student loans – Robert Kelchen

The Supreme Court Just Blocked Student Loan Forgiveness. Now What?

In a conclusion to one of the most consequential Supreme Court sessions in many years, the Court released an opinion today on the Biden administration’s proposed plan to forgive up to $20,000 in federal student loan debt per borrower. After dismissing one case due to lack of standing from the plaintiffs, the Court voted 6-3 to block forgiveness in the second case (giving standing based on the servicer MOHELA).

This decision will have major implications for higher education policy. Here are the things that I will be looking for in the coming months and years:

Restarting student loan repayment was already going to be a nightmare, and this creates additional challenges. The first challenge is the sheer number of borrowers re-entering repayment. Roughly 43 million Americans have federal student debt, and the Biden administration estimated that about 20 million would have their loans completely forgiven by their proposal. I have little confidence that the Department of Education, student loan servicers, and colleges can smoothly handle 23 million borrowers that would have remained, let alone 43 million. Federal Student Aid badly needed additional resources to manage a return to repayment, but Republicans were only willing to provide the funds if it came with a rider blocking its use on debt relief. Since both parties agreed on no riders in last year’s omnibus spending bill, no additional funding was provided.

In an overlooked item due to yesterday’s important decision on college admissions, the Department of Education released information about how they plan to manage the return to repayment. ED plans to give a 90-day grace period for missed payments and is considering future grace periods. Needless to say, Republicans are not happy and may go to court to stop grace periods based on the agreement in this summer’s debt ceiling legislation.

How many borrowers are willing to start making payments? There is going to be a group of people who are livid about having to resume payments after not getting the loan forgiveness they were expecting. I am expecting a substantial group of borrowers to not make any payments until they get to the brink of default—which could take a while. These borrowers may still hold out hope for another forgiveness effort (more on that in the next section) and they may not proactively reach out to servicers to update their information if they have moved since March 2020. A particularly interesting group is the 20 million students who would have received complete forgiveness, as the frustration factor is likely higher among this group than among students who knew they would still have a balance remaining under this plan.

As a note, with income-driven repayment, students at least in theory should be able to start making some payments. But adding an expense back to the monthly budget is painful and income-driven repayment is still complicated to navigate. So there will be challenges even among people who are not as upset about this decision.

How will Democrats respond? The progressive wing of the Democratic Party has been pressuring the Biden administration to forgive all student debt and immediately pivot to using the Higher Education Act instead of the HEROES Act. That is likely not happening given today’s court decision. But a few moderate Democrats voted in favor of a Republican-led resolution disapproving of debt forgiveness and ending the repayment pause. The Biden administration will point to its expanded income-driven repayment plan, which could also face legal challenges in light of this decision. Free college and debt forgiveness were key issues in the 2020 Democratic presidential primary, and they will continue to be key issues in contested Democratic primaries for the next several years.

How will Republicans respond? By the time you read this, there will be plenty of press releases from Republican politicians celebrating the discussion. But there are still concerns about a future administration trying another avenue to forgiveness, particularly through income-driven repayment. There are some thoughtful efforts among Republicans to maintain income-driven repayment while reversing most of the Biden administration’s proposed changes. But Republicans are also seeking to limit borrowing for graduate students, which is something that I have been expecting for years.

This week’s Supreme Court decisions are likely to influence the direction of American higher education for years to come, and some of the influences are not going to be immediately obvious. But the items discussed above are going to play an outsized role in policy discussions for a good while.

Would Student Debt Forgiveness Drive Inflation?

During the last year or so, inflation has grabbed the attention of the American public. The price of just about everything is way up, with gas prices, food, and rent grabbing the nation’s attention. As I write this piece, the most recent inflation rate checks in at 8.3%, which is leading the Federal Reserve to increase interest rates and also likely increases the risk of a coming recession.

I have been talking for months about the squeeze that inflation puts on colleges, as tuition prices are rising much slower than the costs that colleges face. Although a recession probably would result in an increase in enrollment across higher education, that is not the reason why any of us want to see enrollment increase. Therefore, I am deeply concerned about inflation and its ramifications.

