Though we are early in the Democratic primary process, at this point, Bernie Sanders the frontrunner to secure the Democratic nomination.
For many student loan borrowers, this comes as an exciting development. Bernie Sanders has promised to eliminate all existing student loans — both federal and private.
Sanders may have a long way to go before he can deliver on his debt cancellation promises, but a Sanders presidency is looking like a real possibility. Should these developments impact how student loan borrowers handle their debt while the election unfolds?
Could Bernie Sanders forgive all federal student loans?
If elected, Sanders could conceivably forgive all federal student loans with an executive order. The ability to cancel all federal loans via executive order is significant because it means he could deliver on this aspect of his promise without having to get legislation through Congress.
However, such a move is far from a certainty. First of all, Sanders hasn’t explicitly stated that he is willing to forgive the federal debt via executive order. To date, only Elizabeth Warren has promised federal debt elimination via executive order.
Secondly, even if Sanders were willing to bypass Congress, there is some debate as to whether or not the order would survive the inevitable lawsuits in opposition.
Finally, there is a strong argument to be made that canceling federal loans could be a mistake if college prices are not addressed first. The Sanders plan calls for free public college in addition to student loan forgiveness. Making public college free will require an act of Congress. Sanders may decide that free tuition is a necessary first step before handling the existing debt issues.
What can Berne Sanders do about private loans?
There is no debate about Sanders options with existing private student loans. He will need Congress to approve funding to pay off the existing private debt. This would be very expensive legislation.
Even though borrowers owe more money to the federal government than they do to private lenders, it would arguably be easier for the government to handle the cost of the federal loans. With federal student loans, the government would be eliminating a debt that it is owed, meaning that the blow to the budget isn’t immediately felt — it is spread out over many years.
Eliminating private loans would require the government to spend a ton of money upfront to pay off the existing loans. This expenditure would be a huge cost in the year the loans are forgiven.
The subtle distinction in the mechanics of debt cancellation is a key reason why we think forgiveness of federal loans is more likely than forgiveness of private loans.
What are the chances that Sanders can cancel any student debt?
The odds of student debt elimination are increasing, but it is still a long shot. The early part Democratic primary has gone according to plan for Sanders. However, there are many steps between a strong early showing and delivering on a specific promise.
Sanders would need to:
- Win the Democratic Primary – Right now, he is the front-runner, but 47 states still haven’t voted, so there is a long way to go.
- Beat Donald Trump in the general election – Trump has shown a willingness to win at all costs, and it could be a very ugly campaign. Additionally, the incumbent tends to do well when the economy is strong, which could be good news for Trump.
- Use some of his political capital to cancel debt – Candidates for office make many promises, but delivering on all of them is impossible. As a result, a President Sanders would have to prioritize his goals, and he may decide that student debt forgiveness takes a backseat to healthcare reform or climate change legislation.
Getting rid of private student loans would require even more. In addition to the previous list, Sanders would need:
- Democrats to keep the House of Representatives – A Democratic majority in the House is essential for getting student debt cancellation approved.
- Democrats to take the majority in the Senate – Right now Republicans control the Senate, and only 1/3 of the 100 seats are up for election. Current Majority Leader Mitch McConnell would almost certainly block bills to forgiven student loans.
- Nearly unanimous support from Democrats – Not all Democrats have come out in favor of canceling existing student loans. Of the candidates running for president, only Warren and Sanders have voiced their support. Even with a majority in both chambers of Congress, getting approval could be difficult.
In short, the forgiveness of all federal student loans looks like a realistic possibility should Sanders get elected. Private loan elimination would still be highly unlikely, even if Sanders were to win.
What should I do right now with my student loans if I think Sanders will win?
A Sanders presidency could dramatically change life for student loan borrowers. Those that think he has a good shot at winning the election may want to take immediate steps to maximize any potential student loan benefits.
– Step #1: Get the lowest payments possible on your federal loans.
Signing up for an Income-Driven Repayment (IDR) plan is an excellent way for most borrowers to secure lower monthly payments. The IDR plans are also eligible for various student loan forgiveness programs, so if Sanders doesn’t cancel federal student loans, borrowers will still be making progress towards other forms of student loan forgiveness.
Some might argue that a deferment or forbearance is the best route, but due to the high cost of compounding interest and interest capitalization, plus the uncertainty of cancelation, suspending payments is both risky and expensive.
– Step #2: Refinance private loans but don’t touch federal student loans.
Because it is possible thatfederal student loans may be forgiven, but private student loans remain, borrowers counting on Sanders should avoid refinancing their federal loans with a private lender.
However, refinancing existing private loans with a private lender could be a solid option. Borrowers that have high interest rates or a short repayment length may have larger monthly payments. Refinancing could allow borrowers to secure a lower interest rate and spread the payments out over 20 years or more.
Going this route could help maximize any potential forgiveness, but also make the loans more affordable if the forgiveness never happens. Interest rates on 20-year loans currently start at just over 4%.
– Step #3: Have a backup plan.
It is really easy for student loan borrowers to get caught up in the excitement of the Sanders campaign and what life might be like if he won.
As noted early, the most favorable outcomes are far from a certainty. Borrowers should take steps to prepare themselves for what might happen if a moderate Democrat wins the primary or if Trump wins a second term.
Those making minimum payments in anticipation of debt forgiveness should set aside the larger payments that they normally make in a high interest savings account. If it becomes clear that student debt cancelation won’t happen, borrowers can use the money in this savings account to pay down their debt more aggressively. If forgiveness does happen, the money can be used towards retirement or another important financial goal.
Plan with your head, not your heart.
Many Americans are very confident that Sanders will be our next President. Many others are confident that Donald Trump will be serving a second term.
The only certainty is that nobody knows for sure what will happen.
Borrowers shouldn’t make the mistake of making student loan plans according to what they hope will happen. Instead, they should think about the various potential election results and take steps to protect their interests in all potential outcomes.