Tag Archives: student loan forgiveness

The costs of an undergraduate education in the U.S.

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In last Wednesday’s post, we discussed the recent introduction in the House of Representatives of the Student Loan Forgiveness Act of 2012 by Hansen Clarke (D-MI); a bill that, if enacted, would provide student loan forgiveness, caps on interest rates on Federal student loans, and refinancing opportunities for private borrowers. To provide some background on where this bill came from and why student loan forgiveness should be considered despite the current fiscal environment, we wanted to use today’s post to look at the historical data showing the growing cost of an undergraduate education in the United States.

According to the U.S. Department of Education’s Digest of Education Statistics, the annual cost in 2008-2009 (including tuition, room and board) was $12,804 at public institutions and $32,184 at private institutions. In comparison, in 1980-81, a full-time undergraduate student paid on average (and adjusted to current dollars) $2,372 at public institutions and $5,470 at private institutions. And as the following chart makes clear, the cost of an undergraduate education has increased in every year in between, with no sign of letting up:

This significant rise in the costs of education wouldn’t be such a big problem if median incomes were also rising. But as we showed in a previous post, income levels have been remarkably stable since 1967, with the exception of the richest quintile of the population (see the charts below). For many college grads (e.g., the majority who do not end up in this richest quintile), this means that they exit college facing significant student loan debt and, for those lucky enough to find a job (let alone one in their field or requiring an advanced degree), a low median starting salary that makes it challenging to pay this debt back. (According to a 2011 study by the John J. Heldrich Center for Workforce Development at Rutgers University, median starting salaries for students graduating from four year universities fell from $30,000 in the period 2006-2008 to $27,000 in 2009-2010).

In short, it is this interplay between growing annual costs for college education and stagnant income growth that has led to the numerous proposals in Congress for some form of student loan forgiveness. And for the growing number of recent grads who are behind in debt and unable to do much about it as a result of on low starting salaries, it is certainly an idea that should be given serious consideration.

The Student Loan Forgiveness Act of 2012

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The Student Loan Forgiveness of 2012

The Student Loan Forgiveness Act of 2012 was introduced in the House of Representatives by Representative Hansen Clarke (D-MI) on March 8, 2012 and referred to the Committees on Education and the Workforce , Foreign Affairs and Armed Services. Each of these committees will be holding public hearings and their contact information is available at the end of this post for those interested in obtaining more information directly from them.

The stated purpose of The Student Loan Forgiveness Act of 2012 is “to increase purchasing power, strengthen economic recovery, and restore fairness in financing higher education in the United States through student loan forgiveness, caps on interest rates on Federal student loans, and refinancing opportunities for private borrowers, and for other purposes.” There are several provisions of this act and below, we give an overview of those provisions along with examples of how they would work.

The 10/10 Loan Repayment Plan

This provision, which would be open to all eligible borrowers, creates a new income-sensitive repayment plan that sets annual payment limits at 10% of the amount by which a person’s income exceeds 150 percent of the poverty level. For example, using the federal poverty guidelines for the 48 contiguous states and the District of Columbia, the annual payment limit for a single person with adjusted gross income (AGI) of $35,000 would be calculated as follows:

$35,000 (AGI) – ($11,170 (the poverty level) x 150% (poverty level multiplier)) = $18,245 (the amount by which AGI exceeds 150% of the poverty level). That amount, $18,245, is then multiplied by 10% and divided by 12 to get to the monthly payment, which in this case would be $152.04.

To be eligible for this program, a borrower would have to be willing to allow the holder of the loan to review their income annually and agree to have payments automatically debited from a bank account.

Loan Forgiveness under the 10/10 and Other Repayment Plans

A second provision of The Student Loan Forgiveness Act of 2012 provides for three different forgiveness options, which we describe in more detail below by class of borrower.

Existing Borrowers

Existing borrowers who have already made 120 payments that meet the minimum requirements of the 10/10 Repayment Plan during the ten years prior to the enactment of The Student Loan Forgiveness Act of 2012 would have their entire remaining balance cancelled (this is similar to existing rules for federal employees—although that program lacks the retroactive portion).

Existing borrowers who have less than 120 payments credited to their account meeting the minimum requirements of the 10/10 Repayment Plan would have their outstanding loan balance forgiven once those 120 payments are made.

