Recent changes have been proposed for main components of public student loan repayment that would have a significant impact on many borrowers. One politician has proposed a restructuring of the federal government's management of student loan debt, which has largely remained unchanged since Obama was in office. The politician's name and affiliation are omitted from this article to allow you to read through and critique the proposal without being influenced by your own political alignment. The proposal calls for 4 main changes to the current federal student loan lanscape including student loan debt cancellation, no monthly payments for low income earners, lower maximum payments for all others, and no tax burden for non-public service loan forgiveness after 20 years of payments.
I am suggesting that student loan debt be forgiven for all borrowers whose gross annual income is less than $50,000 per year. This way, many of the high debt, high income borrowers aren't provided with $10,000 that they'll likely never benefit from, but those with the most financial strain can still benefit from the student loan forgiveness. In addition the people who are most affected by $10,000 of student loan debt, are those who never received a degree, and therefore never benefited from actually accruing that debt. I understand the argument that these borrowers knew the risks of taking on student debt, and could have likely made better decisions when they were younger to prevent incurring this debt, or not graduating from college in the first place, but I also realize how hard high school students are pushed to attend college. Many high school students are persuaded to attend college by their teachers and guidance counselors, and are convinced they have the ability to achieve unrealistic aspirations, when their past behavior shows no indication that they'll ever be successful in college. I have no argument against helping these people get back on their feet.
Again, this doesn't apply the the high-debt, high-income cohort, who have a much larger discretionary income. This is a good change for those who earn less than $70,000 or $80,000 annually, but with incomes that are much higher than that, many borrowers should be able to continue to make payments at 10% of their discretionary income. I would propose an income cutoff for this piece as well.
If you're like the vast majority of people who don't tightly manage their finances, you would likely end up restructuring that debt to the IRS and paying it back over an additional 10-20 years. I'm not sure how many 70 year olds the government wants repaying student loan debt they incurred in their 20s. The most straightforward way to handle this will be to simply waive the income tax burden. This is how it's currently handled under public service loan forgiveness, and is probably the best template we have for how the 20 year forgiveness will be handled when the first borrowers become eligible. This seems like the most likely change to federal student loan forgiveness in the future.
Let me know your thoughts on these proposed changes in the comments below.
Here's the link for what I'm referring to if you're curious.
Student Loan Debt Cancellation
Under the most recent proposal, student loan debt up to $10,000 would be cancelled for all borrowers. This might be easy to implement and look good on paper, but could be vastly improved upon. First, $10,000 of forgiveness for everyone is too broad. There are many people who would not benefit at all from $10,000 of forgiveness. For example, let's consider an individual who works at a non-profit organization, like a hospital or university, and has more than $100,000 in student loan debt. Unless they make more than $100,000 per year, their best financial decision would be to pay back their student loans under an income-driven repayment plan, and pursue public service loan forgiveness after 10 years of payments. With this repayment strategy, their total student loan balance actually increases each month, because their payment won't be enough to cover the acrruing interest. Forgiving $10,000 right now wouldn't save anyone enough money in the long term, and would do nothing to help the financial strain felt by these individuals. My suggestion for this component would be to place an income cap on the $10,000 of forgiveness.I am suggesting that student loan debt be forgiven for all borrowers whose gross annual income is less than $50,000 per year. This way, many of the high debt, high income borrowers aren't provided with $10,000 that they'll likely never benefit from, but those with the most financial strain can still benefit from the student loan forgiveness. In addition the people who are most affected by $10,000 of student loan debt, are those who never received a degree, and therefore never benefited from actually accruing that debt. I understand the argument that these borrowers knew the risks of taking on student debt, and could have likely made better decisions when they were younger to prevent incurring this debt, or not graduating from college in the first place, but I also realize how hard high school students are pushed to attend college. Many high school students are persuaded to attend college by their teachers and guidance counselors, and are convinced they have the ability to achieve unrealistic aspirations, when their past behavior shows no indication that they'll ever be successful in college. I have no argument against helping these people get back on their feet.
No Monthly Payments and 0% Interest for Incomes Under $25,000 Annually
This is more of a slight tweak to the current income-driven repayment plans, but it's a welcome change. In most cases, a person's repayment would likely be $0 if their income is below $25,000 anyway, but it still requires them to apply for income-driven repayment, and interest still accrues on their loan balance during that time. For someone not pursuing student loan forgiveness, this could be extremely costly. $25,000 is also an appropriate cutoff, because it won't apply to medical residents who start out with lower incomes (~$40,000-$50,000 annually), but who will eventually progress to much higher incomes and should be able to manage their debt repayment. This seems like a helpful addition, and I wouldn't make any changes to this component.For All Other Incomes, Monthly Payments Capped at 5% Discretionary Income
This is fine, but again it's too general. I've seen many people who make more than $25,000 a year, who are still significantly impacted by their income-driven student loan payments, which are usually capped at 10% of their discretionary income. If you're in this situation, you probably don't have issues making regular bill payments or keeping your credit healthy, but it's still common to have a hard time saving up for a house, or fully investing in your 401k. This is the story for many young people, who are struggling with student loan debt, but would also like to be able to afford basic aspirations, like owning their own home, and retiring someday.Again, this doesn't apply the the high-debt, high-income cohort, who have a much larger discretionary income. This is a good change for those who earn less than $70,000 or $80,000 annually, but with incomes that are much higher than that, many borrowers should be able to continue to make payments at 10% of their discretionary income. I would propose an income cutoff for this piece as well.
Student Loan Forgiveness: After 20 years of Repayment Federal Student Loan are Forgiven Without Owing Income Tax
This last point is more a matter of when it happens as opposed to if it happens. It's completely non-nonsensical to tell someone who owes $400,000 in student loan debt that their balance is forgiven, yet they now owe the IRS almost $150,000 in additional income tax. If you're the type of person who is extremely financially diligent and is tightly managing your budget and always planning ahead for your financial future, then you should be fine paying the tax burden, because you would have saved up it over the 20 years of income-driven repayments.If you're like the vast majority of people who don't tightly manage their finances, you would likely end up restructuring that debt to the IRS and paying it back over an additional 10-20 years. I'm not sure how many 70 year olds the government wants repaying student loan debt they incurred in their 20s. The most straightforward way to handle this will be to simply waive the income tax burden. This is how it's currently handled under public service loan forgiveness, and is probably the best template we have for how the 20 year forgiveness will be handled when the first borrowers become eligible. This seems like the most likely change to federal student loan forgiveness in the future.
Conclusion
As someone who values an educated population, and hopes to foster a society that values education, I understand the importance of making college as affordable as possible. Whether you agree with these proposals or not, changes will be coming for federal student loan debt. We can't allow the cost of education to continue increasing at it's current rate, and I foresee major education reforms coming in the future as well. With minor changes to account for income limitations with immediate debt forgiveness, and capped monthly payments, I think the concepts above could really help a large number of people who feel buried by their student loan debt. Overall, the plan laid out would be extremely helpful to many borrowers, and while I would personally rather see the proposal go into effect without my edits, I feel they would provide the greatest amount of benefit to those who need it most.Let me know your thoughts on these proposed changes in the comments below.
Here's the link for what I'm referring to if you're curious.
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