To dampen the inflationary impact of student loan forgiveness, President Biden is reportedly considering tying it to the restart of loan payments. But Biden could go one step further and help ease borrowers out of the payment pause by requiring the two-thirds of borrowers (PDF) who will need to resume paying their loans to reconnect with their servicers.
Some evidence shows servicers and borrowers aren’t ready for the payment restart. According to a recent Government Accountability Office report, the Department of Education (ED) is missing email addresses (its primary form of communication) for 13 percent of all borrowers and 25 percent of those in default.
Borrowers who aren’t in touch with their servicer are unlikely to resume payments, which puts them on the road to delinquency and default. Before the pandemic, more than a million borrowers defaulted on their loans every year, leading to negative consequences such as credit score penalties and wage garnishment. This default crisis has hit Black borrowers the hardest, in part because of the racial wealth gap.
Transitioning to a system of automatic income-based repayment, as is the norm in countries like Australia, would be ideal, but Congress has shown little interest in making such a move. Instead, policymakers will need to figure out how to make the current system work as well as possible.
Coupling forgiveness with the payment restart
To grab borrowers’ attention as payments resume, Biden could make the $10,000 in loan forgiveness contingent on borrowers connecting with their servicer and resuming payments—which, for some, will mean verifying their income is low enough to make $0 payments under an income-driven repayment plan.
In practice, the 15 million borrowers who owe less than $10,000 wouldn’t have to do anything—their entire balance would be erased. This forgiveness would significantly help the 10.3 million borrowers in delinquency or default, as 41 percent would see their full balance wiped out (PDF).
The borrowers who would have to take action to receive forgiveness are the 45 million who currently owe more than $10,000. Biden could announce that all these borrowers must call their servicer and make a plan to restart payments (which, for some borrowers, might mean switching to a plan with lower payments) to receive forgiveness. In this scenario, the administration will need to aggressively monitor servicers, given the sector’s troubled history and recent turnover.
Normally, administrative burdens are best avoided, but this approach could bridge the desire to make forgiveness as easy as possible with the need to reach borrowers who might otherwise end up in default. The proposed $10,000 amount is a significant sum for most borrowers, and forgiveness will get the attention of many. There’s also little downside to making forgiveness contingent on resuming payments because borrowers who don’t contact their servicers will unfortunately default, so reducing their balance by $10,000 will have a limited impact (e.g., the same percentage of wages is garnished regardless of the amount owed).
Will forgiveness reduce monthly payments?
Forgiveness can help borrowers resume payments by reducing the size of those payments, but whether that happens will depend on how ED implements forgiveness. For borrowers who make a fixed payment every month, ED could keep payments the same, which would mean that borrowers pay off their loans sooner, or it could reduce payments but keep the number of payments the same (e.g., a borrower who is slated to pay $200/month for the next 10 years could instead pay $117/month).
For borrowers on income-driven repayment plans, payments would most likely remain the same because they are based on income and not the amount owed (though many borrowers would pay off their loan more quickly because of the lower balance).
Borrowers will most likely have different preferences. Those with small balances may wish to repay quickly, but those with larger balances may prefer the lower monthly payment. A key decision facing ED is whether to let borrowers choose or to set the same terms for everyone, as complexity can make loan forgiveness programs more difficult to implement.
A fresh start for borrowers in default
ED plans to give the millions of borrowers currently in default a “fresh start” on their loans by allowing them to resume repayment in good standing. But this fresh start may quickly turn sour for many borrowers. Historically, 41 percent of defaulted borrowers who rehabilitated their loans redefaulted within five years.
Tying $10,000 in forgiveness to the resumption of payments offers an opportunity to reconnect borrowers and servicers. This solution is not as effective as fixing the structural problems with student lending would be, but is certainly superior to implementing these two policies in isolation.
This approach also mitigates the risk of making the loan program even more unmanageable. With blanket debt cancellation, current and future students could believe that more forgiveness is coming and delay payments or borrow more with the expectation that some or all of their debt will be forgiven.
But by tying forgiveness to the resumption of payments, the Biden administration could make clear that this action is not representative of how it plans to run the loan program; rather, it is a one-time initiative to support borrowers as they resume payments for the first time after more than two years of a pandemic.