New Borrowers

For new borrowers, which the Act defines as those who take a new Federal Direct Loan after the enactment of The Student Loan Forgiveness Act of 2012, the 10/10 Repayment Plan will be available; however, the amount of forgiveness cannot exceed $45,520. Although there is a cap on forgiveness for new borrowers, interest rates on these loans are also capped at 3.4%.

Other Provisions

The existing repayment time for public service employees (mentioned above) is reduced to 60 months from the current 120 months, and public service employees are granted the same retroactive rights as other borrowers under The Student Loan Forgiveness Act of 2012. That means that existing public service employees who have made 60 payments that comply with the 10/10 repayment plan will have their outstanding loan balances forgiven.

Additionally, borrowers with private education loans would be able to refinance many of those loans as new Federal Direct Loans and thus be eligible to participate in the provisions of The Student Loan Forgiveness Act of 2012 as “new borrowers.”

In a previous post, we discussed the two sides of this debate and, while we do not usually come down on one side or the other, we do think that Representative Clarke has constructed a bill that will accomplish the goals it sets out to meet while addressing critics of outright forgiveness like Justin Wolfers. The Student Loan Forgiveness Act of 2012 requires borrowers to make the same number of payments required since the inception of the Student Loan program: 120 payments over ten years. Thus, there is a level of responsibility for the borrower. Under this plan, some people, such as those with low debt, high income, or a combination of the two, will easily pay off their entire loan in those ten years. Others with higher debt or lower incomes will not. However, no matter what the case may be, either immediately for those who have already paid or within ten years of graduation for others, they will know that their student loans will be paid in full and the money previously dedicated to those payments can be used as the act states to “start businesses, invest, or buy homes.”

 

The Committee on Education and the Workforce

Phone: 202-225-4527 Fax: 202-225-9571

 

The Committee on Foreign Affairs

Phone: 202-225-5021 Fax: 202-226-7629

 

The Committee on Armed Services

Phone: 202-225-4151 Fax: 202-225-0858

Soaring Student Loan Defaults—What if Anything Can be Done?

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Recent news reports indicate that student loan delinquencies have reached more than $85 billion, with about 14 percent of all student loan holders being delinquent on their debt. The remaining 86 percent are either “paying as agreed,” in deferment, forbearance, or still in school.

Student loan debt is a persistent issue and was one of the clarion calls for the Occupy Wall Street movement. Thie increasing debt load of college students also spawned a national petition sponsored by Robert Applebaum that elicited a response from the Obama Administration last fall and more recently an official student loan complaint site from the Consumer Financial Protection Bureau.

The advocates in favor of student loan forgiveness argue that the stimulative effect on the economy of forgiving student loans would far outweigh any immediate loss from wiping out the debt. Supporters of this idea include Representative Hansen Clarke (D) of Michigan who has a bill pending in the 112th Congress to forgive student loans as a means of stimulus. Others, like Justin Wolfers, call forgiving student loans “the worst idea ever.” Mr. Wolfers’ argument is that, not only is it a bad idea to forgive student loans, it sets a bad precedent. Wolfers writes: “This is a bunch of kids who don’t want to pay their loans back. And worse: Do this once, and what will happen in the next recession? More lobbying for free money, rather than doing something socially constructive. Moreover, if these guys succeed, others will try, too. And we’ll just get more spending in the least socially productive part of our economy—the lobbying industry.”

The argument in favor of forgiving the debt rests primarily on the notion that freeing students from debt will allow them to become bigger consumers and in an economy that has more than 75% of its activity driven by consumer spending, more and bigger spending is important. There is another argument for proponents of forgiving the debt that would seem to have some support in at least one recent study. That argument is that forgiveness of student loans is akin to a tax rebate for people who actually do something “socially constructive” by putting in the time to get a college education.

That support comes from a recent Organisation for Economic Co-Operation and Development (OECD) country note on the United States that shows that college graduates in the United States “generate more public revenue” than college grads in any other OECD country. The OECD calculates that an average male college graduate in the United States contributes about $190,000 more public revenue than non-college educated men. (For women the figure is $90,000, and both are far above the OECD average of about $55,000 in spite of generally higher tax rates in other OECD countries). Thus, one could argue that forgiveness of up to $190,000 in student loan debt would be akin to a tax rebate for people who put in the time to go to college.

We would like to know what you think? Is forgiving student loans a good stimulus plan or is it just a giveaway to a bunch of would be freeloaders?