Much of the higher education policy discussion over the last two years has been dominated by the issue of student debt forgiveness as payment pauses continue. The latest news on this front is that the Biden administration is still pondering $10,000 in forgiveness (with a limit on income to qualify), and that high inflation rates are causing them to potentially rethink this issue.

I have plenty of thoughts and concerns about how student debt forgiveness would work, whether it should be limited to undergraduate debt only, whether it would lead to potential limits on federal student loans, and that we would be back in the exact same situation in just a few years without meaningful reforms. But I’m actually not too concerned about the effects of $10,000 in student debt forgiveness on inflation. Here’s why, with some caveats.

Let’s look at three groups of students that will be affected in different ways by $10,000 in forgiveness.

The first group is people with less than $10,000 in debt. As far as I know, nobody is getting handed a check for $10,000 and that benefits would be spread out. (I could see a world in which people who chose to pay off their loans since March 2020 get refunds, but I doubt that will happen.) Let’s say someone had $8,000 in debt remaining to pay off over five years, with monthly payments of $175. Those payments would be completely wiped out, and would increase the capacity to spend right now. But would people spend that money or save it?

Let’s keep in mind that borrowers have not had to make any payments for the last 27 months. Any borrowers who do not have to make payments have the same monthly take-home pay as they do now, but with the knowledge that they won’t have to resume payments at some point in the future. I think that could affect making some larger purchases like cars (a market with lots of inflation right now), but probably not a purchase like a home due to the larger sticker price.

Now consider borrowers with more than $10,000 in debt who are not using income-driven repayment. Consider someone with $20,000 in debt that they are paying over a standard ten-year plan, with payments of about $212 per month at 5% interest. If $10,000 gets forgiven, how does this work? One option is that students stay on the ten-year payment plan and drop their payments in half. Another option is to keep the same $212 payment, but pay off in about half the time. The first option could increase discretionary income now, while the second option does nothing now and increases it later. This pushes any inflation concerns years into the future.

Finally, let’s turn to borrowers with more than $10,000 in debt who are using income-driven repayment or pursuing Public Service Loan Forgiveness. For many of these borrowers, the effect will be less money forgiven years down the road. For example, instead of having $60,000 forgiven under PSLF, taking $10,000 off the balance now would result in the same monthly payments and maybe $40,000 forgiven in the future. This shouldn’t affect inflation at all.

My takeaway: the short-term effects on inflation are likely to be fairly modest. And if payments resume alongside forgiveness, there may even be a modest decrease in inflation compared to the current repayment pause. There could also be modest positive pressures on longer-term inflation, but that will hopefully be less of a concern if inflation is brought under control in the next few years.

A closing note: expect an administrative nightmare when trying to put an income limit on student debt forgiveness. The Department of Education cannot access IRS data on income, so this would require that people honestly provide their own income based on instructions provided. If the goal is to make sure that the most affluent individuals do not get debt forgiven, it is a better idea to use data from FAFSAs to make the determination (credit to the brilliant Sue Dynarski here). For example, debt forgiveness could be tied to an Expected Family Contribution threshold that excludes the wealthiest few percent of students’ families.

Will Republicans Try to End the Federal Student Loan Program?

Multiple news outlets are reporting that the Biden administration will announce a fifth extension of the federal student loan repayment pause that began in March 2020 shortly, with this extension going through the end of August 2022. This news doesn’t seem to make anyone truly happy, with borrower advocates and many progressives advocating for an extension through the end of 2022 and/or outright student debt forgiveness. On the right, conservatives are unhappy with continuing to kick the repayment can down the road when the economy is strong and a sizable share of borrowers could resume repayment (with or without income-driven repayment).

At this point, it seems more likely than not to me that the Biden administration will not resume student loan repayment during its time in office. There is almost no chance that the administration will restart payments in August as Democrats face a challenging midterm election and need every vote that they can get from their base and younger voters. Then 2023 starts the next presidential election cycle. If Biden and/or Harris want to run for office, resuming payments is a terrible way to position themselves in a Democratic primary.

