changes in the future for student debt

The Future of Student Loans: Predictions on Forgiveness, Free Tuition and Repayment Plans

Michael Lux Blog 0 Comments

Making exact predictions about the future of student loans is impossible.  There is no way to determine the precise changes that will be made or when they will happen.  However, it is certainly possible to make some educated predictions about what the future holds.

The history of student loan legislation tells us a few things.  First, the more influential groups are the ones most likely to get their needs addressed.  Second, the more severe a problem, the more likely it is that something will be done.  Finally, we know that the easy fixes are much more likely to happen than the challenging ones.

Armed with both a historical context and an understanding of the issues most affecting borrowers, we will predict the following…

Will all Federal Student Loans ever be forgiven?

The problem with across the board student loan forgiveness is that it is extremely expensive.  If the federal government were to wipe out the existing debt, the amount forgiven would exceed $1.5 trillion.

Even though the economic advantages of a “student loan stimulus” would be huge, there seems to be little support outside of student loan circles for this idea.

While forgiveness would help many borrowers, it wouldn’t actually fix the student loan crisis.  As a new generation of college students heads off to school, more debt would be incurred and the problem would appear again.  Future students might even expect that their loans would be forgiven based up prior forgiveness.  This could cause yet another debt bubble, and even higher tuition prices.

Unless federal student loan forgiveness for all is accompanied by a plan to address future students, the odds of it ever happening are extremely low.

Will the many Income-Driven Repayment Plans be combined into one?

The variety of federal student loan repayment plans makes things confusing for many borrowers.  As a result, many have proposed the creation of one single income-driven repayment plan to make things less complicated.

The problem with this approach is that the one plan selected would either have to be better than all of the current plans, or the existing plans would have to be kept in effect for all current borrowers.  This is because the current repayment plans are written into the student loan contract that borrowers sign with the government.  Eliminating these plans would likely require replacing them with something better.

For one single income driven repayment plan to replace all of the others, it would have to have the low payment requirements of PAYE, the favorable interest treatment of REPAYE, and the protections for married borrowers of IBR.  Such a plan would make things much easier to understand for borrowers and save many of them a great deal of money.

Over the years, many new repayment plans have come along.  There is a good chance that a new income-driven plan will be created that will replace all of the other existing plans.  Such a plan is likely far off in the distance, but it is a very real possibility.

Will forgiven student loans always be taxed?

The taxation of student loan forgiveness is often call the forgiveness tax bomb.

The IRS treats forgiven debt as income.  With most forms of student loan forgiveness, if the lender forgives $50,000, the government will tax the borrower as though they made an extra $50,000 in that particular year.  The notable exception is public service loan forgiveness.

This is one rule that seems ripe for change.  If the IRS treats forgiven credit card debt as income, such a move makes sense because that individual comes out ahead because of the forgiveness.  Forgiven student debt seems like it should work differently.  Grants and scholarships are not treated as income for tax purposes, so if a student loan is converted after the fact to essentially a grant or scholarship, why should it be taxed?

Many of the student loans that are currently forgiven happen because of death or permanent disability.  Because these borrowers are already facing a difficult time, imposing a tax seems cruel and unnecessary.  As a result of the hardship the tax can cause, there is a wide range of support to change the taxability of student loan forgiveness.

We still suggest borrowers set aside money to prepare for taxation of any forgiven student debt, but there is a very real possibility that the tax bill may not ever come due for many borrowers.

Will employers get a tax break for helping out with employee student loans?

Several representatives in Congress have proposed plans that would allow employers to make student loan payment contributions and get a tax break.  Like money put in a 401(k), student loan payment assistance wouldn’t be treated as additional income.  This would allow employers to offer another benefit to attract top talent and it would help borrowers pay off their debt faster.

This plan has support from a number of large financial services companies that would profit from such a system.  It would also be very popular with many voters.  For this reason, we think it is highly likely that a tax break for student loan contributions becomes a reality.  This could be the next big change coming to student loans.

Will the government help borrowers with private loans?

The most dire student loan situations are normally caused by private lenders.  Borrowers who don’t make enough money to keep up with their payments face serious trouble.  Private lenders offer no repayment plans based upon income, and borrowers who fall behind often face devastating financial consequences.

One fix that could help many borrowers would be to restore bankruptcy protections to student loans.  This idea would force lenders to work with borrowers a little bit more, but it could also result in higher interest rates and more difficulty qualifying for a private student loan.  Though there is support for restoration of bankruptcy rights for student loans, the lenders the successfully lobbied for the changes remain influential to this day.

The other hurdle to federal involvement with private loans is the trillions of dollars in federal loans.  The federal government already is dealing with many borrowers struggling to keep up.  Allowing borrowers to move their debt over to federal student loans would create many more struggling borrowers for the government.  Such a change seems unlikely.

Is free tuition a possibility?

Any long-term solution to the student loan crisis has to address the high cost of college.  Each year, more and more student debt is created.  Each year, the student debt crisis gets worse.

Some states are already experimenting with free college and it has the potential to gain popularity.  The genius of this approach is that all college doesn’t need to be free.  There just needs to be a meaningful opportunity for higher education.  If private colleges want to keep getting students, they will have to show they are worth the investment.  By creating competition to drive college prices down, the cost of education will better reflect the value of education.  When this happens, the student debt crisis will be well on its way to becoming history.

There is support for a nationwide free tuition plan and it is being discussed in many states.  Free college is a real possibility, but it is far from being a sure thing.

Final Thoughts

Those that speak up will be the ones who are heard.

Student loan borrowers may not have the money to hire lobbyists, but we certainly have large numbers.  Show up at the polls every election and make sure your elected representatives know how important student loan issues are in your home.

The more vocal student loan voters are as a group, the better things will become.