Student Loan Debt Forgiveness & Elimination – Top 4 Pros and Cons

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Student loan debt is frequently in the news as politicians debate solutions to the rising costs of college that lead to sometimes crippling amounts of debt. For those with outstanding student loans, such debt can be discharged in two ways: forgiveness and bankruptcy.

Americans owed a collective $1.71 trillion in student loan debt as of Dec. 2020, according to the Federal Reserve. By comparison, in Dec. 2010, Americans owed about $845 billion in student loan debt, which means student loan debt has increased by about 102% over the last ten years. [1] [2]

According to the US Department of Education, 42.9 million Americans held outstanding student loan debt at the end of 2020, or about 17% of the US adult population. 75% of students with school-loan debt went to 2- or 4-year colleges, and the remaining 25% also borrowed for graduate school. About 6% of people with school loan debt owe more than $100,000–this group accounts for about a third of all outstanding student loan debt and usually encompasses both college as well as graduate school expenses. Approximately 40% leave college with between $20,000 and $100,000 in outstanding student loans. About 25% leave college with less than $20,000 in debt, and 30% leave with no student loan debt. [3] [4]

The New York Federal Reserve reported that about 11% of student loan debt payments were either late or in default (270 or more days late) at the beginning of 2020. By all indications, this debt, and the late payments and defaults as well, will continue to rise as college costs outpace average incomes. [5] [6] [7]

Some have proposed that the US federal government forgive some or all existing student loan debt in order to relieve the financial pressure on individuals and the country. Student debt forgiveness proposals range from a discharge of $10,000 per borrower (which would forgive the entire debt bills held by about 15 million borrowers) to $50,000 per borrower (which would forgive the entire debt bills held by about 36 million borrowers) to plans that would forgive all outstanding student loan debt. Each plan would include forgiveness for those with late or in-default accounts, as well as partial debt forgiveness for many more borrowers. [8]

Others have proposed making student loan debt easier to discharge through bankruptcy. Credit card debt, medical bills, auto loans, and even gambling debt can be canceled by declaring bankruptcy, but due to a 1976 federal law, discharging student loan debt is much more difficult. Private student loans have also been protected from discharge in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. According to the US Department of Education, people who declare Chapter 7 or Chapter 13 bankruptcy can have student loan debt canceled but only if a court finds there is evidence of “undue hardship.” Getting student loans discharged is so difficult and rare, however, that many lawyers advise clients not to try: less than 0.5% of students clear their debts through bankruptcy. [9] [10] [11] [12] [13]

Should Student Loan Debt Be Eliminated via Forgiveness or Bankruptcy?

Pro 1

Student loan debt is slowing the national economy. Forgiveness would boost the economy, benefiting everyone.

Student loan debt slows new business growth and quashes consumer spending. A Federal Reserve Bank of Philadelphia study found “a significant and economically meaningful negative correlation” between student loan debt and the falling rate of new small businesses. [14] [15]

Student loan debt can make getting a business (or any other) loan difficult, meaning people with student loan debt are less likely to be able to open their own businesses. And the effects snowball from there: fewer small businesses means fewer jobs and less economic output and consumer spending, which in turn means lower national income and slow economic growth for the country. [15]

As William Foster, Vice President Senior Credit Officer in Moody’s Sovereign Risk Group, explained, “U.S. real GDP could be boosted on average by $86 billion to $108 billion per year, [which is] quite a bit… That’s if you had total loan forgiveness.” Though Foster stated total forgiveness isn’t necessary to see a positive impact. [16]

When everyone can’t participate in the economy, the whole economy suffers.

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Pro 2

Student loan debt has disproportionately hurt black students. Forgiveness could help rectify racial inequity.

Black college students borrow more than their white counterparts due to family income, generational wealth, parental education, and the types of colleges attended. [17]

According to Judith Scott-Clayton, PhD, Senior Research Scholar with the Community College Research Center at Columbia University, interest rates and graduate school loans leave black graduates with twice as much debt as white graduates, almost $53,000 four years after graduation. Scott-Clayton also noted black graduates default on student loans at a rate of 21% while white graduates default at 4%. The disparity, she explains, is the result of most black students who default having attended predatory for-profit colleges that have overall higher default rates for all students. [17]

Ashley Harrington, JD, Federal Advocacy Director and Senior Counsel at the Center for Responsible Lending, explained the catch-22 in which students of color often find themselves: “The student debt crisis is absolutely a racial justice issue. For brown and Black folks, they often need to get more education to get the same salaries and positions that white folks can get with less education and that means how do they do that? They have to take on more debt… [The debt is then] preventing wealth building, This is something that is impacting not just individuals, it’s impacting their families, their communities.” [18]

An Aug. 2020 Roosevelt Institute study concluded, “[W]hile individual white borrowers at the median stand to gain the most in absolute dollars from student debt cancellation, the relative gains for Black borrowers are much larger and the greater proportion of Black borrowers means that Black wealth overall would experience more growth as a result. Given the many advantages wealth confers in the contemporary U.S. context, the substantial increase in Black net worth is a very significant positive contribution of student debt cancellation, one with potentially transformative positive impacts for Black families overall.” [19]

The help provided by student loan debt forgiveness exceeds simple dollar amounts.