Meanwhile, Republicans are stewing. Rep. Virginia Foxx, ranking member of the House Education and Labor Committee, had this to say (h/t Michael Stratford of Politico):

If Republicans take control of Congress in the November elections, I fully expect a serious effort to stop issuing federal student loans framed around statements like that from Rep. Foxx. 2023 is a great time for Republicans to make this play, as somewhere between ten and 250 Republicans in the House and Senate seem likely to run for president in 2024 and this is great messaging in a GOP primary. Additionally, a certain Biden veto makes this a vote with no real consequences, allowing people to vote yes without cutting off access to federal loans. There is a realistic chance that legislation would pass Congress while not becoming law.

Fast forward to 2025. If Republicans take control of the White House along with Congress, then they have to either put up or shut up about this issue. On health care, Republicans largely shut up because they could not agree on a replacement for the Affordable Care Act. The same may well happen about federal student loans, with a few moderate Republicans stopping passage to protect students and/or their own political careers in swing districts. Possible replacements include education savings accounts, income share agreements (a la Jeb Bush), or simply turning the issue over to colleges and states to figure out.

Do I think that Republicans will end federal student loans? Probably not, but I also didn’t expect payments to still be paused in April 2022 when I first suggested a pause on March 18, 2020. The more likely outcome is efforts to limit graduate and professional student borrowing to reduce the federal loan portfolio without affecting the most vulnerable undergraduates.

It’s Time to Suspend Federal Student Loan Payments

It is hard to believe that higher education was essentially functioning normally just two weeks ago. Then the novel coronavirus started to make itself known, with travel being suspended, in-person classes being suspended and then moved completely online, and now all on-campus operations are quickly grinding to a complete halt. Much of the American economy is also grinding to a halt thanks to social distancing practices and restrictions on certain sectors of the economy.

This sudden recession (depression?) has placed higher education under an incredible amount of strain, although our industry is far better off in the short term than many other service industries. This has also resulted in a number of proposed economic stimulus packages and other ideas to keep the economy moving. President Trump’s current higher education-related proposal is to unilaterally waive interest on student loan payments. But since this does not actually reduce payments (instead just allowing people to pay down more principal), the economic benefits of the proposal are likely to be zero if this plan survives potential legal challenges.

If the federal government wants to provide economic relief for millions of Americans who will likely be struggling with their student loan payments (or getting into income-driven repayment) over the next several months, my recommendation is relatively straightforward. Congress should seriously consider passing legislation to suspend all federal student loan payments for a period of six to twelve months. Just like the coronavirus is freezing the economy, freezing student loan payments would give Americans a chance to recover before either resuming normal payments or going onto income-driven repayment plans. A six-month halt would also give people time to navigate the complicated income-driven repayment system, which is likely to be overwhelmed in the short term.

To explain how this would work, consider a student with $15,000 in debt and six years of payments remaining. In the case of a six-month pause, the student would still have $15,000 in debt and six years of payments six months from now. Since this plan would not directly forgive any student loans, the taxpayer burden would be relatively small in the long term. The only cost would be that more struggling borrowers would enroll in income-driven repayment plans. I also would not count this six-month pause toward the required number of payments for Public Service Loan Forgiveness, as no payments would be made.

Hitting the pause button on student loans could be a good way to get more money in the hands of Americans in the short term while not resulting in a massive forgiveness of student debt. It is an idea worth serious consideration at this point.

Why Public Service Loan Forgiveness Should Become a Monthly Benefit

It’s safe to say that the Public Service Loan Forgiveness (PSLF) program for federal student loans has run into a number of obstacles over the last few years. In order to qualify for PSLF, borrowers must currently make 120 monthly payments while enrolled in an income-driven repayment plan and working for a qualified nonprofit organization. The balance of the loan is then forgiven after the PSLF application is approved. To this point, just over one percent of PSLF applications have been forgiven, although I expect that rate to increase over time as more borrowers fix paperwork issues and/or make more payments.

Setting a whole host of logistical and implementation issues aside, there are two other problems with the current PSLF program. The first is that requiring borrowers to make 120 payments while working for a qualified nonprofit can severely restrict someone’s career trajectory, as borrowers may feel trapped in their current job until their PSLF application is approved. This can also stop people from going into public service because the promise of forgiveness is too far away to be real.

The second problem is that the average amount forgiven is sizable as benefits disproportionately go to people with expensive graduate degrees. The average balance forgiven under PSLF is just over $63,000, and the average outstanding balance of people who have indicated interest in PSLF by filling out an employment certification form is nearly $90,000. Having this type of loan forgiveness increases the risk of a Republican Congress or White House killing the program entirely, as President Trump has repeatedly proposed.

