion and auto loans account for $730 billion). The average outstanding balance is $23,300, but the median is $12,800 — suggesting a minority of borrowers who owe mind-blowing sums of money for their education. Indeed, according to the study, about 0.5 percent of borrowers owe more than $200,000 for their education (one’s mind immediately goes to all the trend pieces about accredited lawyers unable to find associate-level positions; three years of post-secondary education is not cheap!). A plurality of about 43 percent, however, owe less than $10,000; slightly less than 30 percent owe between $10,000 and $25,000.

Student Loan Forgiveness Act: Both Promising and Problematic

By the New York Fed’s calculations, about 47 percent of borrowers “appear to be in deferral or forbearance periods,” and 27 percent are past due on their loans. This affects all age groups, not just recent graduates; 12 percent of those past due are between age 50 and 59. Famously, President Obama only paid off his loans relatively recently, after writing a pair of best-selling books.

Discretionary income, as defined in this context, is “the amount by which adjusted gross income exceeds 150% of the poverty line.” If the average individual income in the United States is about $39,000 and the poverty line for an individual is almost $11,000, then we can infer that “discretionary income” for the average American (at least in this sense) is around $22,500. Divide that by ten and multiply it by ten, and you’re back where you started: $22,500 over ten years, which is only about $700 short of the average outstanding balance! It might have looked crazy on the face of things, but Rep. Clarke’s math is actually sound.

Additionally, the bill considers the tax implications of the plan. Typically, debt forgiveness is considered taxable income. Receiving a tax bill for $23,000 in income you didn’t technically receive would be a tough blow for anyone, even if it wiped out their loan debt. So, write-downs would not be considered taxable income.

What about the others?

Like the mortgage deal the Obama administration recently completed, if this proposal has any legs it will likely meet cries of moral hazard — essentially that this sort of intervention allows risk-takers to pass on the costs of their own risk-taking to those who did not take risks in the first place. This is a legitimate concern — how would you feel if you avoided a private school education because of the costs only to find out that had you gone, it would have been paid for? It seems potentially unwise to effectively subsidize college education after the fact, instead of doing so upfront, thereby evening the playing field.

In the interest of fairness — and realism — Clarke’s bill includes provisions to cap loan forgiveness in the future. Only $45,520 would be forgivable in the future, which would “incentivize students to be mindful of education costs and for colleges and universities to control tuition increases.” Instead of providing more funding up-front, the federal government would have to do so afterwards, to those willing to take on substantial risk.

Would this solve anything?

While this would certainly lift the weight of crushing student debt off the back of Americans who need it most, it would not get to the heart of the problem: that there is a college education bubble that has been growing over the last few decades because of the way we pay for college. The New Republic’s Kevin Carney explains it best:

Imagine you’re in the business of selling apples that cost $1 on the open market. Then the government decides that more people should have the opportunity to buy apples and society would benefit from a net increase in apple consumption. So it decides to drop the price of apples to 60 cents. Sometimes it does this by giving you 40 cents for every apple you sell, on the condition that you start selling apples for 60 cents. Sometimes it gives people vouchers worth 40 cents that can only be used to purchase apples from approved vendors.

At first, the policy works splendidly. Apples are effectively less expensive so more people buy them and the nation is suffused with apple goodness. But then you, the apple vendor, look at the situation and say “Hey, the market price of an apple is still $1. Wouldn’t it be great if I could charge $1 for apples, but still get 40 cents from the government for every apple I sell?” Raising the price all the way from 60 cents back to $1 in a single year would be too obvious and jeopardize political support for the apple subsidy program. So you start raising prices by three, four, or five percent above inflation annually. When annoyed public officials begin asking why, you explain that apple production is an expensive, labor-intensive business, and that all of the extra money is being used to produce the very best apples money can buy. Since apple quality is substantially a matter of taste, this is a hard claim to refute.

As things stand now, this bubble cannot burst. Clarke’s bill, attractive as it is — the petition supporting it has 158,000 signatures just a few days since the bill was introduced — doesn’t do much to address this problem, long-term forgiveness obligation notwithstanding. It also doesn’t stand a snowball’s chance in hell. It has no co-sponsors and it was introduced to the overwhelmingly Republican House of Representatives during an election year.

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  • Lucky Liz

    It’ll work. With the pressure of their constituents  and the tonnage of bad press about college debt, parents will be stopping their children from doing large colleges.

    If this bill doesn’t pass you can be certain the people attending colleges will continue to drop as it has been since early 2005.