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Pro 3

Student loan debt has infantilized a generation or more of Americans, preventing them from achieving milestones such as getting married, buying a house, or saving for retirement. Discharging such debt would help foster a healthier, most productive, more socially constructive citizenry.

For women with bachelor’s degrees, each increase in $1,000 of student loan debt decreased the odds of marriage by 2% per month in the four years after graduation. [14]

Student loan debt prevented about 400,000 people from buying homes between 2005 and 2014, which accounted for 25% of the decrease in home-ownership. Every $1,000 increase in student loan debt lowered the home ownership rate by 1.5% for those who attended four-year colleges. [14] [20]

Further, student loan debtors save half as much for retirement by age 30 as those without debt. [14]

An Aug. 2020 Roosevelt Institute study explained, “The positive effects of an evidence-based student debt cancellation policy for individuals and households extend far beyond the immediate need of removing burdensome debt. The ramifications for financial and personal well-being, credit, job stability and satisfaction, homeownership earlier in the life course, capacity to build wealth for emergencies, human capital investments, family stability, and accumulating wealth can multiply throughout a person’s life.” [19]

Choosing to go to college to compete in the job market shouldn’t prevent people from living the American dream.

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Pro 4

Denying student loan debtors the benefits of bankruptcy--benefits that all other debtors have access to--is unfair.

The US Supreme Court said in 1915 that the benefits of bankruptcy allow debtors to “start afresh free from the obligations and responsibilities.” Famous business leaders from Henry Ford to President Donald Trump have used bankruptcy for a fresh start. [21]
[22]

Car loans, credit card charges, medical bills, and even gambling debts can be discharged in bankruptcy; not allowing educational debt to be discharged is unfair. Mark Huelsman, Senior Policy Analyst at Demos, wrote, “[I]n a world where most students must borrow for a credential, borrowers should receive the same failsafe protections on these loans as they do on any other consumer loan.” [13] [23]

Students who didn’t understand the consequences of taking out big loans at age 18 or who were misled about future job prospects can be saddled with six-figure debt for decades. [24] [25]

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Con 1

Student loan forgiveness is an abuse of the loan system. People must be held responsible for their personal economic choices.

A 2020 survey found 46% of Americans believe student loan forgiveness is unfair to those who have paid off their loans, and 39% believe it unfair to those without loans. [26]

Matthew Noyes, columnist at Lone Conservative, who noted the sacrifices he had to make to pay off his $27,000 in student loans, explained, “Taking out a loan is a choice, and personal responsibility shouldn’t be supplanted by taxpayer bailouts. ‘Canceling’ student loans means penalizing people like me for honoring my word and repaying the debt I chose to accept.” [27]

Noyes states that the forgiveness debate is steeped in the idea that “people are entitled to a college education and other peoples’ hard work. It codifies in policy the idea that adults are not responsible for their own actions (i.e. taking on debt). In a free society, I am not entitled to a college education and neither is anyone else.” [27]

Further, less than 20% of American adults have student loan debt. Is it fair to offer relief to people who over-stretched their financial capabilities to go to college and not those without student loans debt but who may still struggle financially? [28]

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Con 2

Student loan debt forgiveness would disproportionately help rich or more financially secure college graduates.

Constantine Yannelis, PhD, Professor of Finance at the University of Chicago, found, “Any policy that is a universal loan forgiveness policy or a capped forgiveness policy — say forgiving debt up to $50,000 — is going to give most of the dollars in forgiveness to upper-income individuals… Basically, most of the benefits will end up accruing to upper-income individuals.” [29]

As journalist Emma Ayers adds, “Students from families earning more than $114,000 a year borrow at the same rate as the lowest-income students — and they take out loans nearly twice as large. Students with advanced degrees — lawyers, doctors and others — account for 40% of all student debt [according to estimates by American Progress]. And the top 25% of income-earning households hold almost half of student loan debt… Student forgiveness would largely be a hand up to the better off.” [30]

Moreover, as Adam Looney, PhD, Nonresident Senior Fellow at the Brookings Institute, pointed out, student loan forgiveness only benefits people who went to college: “More than 90 percent of children from the highest-income families have attended college by age 22 versus 35 percent from the lowest-income families. Workers with bachelor’s degrees earn about $500,000 more over the course of their careers than individuals with high school diplomas That’s why about 34 percent of all student debt is owed by borrowers in the top quartile of the income distribution and only 12 percent owed by the bottom 25 percent. Indeed, the majority of all student debt is owed by borrowers with graduate degrees.” [31]

People who borrowed for masters degrees and PhDs hold 56% of student loan debt, according to Brookings Institute estimates. Holding a masters or doctorate degree is also correlated to higher incomes. People with master’s degrees earn about $2.7 million over a lifetime, more than twice what those with high school diplomas earn ($1.3 million). PhD holders earn $3.3 million more over a lifetime. [32] [33]

Why should the federal government subsidize the incomes of people with high-earning degrees?