One potential way to address both of these concerns is to make PSLF a monthly benefit instead of giving borrowers a lottery ticket for potentially massive loan forgiveness after ten years. I have had the pleasure of working with the Bipartisan Policy Center over the last couple of years on higher ed policy issues, and last week they released a set of 45 bipartisan proposals for Higher Education Act reauthorization. One of the proposals from their blue-ribbon panel was to turn PSLF into a benefit of $300 that borrowers would automatically receive each month for up to five years of working in public service. This would significantly limit the overall benefit that borrowers receive (a total of $18,000), but it would help borrowers manage their principal upfront while also directing more resources to students with less debt (and likely less income).

If Higher Education Act reauthorization is to move forward in Washington—and that is an enormous “if” at this point—the idea of frontloading PSLF benefits deserves serious discussion. The monthly/annual amount forgiven and the number of years of forgiveness are certainly up for debate, but the key idea of making benefits immediately tangible while limiting back-end forgiveness makes a lot of sense.

Income-Based Repayment Becoming a Costly Solution to Student Loan Debt

This post was originally published at The Conversation.

When Congress established the income-driven repayment for federal student loans back in 2007, it was touted as a way to help student loan borrowers save money by capping monthly payments at a certain percentage of a borrower’s income.

Since then, student loan debt has risen from US$500 billion to where it is now approaching the $1.5 trillion threshold. The federal government expects to forgive over $100 billion of the $350 billion in loans under income-driven repayment as of 2015. That means taxpayers are picking up the bill.

This has put the entire income-driven repayment system in jeopardy as there have been proposals by congressional Republicans and the Trump administration to reduce the amount of loans forgiven and end the Public Service Loan Forgiveness program, which is a special repayment option for people in public service fields. So far, these proposals have failed to become law, but expect to see them put forth again in the future as concerns about program costs continue to grow.

As a researcher who specializes in higher education policy and financial aid, here are some of my insights on how income-driven repayment works, why its future is now in jeopardy and some potential options that can protect the most vulnerable borrowers while also helping taxpayers.

How it works

Six months after they leave college, students who took out a federal student loan are automatically put into a repayment plan with fixed monthly payments over 10 years. This is similar to how mortgages and car loans work. However, repayment can often be a major burden for student loan borrowers who take low-paying jobs or struggle to find employment after college.

To address this issue, Congress and the Department of Education created a number of options during the George W. Bush and Barack Obama presidencies that tied student loan borrowers’ payments to their discretionary income, that is, how much money they have left after meeting their basic needs.

Most students who take out federal loans today qualify for a plan called Pay As You Earn. This plan – known as PAYE – limits monthly payments to 10% of a student loan borrower’s discretionary income for up to 20 years.

There are two requirements. First, student loan borrowers must fill out paperwork each year with their income to be eligible for income-driven repayment. In recent years, more than half of federal student loan borrowers have failed to complete the paperwork on time, putting them back into the standard plan. Second, if any part of the loan is not repaid within 20 years, the remaining balance is forgiven. But this forgiveness counts as income and taxes must be paid on it in that year.

Borrowers who work for government agencies and certain nonprofit organizations can qualify for Public Service Loan Forgiveness, which limits payments to 10% of discretionary income for as little as ten years with no income tax penalty. So far, just 1% of borrowers who applied for forgiveness have had their loans forgiven, but this rate will likely increase over time as the Department of Education gets better at managing the forgiveness process.

Problems abound

In some respects, the biggest problem with income-driven repayment is that too many people are taking advantage of it.

The share of students who reduced their loan balances by even one dollar within five years of leaving college has fallen from 67% to 51% over the last five years as low monthly payments under income-driven repayment mean that many borrowers’ balances are growing instead of shrinking. This has increased the projected price tag of these programs to the federal government well beyond expectations.

These programs tend to be used more frequently by borrowers with large debt burdens – especially those who have more than $100,000 in debt. Data from the Department of Education show that students who owe $100,000 or more make up just over one-third of all outstanding student debt but nearly half of all borrowers in income-driven repayment.

