Student loan forgiveness programs like Income-Driven Repayment and Public Service Loan Forgiveness are very popular with borrowers. These programs provide an excellent lifeline to borrowers in need. However, the unintended consequences of student loan forgiveness present major concerns from a policy standpoint.
This article will focus on the concerns of the taxpayer rather than that of the individual borrower. This site has previously addressed the reasons individual borrowers should be wary of student loan forgiveness programs.
The Cost of Student Loan Forgiveness
The federal government holds well over a trillion dollars in student debt.
Many borrowers will pay off their student loans in full. However, all federal loans are eligible for multiple varieties of student loan forgiveness.
Based upon current enrollment numbers, the Public Service Loan Forgiveness (PSLF) program will cost well over $20 billion dollars. However, this number could swell considerably as more students enroll.
Plans calling for massive debt cancellation may be unlikely to become a reality, but they would cost over a trillion dollars.
While forgiveness programs might produce some benefits to the broader economy, student loan forgiveness still comes with a hefty price tag.
Borrowers Mistakenly Assuming Eligibility
Looking beyond the numbers, one issue with the current student loan forgiveness programs is that many borrowers mistakenly assume they are eligible.
When the first cohort of borrowers applied for PSLF, an astonishing 99% were rejected. At the time the 99% rejection rate circulated, we speculated that there were a number of reasonable explanations for the rejections and that approval rates should go up. Approval rates did go up, but approximately 98% of applicants are still being rejected.
The high rejection rates demonstrate a critical failure of the loan forgiveness program. The disconnect between borrower expectations and actual outcomes is evidence that there is a major issue with the policy.
Is Student Loan Forgiveness Fair?
Student loan forgiveness programs and proposals introduce several questions of fairness.
- Is student loan forgiveness fair to the families and borrowers that worked hard to prevent or eliminate student debt?
- Does student loan forgiveness disproportionately benefit higher-income households?
- Is student loan forgiveness fair to the taxpayers who didn’t attend college?
In the case of Public Service Loan Forgiveness, it would be hard to argue that the program isn’t fair. Qualifying borrowers have to commit to at least a decade of non-profit work. These borrowers fill important needs and forgo the opportunity to earn more in the private sector.
Forgiveness proposals that call for a mass cancellation of student debt are more challenging to justify. The non-partisan Brookings Institute found that Elizabeth Warren’s plan to forgive $50,000 of student debt for all borrowers would disproportionately benefit higher-earning households that don’t need the help.
Unintended Consequences on College Costs
As previously discussed, many borrowers think they are eligible for forgiveness only to be rejected.
Presumably, many of these borrowers took out loans during college under the assumption that they would eventually qualify for forgiveness. One of the hidden dangers of forgiveness programs is that students may make risky borrowing decisions during college. The existence of student loan forgiveness programs arguably creates a moral hazard.
Dangerous borrower impacts more than just the borrower. A study by the Federal Reserve Bank of New York found a causal relationship between expanded federal financial aid and tuition increases. In other words, when students can borrow more money to pay for school, the school can charge more for tuition. If student loan forgiveness programs create more student loan borrowers, tuition for all students will increase.
As the New York Fed noted, the benefit of expanding federal aid programs is that it expands access to college. The challenge from a policy perspective is balancing the need to increase access to college with the desire to keep tuition prices in check.