  • Moon314pi

    Willy, you summed up the situation in an- easy- to- understand way but there are two critical factors missing from the data that significantly changes the TOTAL average debt. 
    1) Private loans are not included in the data-and SIGNIFICANTLY  impact the total debt owed but not reconized in the above data.
    2) Parent Plus loans or parents who took out a home equity loan or tapped their retirement savings in order to pay for the lions share of their child’s education-as to LEAVE the STUDENTwith only $23,000 of average debt. The information is flawed and decieving because SOMEONE had to pony up the difference since a private school education can run per year $40+ or a state university education  $25,000 when all is said and done. so TOTAL STUDENT DEBT must include the parents portion of that debt-because we’ll be paying for our children’s student loans while we are collecting Social Security.
    So an uninformed person would look at the $24,000 average and say “Well, that’s not so bad, I graduated 25 years ago with $10,000 so an increase is expected. It’s a little high, but somewhat reasonable-why are all these students complaining?” …and then those same people will get angry and resentful about relieving student loan debt. Not because they are selfish, but because they are relying on flawed data to make this decision.
    The truth of the matter is that over the last 25 years students have OVERPAID for an education and the lending terms have been one sided since consumer protection was removed for student loans (and one of the top reasons why we’ve seen an 800% in education during the last 25 years..)
    This student loan issue is a hot potato and none of the candidates are really tackling it as a priorty because if they’re using the same data that you did, they can’t support “forgiveness”. 
    The true cost is hidden in families.
    I believe the EFC (Expected Family Contribution) should be wiped out of the equation. If the State and Federal government list the age of majority as emaciapation or the time when one is declared an adult-then why is a student considered a minor and declared dependent only in determining an EFC? Why? because the parents pockets can be tapped to foot the bill yet- that HUGE amount of debt is not listed in the total student debt? ?
    Why am I mandated to pay “my EFC share” for a child’s education ? When I call up the college with a finanical question, I am told “sorry, we can’t talk to anyone but the student unless the student gives permission” WHAT? So, I am expected to pay without having the right to question what I am paying for? The flat answer is “your student is an adult and not a minor, that’s why we cannot talk with you”  -the government is having it both ways. Either the student is a minor and declared a dependent for tax purposes or the student is an adult and considered independent for any aid consideration and not delcared on a parents tax return.
    The age of majority should be across the board. If one can vote, marry, go to war, sign a loan, credit card, etc then a parent should not be expected to pay for an adult’s education. Is a student considered an adult or a minor? The answer is: it depends on where the most money can be made. Without the ability to tap parents to pay for a child’s education (unless they want to) the price of education will come down because there is more risk placed on where it should be and not on the backs of aging parents.

     

  • TSJ

    This is wrong!  You borrowed the Money went to school so just like everyone else who borrows money you need to pay it back in full.  This sounds like another government bailout.

    • kd

      It seems every other type of debt has an option to be discharged through bankruptcy, except student loans.  Maybe we should remove all consumer protections from other loans and debt?

      What I think is wrong is that the cost of tuition has increased by over 800% since 1980.  Students shouldn’t have to overpay for an education that won’t secure them a job, especially in this ailing economy.

      • urge

        KD,  Your comment “Students shoudn’t have to overpay for an education” is true. The student shouldn’t be getting a loan if it’s too much period.  College education is not a right, it’s a privilege.  Getting a high school education is the only right you have.  Students are not that stupid to realize that if you borrow 100K for college, that it’s going to take a job (a risk), and a long time to pay it off (will hamper your discretionary income).  

        JOFB, don’t blame lenders for predatory practices of manipulation etc..   Basic math skills say you borrow alot, you will take a long time to pay it off. If you aren’t being realistic, then you’ll struggle paying off those bills.  Students that can borrow for college are gettting an opportunity.  No they shouldn’t be raked over the coals, but then again they have the option of saying NO.   Just like an overpriced car, you walk away.  You must be one of those entitlement people. 

    • Moon314pi

      What specifically is wrong TSJ? The fact that education has increased 800% and people simply cannot pay back loans at between 8-25% -and capitalized on top of that interest rate- without even a strong job market to sustain the out of control debt? Is that what you mean? Then I agree, “this is wrong”.
      If you mean it is wrong to relieve this debt-then I disagree. Few here would argue that one should honor a debt but when you OVERPAY for a product, and repay for that over priced product 3 and 4 times over the cost of the original product-the debt becomes immoral and that is what’s happened with today’s student loans. I’m as ticked off as you that the government will have to “bail out the student loan debt” because the people who should really pay for this “bailout” are the banks and lenders who caused it and Congress for allowing the banks to have a free ride on the backs of 18 year old kids. Blame them for this out of control student debt, not the students.

      • Joe Blow

        Holy crap! Have people just stopped thinking over the past decade period?! Boooohoooo, overpay, booohooo! Did you not know what tuition costs before you took out the student loan? You had a choice to not “overpay” in the beginning! Once you spent the money it’s time to repay not to reconsider your decision to ge into debt.

        This is exactly the type of attitude that is going to plunge this country into the colossal crap shoot that Greece is sinking into and others quickly following. Don’t worry about the consequences of your decisions, someone else will be on the hook for that.

      • Jasons12

        The fact that you believe you are “overpaying” for a debt is irrelevant to whether you need to pay it back. Yes, it is ridiculous that college tuition increases have far exceeded inflation, but when you choose to attend college, you call on a third party for a loan. The bank that services the loan is not responsible for the expensive tuition, they are only providing you a service. Why should the bank (which pays your tuition) not receive the money they put out for you and you agreed to pay back. You are overpaying for tuition, not overpaying for the loan. Also, how do you rationalize that banks are responsible for increasing tuition and student debt? All the banks are doing is offering you an option to defer college payments until a later date, if you don’t want a loan, banks aren’t forcing you to take one. There is a cost to borrowing money and of course the bank must charge you interest to compensate them for the cost of borrowed funds and for the risk of default.  