Trying to pay back $100,000 in student loans is certainly not easy, and I can speak from experience thanks to my wife’s law school debt. But most of the borrowers with large student debt burdens tend to be professionals with graduate degrees and reasonably high incomes. Many of the borrowers who have the greatest difficulty repaying their loans never earned a college degree and thus did not see substantial financial benefits from their investment.

What can be done?

As a researcher of student financial aid, my concern is that policymakers might throw the proverbial baby out with the bathwater and get rid of the entire income-driven repayment system.

In my view, a better way to stop borrowers with $100,000 in debt from getting most of the benefits is to limit the amount forgiven. This can be done by capping the amount of loans that can be repaid through income-based repayment or extending the repayment term.

President Obama proposed limiting Public Service Loan Forgiveness to the first $57,500 in loans, although this did not pass Congress. His administration also implemented a program that required graduate students to pay for five more years than undergraduate students.

The savings from requiring higher-income borrowers with large loans to repay more of their loans can then be used to help the most vulnerable borrowers. Students who dropped out of college after a semester or two could see their debt forgiven more quickly and without having to pay additional income taxes. This may be a tough political sell, but this could also encourage students – especially those who are the first in their families to attend college – to give college a shot.

Some of the money could also be used to support larger Pell Grants to reduce the need for borrowing in the first place. Cutting the total amount of loans forgiven in half would allow for an increase of about 20%, or $1,200 per year, in the maximum Pell Grant, which is $6,195 for the 2019-2020 academic year. This would help cover much of the tuition increases over the last decade and reduce student loan debt.

How Much Money Should Students Borrow for College?

Well-known personal finance personality Dave Ramsey apparently tweeted out something about paying for college yesterday. When I went to click on the link, I got the following notice from Twitter.

As far as I am aware, this is the first time that someone has blocked me on Twitter (I only use the blocking function for likely Russian bots and people who have made racist or sexist statements against people I know). And I’m pretty sure I know the reason why Ramsey blocked me—this interview that I did with Money magazine last spring in which I noted that his advice to avoid all college debt is a generally bad idea for students. Limiting ridiculous credit card debt and having a plan to pay off debt eventually are sound recommendations, but delaying the labor market benefits of a college credential to work your way through debt-free just doesn’t make long-term sense for most people. (And research shows that borrowing for college can improve student outcomes.)

On the other hand, students also should be reasonable about how much they borrow for college. While I was pulling up the Money magazine link for the previous paragraph, I noticed that their feature piece today is on someone with $185,000 in student loan debt and who is struggling to make minimum payments. There are key details missing in the piece, such as how much of the debt is for graduate school, the person’s income, and how much interest has capitalized, but this is certainly a cause for concern absent additional information (which seems to be missing from many of these pieces).

So this brings me to a question that I get asked quite a bit: how much should students borrow for college? To me, the correct answer is generally “it depends”—but most people don’t like that classic answer from a tenured professor. This leads me to specify some basic ground rules that students and their families should consider before signing that Master Promissory Note.

For undergraduate students: I am generally not concerned if students take out the maximum amount in federal student loans in their own name while in college. Younger (dependent) students can typically take out up to $31,000 in federal loans, while independent students can take out up to $57,500. These loans have generous income-driven repayment options that reduce payments if college doesn’t work out financially for a student. (Any forgiven balance outside of Public Service Loan Forgiveness may be taxed, but my guess is that Congress patches that fix on an annual basis going forward.)

Beyond that amount, students and their families may be able to get Parent PLUS or private loans, which generally require a co-signer and varied levels of creditworthiness in order to qualify. Parent PLUS loans scare me (as I talked about last fall with NPR), as they require many parents to pay loans into their retirement and have much lower credit standards than private loans. Students and their families need to have long and hard conversations about borrowing beyond the federal student loan limit to see if parents or co-signers can afford to repay those loans and the student’s likely ability to help parents repay those debts.

For graduate students: Most six-figure student debt burdens are from graduate school, since students can borrow up to the full cost of attendance in their own name through the Grad PLUS program and many of these programs tend to be expensive. New program-level College Scorecard data show that a large number of master’s and professional doctorate programs graduate students with more than $100,000 in debt. And I can speak to this personally as my wife and I are down to the final year of payments on her $110,000 in law school debt.