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Con 3

Discharging student loan debt would only be a temporary bandage for the much larger problem of inflated college costs.

The US already has several student loan forgiveness programs and yet we’re still in a student loan debt crisis.

People who work in public service jobs can have their loans forgiven after 120 loan payments. Some teachers can have up to $17,500 forgiven after five years of teaching. Nurses can have up to 60% of nursing education loans forgiven, followed by another 25%. [8]

Income-driven repayment (IDR) plans are available that allow loans to be forgiven after 20-25 years of income-based payments. Military members can have up to 100% of their loans forgiven. Medical doctors and lawyers have multiple options for forgiveness. AmeriCorps service members can have 100% of their loans forgiven. [8]

Betsy Mayotte, President and founder of the Institute of Student Loan Advisors, noted, “To me the free or debt-free college proposals hold more weight [than loan forgiveness], as they address the illness itself rather than just the symptoms. Don’t get me wrong — if we could find a way to do both, we should — but reducing the debt consumers have to take out in the first place would be the thing that would have the longer-lasting benefit to the economy.” [15]

The US needs a solution to outsized college costs that cause students to take out loans in the first place, rather than a temporary solution that does nothing to prevent the next generation from accruing similar debt.

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Con 4

Student loan discharge via bankruptcy would allow borrowers to abuse the loan system and encourage colleges to increase tuition.

Making it easier to discharge loans would give people an incentive to take out loans with no intention of paying them back, or to borrow more than they need. Which, in turn, could cause them to seek bankruptcy without fully realizing the negative long-term consequences on their credit scores and other aspects of their lives. [34] [35] [36]

New college graduates rarely have significant assets to surrender in bankruptcy, so they have less incentive to avoid bankruptcy. [37]

Student debt elimination through bankruptcy would encourage increased borrowing, and more borrowing leads to higher tuition. Abigail Hall Blanco, PhD, Assistant Professor of Economics at the University of Tampa, said, “loan forgiveness would be one giant subsidy, creating perverse incentives for both schools and students. If schools knew the government would forgive the cost of their students’ education, they’d face no incentive to cut costs to keep tuition down.” [38] [39]

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Discussion Questions

1. Should the US federal government forgive student loan debt? How much? For whom? Explain your answers.

2. Should student loan debt be easier to discharge in bankruptcy? Explain your answer.

3. Explore the pros and cons of other programs to resolve the student loan debt issue, such as targeted relief programs, employment assistance, or aid to colleges in order to lower tuition. Explain why your chosen programs are better or worse than debt forgiveness.

Take Action

1. Analyze Senator Elizabeth Warren’s student loan forgiveness policy proposal.

2. Consider current student loan debt forgiveness programs at the US Department of Education.

3. Explore Adam Looney’s position that targeted student loan relief is a better policy than forgiveness.

4. Consider how you felt about the issue before reading this article. After reading the pros and cons on this topic, has your thinking changed? If so, how? List two to three ways. If your thoughts have not changed, list two to three ways your better understanding of the “other side of the issue” now helps you better argue your position.

