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US to forgive at least $108B in student debt in coming years

The government is on track to forgive at least $108 billion worth of student loan debt in coming years. BGC Partners Chief Strategist Steve Cortes with more.

 

The federal government is on track to forgive at least $108 billion in student debt in coming years, according to a report that for the first time projects the full cost of plans that tie borrowers’ payments to their earnings.

The report, to be released on Wednesday by the Government Accountability Office, shows the Obama administration’s main strategy for helping student-loan borrowers is proving far more costly than previously thought. The report also presents a scathing review of the Education Department’s accounting methods, which have understated the costs of its various debt-relief plans by tens of billions of dollars.

Senate Budget Committee Chairman Mike Enzi (R., Wyo.) ordered the report last year amid a sharp increase in enrollment in income-driven repayment plans, which the Obama administration has heavily promoted to help borrowers avoid default. The most generous version caps a borrower’s monthly payment at 10 percent of discretionary income, which is defined as any earnings above 150 percent of the poverty level.

That formula typically reduces monthly payments of borrowers by hundreds of dollars. Any remaining balance is then forgiven after 10 or 20 years, depending on whether the borrower works in the public or private sector.

Congress approved the plans in the 1990s and 2000s, and President Barack Obama has used executive actions to extend the most-generous terms to millions of borrowers.

Enrollment in the plans has more than tripled in the past three years to 5.3 million borrowers as of June, or 24% of all former students who borrowed directly from the government and are now required to be making payments. They collectively owe $355 billion.

The GAO estimates that $137 billion of that figure won’t be repaid. Most of it—$108 billion—will be forgiven because of borrowers fulfilling their obligations under income-driven repayment plans. The $108 billion only covers loans made through the current school year, however. The overall sum could continue to grow alongside enrollment increase.

The other $29 billion will be written off because of disability or death, the GAO projects, the only other circumstances under which the government takes a loan off its books. The government can garnish wages and Social Security checks for those in default.

Supporters say the plans offer a lifeline to borrowers who are unemployed or earning little, while the Obama administration has credited the programs for leading to a reduction in the number of new graduates defaulting on their loans. Supporters also point out that under current law, any amount forgiven would be taxed as ordinary income for private-sector workers, limiting the benefits for individuals. Public-sector workers aren’t taxed on forgiveness.

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