Income-driven repayment plans and PSLF extend to all graduate debt through the federal government, so there is some protection against low earnings after attending graduate school. However, unless a student is sure that he or she is going to be in a public service field and receive PSLF, it is important to keep loan balances in mind. Income-driven repayment plans require 20 years of payments instead of the ten years under PSLF, and this requires committing ten percent of your income over 150% of the poverty line for much of your prime earning years. Sit down with your family and try to get a handle on expected future earnings (program-level earnings data will come out this fall) and other expenses such as childcare and housing and see what is affordable. $100,000 in debt is extremely manageable for a two-income household making $150,000 per year, but much harder for a single adult making $60,000 per year.

The right answer for how much a student should borrow for college depends quite a bit on individual circumstances, but in general the modest federal loan limits for undergraduate students are manageable for most graduates with the help of income-driven repayment programs. Dave Ramsey may be an influential voice in the personal finance world, but following all of his advice on paying for college is likely to be a losing proposition for many students.

What is Public Service Loan Forgiveness? And How Do I Qualify to Get It?

This piece was originally published at The Conversation.

The first group of borrowers who tried to get Public Service Loan Forgiveness – a George W. Bush-era program meant to provide relief to those who went into socially valuable but poorly paid public service jobs, such as teachers and social workers – mostly ran into a brick wall.

Of the 28,000 public servants who applied for Public Service Loan Forgiveness earlier this year, only 96 were approved. Many were denied in large part due to government contractors being less than helpful when it came to telling borrowers about Public Service Loan Forgiveness. Some of these borrowers will end up getting part of their loans forgiven, but will have to make more payments than they expected.

With Democrats having regained control of the U.S. House of Representatives in the November 2018 midterm elections, the Department of Education will likely face greater pressure for providing better information to borrowers, as it was told to do recently by the Government Accountability Office.

The Public Service Loan Forgiveness program forgives loans for students who made 10 years of loan payments while they worked in public service jobs. Without this loan forgiveness plan, many of these borrowers would have been paying off their student loans for 20 to 25 years.

Borrowers must follow a complex set of rules in order to be eligible for the Public Service Loan Forgiveness program. As a professor who studies federal financial aid policies, I explain these rules below so that up to 1 million borrowers who have expressed interest in the program can have a better shot at receiving forgiveness.

What counts as public service?

In general, working for a government agency – such as teaching in a public school or a nonprofit organization that is not partisan in nature – counts as public service for the purposes of the program. For some types of jobs, this means that borrowers need to choose their employers carefully. Teaching at a for-profit school, even if the job is similar to teaching at a public school, would not qualify someone for Public Service Loan Forgiveness. Borrowers must also work at least 30 hours per week in order to qualify.

What types of loans and payment plans qualify?

Only Federal Direct Loans automatically qualify for Public Service Loan Forgiveness. Borrowers with other types of federal loans must consolidate their loans into a Direct Consolidation Loan before any payments count toward Public Service Loan Forgiveness. The failure to consolidate is perhaps the most common reason why borrowers who applied for forgiveness have been rejected, although Congress did provide US$350 million to help some borrowers who were in an ineligible loan program qualify for Public Service Loan Forgiveness.

In order to receive Public Service Loan Forgiveness, borrowers must also be enrolled in an income-driven repayment plan, which ties payments to a percentage of a borrower’s income. The default repayment option is not income-driven and consists of 10 years of fixed monthly payments, but these fixed payments are much higher than income-driven payments. The bottom line is it’s not enough to just make 10 years of payments. You have to make those payments through an income-driven repayment plan to get Public Service Loan Forgiveness.

Parent PLUS Loans and Direct Consolidation Loans have fewer repayment plan options than Direct Loans made to students, so borrowers must enroll in an approved income-driven repayment plan for that type of loan. Borrowers must make 120 months of payments, which do not need to be consecutive, while enrolled in the correct payment plan to receive forgiveness.

How can borrowers track their progress?