5. Push for the position and policies you support by writing US national senators and representatives.

Sources

1.Board of Governors of the Federal Reserve System, “Consumer Credit - G.19,” federalreserve.gov, Apr. 7, 2021
2.Abigail Johnson Hess, “U.S. student debt has increased by more than 100% over the past 10 years,” cnbc.com, Dec. 22, 2020
3.US Department of Education Federal Student Aid, “Federal Student Loan Portfolio,” studentaid.gov, 2020
4.Dudley L. Poston, Jr., “3 Ways That the U.S. Population Will Change over the Next Decade,” pbs.org, Jan. 2, 2020
5.New York Federal Reserve Center for Microeconomic Data, “Quarterly Report on Household Debt and Credit 2020: Q1,” newyorkfed.org, May 2020
6.US Department of Education Federal Student Aid, “Coronavirus and Forbearance Info for Students, Borrowers, and Parents,” studentaid.gov (accessed May 6, 2021)
7.Carmen Maldonado, “Price Of College Increasing Almost 8 Times Faster Than Wages,” forbes.com, July 24, 2018
8.Hanneh Gundersen, “Federal student loan forgiveness update: See where the latest policies and proposals stand,” msn.com, May 5, 2021
9.Ashlee Kieler, “You Can’t Discharge Your Student Loans in Bankruptcy Because of Panicked 1970s Legislation,” consumerist.com, Mar. 17, 2015
10.John O’Connor, “Make Student Loan Debt Dischargeable in Bankruptcy… Again,” natlbankruptcy.com, Feb. 28, 2014
11.Federal Student Aid, “Discharge in Bankruptcy,” studentaid.ed.gov (accessed Jan. 4, 2018)
12.Bill Fay, “Bankruptcy & Student Loans,” debt.org (accessed Jan. 4, 2018)
13.Brett Greene, “The $1 Trillion Student Loan Debt Bubble: An Interview with Robert Applebaum,” huffingtonpost.com, Nov. 11, 2011
14.Christopher Ingraham, “7 Ways $1.6 Trillion in Student Loan Debt Affects the U.S. Economy,” washingtonpost.com, June 25, 2019
15.Elyssa Kirkham, “What Are the Effects of Student Loan Debt on the Economy? Experts Share Their Thoughts,” studentloanhero.com, Oct. 28, 2019
16.Chris Arnold, “Forgiving Student Debt Would Boost Economy, Economists Say,” npr.org, Nov. 25, 2019
17.Judith Scott-Clayton, “Shrinking Racial Gaps in Student Debt and Default: Recommendations to Congress,” ccrc.tc.columbia.edu, Mar. 6, 2019
18.Cristina Silva, “The Student Debt Crisis Is Crushing Black Americans. Here's How Loan Forgiveness Could Help,” usatoday.com, Apr. 15, 2021
19.Raphaël Charron-Chenier, Louise Seamster, Tom Shapiro, and Laura Sullivan, “Student Debt Forgiveness Options: Implications for Policy and Racial Equity,” rooseveltinstitute.org, Aug. 2020
20.Knowledge @ Wharton, “The Student Debt Crisis: Could It Slow the U.S. Economy?,” knowledge.wharton.upenn.edu, Oct. 22, 2018
21.US Supreme Court, Williams v. United States Fid. & Guar. Co., justia.com, 1915
22.Ethan Trex, “7 Wildly Successful People Who Survived Bankruptcy,” mentalfloss.com, Nov. 6, 2015
23.Mark Huelsman, “Want to Help Struggling Student Loan Borrowers? Start with Bankruptcy Reform,” demos.org, May 31, 2017
24.Jeffrey J. Selingo, “Did Your College Mislead You About Job Prospects? It Might Become Far Easier to Have Your Loans Forgiven.,” washingtonpost.com, July 20, 2016
25.Megan Thompson, “Are You Older Than 60 and Paying off Student Loans? Tell Us Your Story.,” pbs.org, Sep. 3, 2017
26.Rebecca Safier, “50% Say Mass Student Loan Forgiveness Unfair to Former Borrowers: Survey,” studentloanhero.com, Apr. 29, 2020
27.Matthew Noyes, “‘Canceling’ Student Debt is Unfair to Graduates Like Me Who Sacrificed to Pay Off Our Loans,” fee.org, Jan. 26, 2021
28.Zack Friedman, “Why Student Loans Should Not Get Cancelled,” forbes.com, Feb. 24, 2021
29.Knowledge @ Wharton, “How Student Loan Forgiveness Could Increase Inequality,” knowledge.wharton.upenn.edu, Dec. 15, 2020
30.Emma Ayers, “I Sold Bibles to Keep My Student Debt Low. Turns out, I Didn't even Need That Degree,” usatoday.com, Dec. 3, 2020
31.Adam Looney, “How Progressive Is Senator Elizabeth Warren’s Loan Forgiveness Proposal?,” brookings.edu, Apr. 24, 2019
32.Michelle Cheng, “What Will Canceling $10,000 in Student Debt Really Do?,” qz.com, Mar. 2, 2021
33.Anthony Carnevale, Stephen J. Rose, and Ban Cheah, “The College Payoff: Education, Occupation, Lifetime Earnings,” 2011
34.Kelsey Sheehy, “Undergrads Blow It with Student Loan Refunds,” usnews.com, July 24, 2013
35.Mike Brown, “Spring Break Student Loan Study,” lendedu.com, Mar. 8, 2017
36.Federal Student Aid, “Understanding Delinquency and Default,” studentaid.ed.gov (accessed Jan. 2, 2018)
37.Rajeev Darolia, “Should Student Loans Be Dischargeable in Bankruptcy?,” brookings.edu, Sep. 29, 2015
38.Grey Gordon and Aaron Hedlund, “Accounting for the Rise in College Tuition,” nber.org, Feb. 2016
39.Abigail Hall Blanco, “Don’t Forgive Us Our Debts: The Case against Student Loan Forgiveness,” insidesources.com, Apr. 14, 2015