    • jofb

      TSJ, since you are reacting emotionally, and do not have the voluminous facts that prompted this bill, I invite you to our group, at Forgivestudentloandebt.com, and thousands of us would be happy to send you and provide you with details. You could begin by querying “Education Management Corp, Fraud charges, by 11 States Attorney Generals. We would also gladly share with you the facts about the predatory lending system, and how the banks, and the government are profiting off of college students and you the tax payer.  I sincerely invite you to review the facts, before you make an emotional judgment on a very complex student lending debacle.  As a retired Prof. I can further enlighten you to facts in the college lending system that dupes and pillages students with lack of transparency and manipulation. If you care to know more, I invite you to the group, and I will be happy to assist with significant information to help you make a well-informed decision. We look forward to providing you with this information.

  • Moon314pi

    I do like the “Apples” analogy, it’s pretty spot on to describe how the debt got out of control-greed.
    Link to the petition in support of Rep. Hansen Clarke’s Bill. 
    http://signon.org/sign/support-the-student-loan.fb1?source=c.fb&r_by=525506

  • jpumpkin

    How about this statement:
    Student loan debt is greater than credit card debt.
    80% of Americans have credit cards, 15% of Americans have student loans. 

  • Tebag1

    FYI-I did not borrow money for college because it was outrageous to go, I have a decent paying job, while my neighbor who did go for say 4+ years and is now unemployed but at least he has a degree!?? W.T.F. ? You borrowed the money knowing it was expensive for school-PAY IT BACK. The government is not your mom or dad to hold your hand because now that you have that “DEGREE” you can not get a job to pay your loan, Suck It Up Jr. It’s called life and you are almost an adult(Because a grown up should know you borrow you pay it back)! Come on people quit crying to the government for money woes that YOU inquired knowing the schooling was expensive hence the reason for the LOAN.

  • Penmaric

    What about us parents who put their children through college and, worked 80 hour weeks to pay the tuition. What do we get back?

    • http://mybanktracker.com Willy Staley

      This is the problem with the bill, right? That it only rewards those who took on the risk of loans — leaving out people who were able to work harder and pay and those who simply opted out of getting an education altogether. This is why I think we should subsidize and control the costs of education before rather than after the fact. 

  • Murano1951

    I overpaid on my house, forgive me. I overpaid on my car, forgive me. I overpaid on my 60″ flatscreen tv, forgive me. I overpaid on my Iphone, forgive me. When do we stop blaming everybody for our bad decisions?

    • http://mybanktracker.com Willy Staley

      Well, when the government’s policies helped create a bubble in both housing and education, there’s a legitimate argument for asking the government to help free us from being indentured servants to the banks after the bubble bursts and we’re left with massive debts and few ways to pay it back. The banks were bailed out and would not have survived were it not for the federal government’s help. Why socialize high finance and nothing else?

  • David60134

    this debt does not vanish in thin air….the debt would be transferred to the taxpayers. Those you acquired the debt must pay back their debt, NOT ME, the responsible taxpayer.

  • Classichak

    I understand and completely
    disagree. Each person should pay back the money they spend. Going to
    school is all about choice. If you chose to spend any amount of money
    measures should be taken to make sure one has the means to pay back
    their debt. Life can certainly take twists and turns, but asking for a
    (possible) huge amount of money one has spent to be wiped clean with far
    less asked for in return is a bit perplexing to me. Should we all buy a
    house or an expensive car and hope a bill like this would come around
    so one would NOT have to pay the full amount? Maybe interest rates
    should cease and the original amount be paid back by the borrower… A
    simple, easy, and fair compromise.

  • http://www.certiport.com/ Haylee Isaacson

    This may really inflate the dollar, but then again we’re already going towards Europe anyways.

  • Bartman

    So what about those of us that were actually responsible and either worked our way through school or the people that took loans they could afford and paid them back?  Do we all get a $45,520 ‘good joe’ check? 
    All this student loan forgiveness is showing is common sense is definitely not a requirement for a college education.

  • arcub68

    I went to school on student loans. I borrowed the money. I benefit from the degree. I would not want the amount of money I borrowed to be forgiven. That would be unfair to the thousands who did not go to school because they could not afford to or did not want to incur student loan debt. I think the Department of Education would have fewer defaulted loans if it lowered interest rates to a point where people could afford to repay the principle. That wouldn’t be a handout. That would be smart business.

    I pay my student loans. It feels like a vice sometimes, but I have a responsibility. The government can have my money in the form of high interest paid on a student loan. However, it might be better to relive some of the interest burden on borrowers and have those millions of dollars free to float the sinking economy we live in.
    Education boosts our economy as an industry. Lending money to students is an industry. Taxing salaries earned as a benefit of education supports thousands of people who don’t work. Sales tax provides revenue for state and local governments. Property taxes paid support schools. Making education affordable for students past, present, and future benefits us all.
    No bail outs, no ‘BOOOOHOOs,’ Simple economics.