First of all, keep every piece of information possible regarding your student loan. Pay stubs, correspondence with student loan servicers and contact information for prior employers can all help support a borrower’s case for qualifying for Public Service Loan Forgiveness. Unfortunately, borrowers have had a hard time getting accurate information from loan servicers and the Department of Education about how to qualify for Public Service Loan Forgiveness.

The U.S. Government Accountability Office told the Department of Education earlier this year to improve its communication with servicers and borrowers, so this process should – at least in theory – get better going forward.

Borrowers should also fill out the Department of Education’s Employment Certification Form each year, as the Department of Education will respond with information on the number of payments made that will qualify toward Public Service Loan Forgiveness. This form should also be filed with the Department of Education each time a borrower starts a new job to make sure that position also qualifies for loan forgiveness.

Can new borrowers still access Public Service Loan Forgiveness?

Yes. Although congressional Republicans proposed eliminating Public Service Loan Forgiveness for new borrowers, the changes have not been approved by Congress. Current borrowers would not be affected under any of the current policy proposals. However, it would be a good idea for borrowers to fill out an Employment Certification Form as soon as possible just in case Congress changes its mind.

Are there other affordable payment options available?

Yes. The federal government offers a number of income-driven repayment options that limit monthly payments to between 10 and 20 percent of “discretionary income.” The federal government determines “discretionary income” as anything you earn that is above 150 percent of the poverty line, which would translate to an annual salary of about $18,000 for a single adult. So if you earn $25,000 a year, your monthly payments would be limited to somewhere between $700 and $1400 per year, or about $58 and $116 per month.

These plans are not as generous as Public Service Loan Forgiveness because payments must be made for between 20 and 25 years – instead of 10 years under Public Service Loan Forgiveness. Also, any forgiven balance under income-driven repayment options is subject to income taxes, whereas balances forgiven through Public Service Loan Forgiveness are not taxed.

Some Good News on Student Loan Repayment Rates

The U.S. Department of Education released updates to its massive College Scorecard dataset earlier this week, including new data on student debt burdens and student loan repayment rates. In this blog post, I look at trends in repayment rates (defined as whether a student repaid at least $1 in principal) at one, three, five, and seven years after entering repayment. I present data for colleges with unique six-digit Federal Student Aid OPEID numbers (to eliminate duplicate results), weighting the final estimates to reflect the total number of borrowers entering repayment.[1]

The table below shows the trends in the 1-year, 3-year, 5-year, and 7-year repayment rates for each cohort of students with available data.

Repayment cohort	1-year rate (pct)	3-year rate (pct)	5-year rate (pct)	7-year rate (pct)
2006-07	63.2	65.1	66.7	68.4
2007-08	55.7	57.4	59.5	62.2
2008-09	49.7	51.7	55.3	59.5
2009-10	45.7	48.2	52.6	57.4
2010-11	41.4	45.4	51.3	N/A
2011-12	39.8	44.4	50.6	N/A
2012-13	39.0	45.0	N/A	N/A
2013-14	40.0	46.1	N/A	N/A

One piece of good news is that 1-year and 3-year repayment rates ticked up slightly for the most recent cohort of students who entered repayment in 2013 or 2014. The 1-year repayment rate of 40.0% is the highest rate since the 2010-11 cohort and the 3-year rate of 46.1% is the highest since the 2009-10 cohort. Another piece of good news is that the gain between the 5-year and 7-year repayment rates for the most recent cohort with data (2009-10) is the largest among the four cohorts with data.

Across all sectors of higher education, repayment rates increased as a student got farther into the repayment period. The charts below show differences by sector for the cohort entering repayment in 2009 or 2010 (the most recent cohort to be tracked over seven years), and it is worth noting that for-profit students see somewhat smaller increases in repayment rates than other sectors.

But even somewhat better repayment rates still indicate significant issues with student loan repayment. Only half of borrowers have repaid any principal within five years of entering repayment, which is a concern for students and taxpayers alike. Data from a Freedom of Information Act request by Ben Miller of the Center for American Progress highlight that student loan default rates continue to increase beyond the three-year accountability window currently used by the federal government, and other students are muddling through deferment and forbearance while outstanding debt continues to increase.

Other students are relying on income-driven repayment and Public Service Loan Forgiveness to remain current on their payments. This presents a long-term risk to taxpayers as at least a portion of balances will be written off over the next several decades. It would be helpful for the Department of Education to add data to the College Scorecard on the percentage of students by college enrolled in income-driven repayment rates so it is possible to separate students who may not be repaying principal due to income-driven plans from those who are placing their credit at risk by falling behind on payments.

[1] Some of the numbers for prior cohorts slightly differ from what I presented last year due to a change in how I merged datasets (starting with the most recent year of the Scorecard instead of the oldest year, as the latter method excluded some colleges that merged). However, this did not affect the general trends presented in last year’s post. Thanks to Andrea Fuller at the Wall Street Journal for helping me catch that bug.

Comments on the Proposed Borrower Defense to Repayment Regulations

The U.S. Department of Education is currently accepting public comments (through August 30) on their proposed borrower defense to repayment regulations, which affect students’ ability to get loans forgiven in the case of closed schools or colleges that misrepresented important facts. Since these regulations also affect colleges and taxpayers, I weighed in to provide a researcher’s perspective. My comments are reprinted below.

August 21, 2018

Jean-Didier Gaina

U.S. Department of Education

400 Maryland Avenue SW, Mail Stop 294-20

Washington, DC 20202

Re: Comments on the proposed borrower defense to repayment regulations

Dear Jean-Didier,

My name is Robert Kelchen and I am an assistant professor of higher education at Seton Hall University.[1] As a researcher who studies financial aid, accountability policies, and higher education finance, I have been closely following the Department of Education (ED)’s 2017-18 negotiated rulemaking efforts regarding borrower defense to repayment and financial responsibility scores. Since there were no academic researchers included in the negotiated rulemaking committee (something that should be reconsidered in the future!), I write to offer my comments on certain segments of the proposed regulations.

My first comment is on the question of whether ED should accept so-called affirmative claims from borrowers who are not yet in default and seek to make a claim against a college instead of only accepting defensive claims from borrowers who have already defaulted. For colleges that are still open, this is a clear decision in my view: affirmative claims should be allowed because ED can then attempt to recoup the money from the college instead of effectively requiring the taxpayer to subsidize at least some amount of loan forgiveness. However, the decision is somewhat more complicated in the case of a closed school, where taxpayers are more likely to foot the bill. My sense is that affirmative claims should probably still be allowed given the relationship between defaulting on student loans and adverse outcomes such as reduced credit scores.[2]

To protect taxpayers and students alike, more needs to be done to strengthen federal requirements for colleges that are at risk of closure. If a college closes suddenly, students may be eligible to receive closed school discharges at taxpayer expense. Yet my research and analyses show that ED’s current rules for determining a college’s financial health (the financial responsibility score) are only weakly related with what they seek to measure. For example, several private nonprofit colleges that closed in 2016 had passing financial responsibility scores in 2014-15, while many colleges have continued to operate with failing scores for years.[3] I also found that colleges did not change their revenue or expenditure patterns in any meaningful way after receiving a failing financial responsibility score, suggesting that colleges are not taking the current measure seriously.[4]

I am heartened to see that ED is continuing to work on updating the financial responsibility score metric to better reflect a college’s real-time risk of closing through another negotiated rulemaking session. However, I am concerned that students and taxpayers could suffer from continuing with the status quo during a potential six-year phase-in period, so anything to shorten the period would be beneficial. I again urge ED to include at least one academic researcher on the negotiated rulemaking panel to complement institutional officials and accountants, as the research community studies how colleges respond to potential policy changes that the rest of the committee may be proposed.

Finally, I am concerned about ED’s vague promise to encourage colleges to offer teach-out plans instead of suddenly closing, as the regulations provide no incentives for colleges on the brink of financial collapse to work with accreditors and states to develop a teach-out plan. It would be far better for ED to require colleges to be proactive and develop teach-out plans at the first sign of financial difficulties, reducing the risk to taxpayers by minimizing the risk of closed school discharges. These plans can then be approved by an accreditor and/or state agency as a part of the regular review process. Colleges would likely contend that having to develop a pre-emptive teach-out plan may affect their ability to recruit and retain students, but tying this to an existing benchmark of federal concern (such as a low financial responsibility score or being on HCM2) should alleviate that issue.

Thank you for the opportunity to provide comments on these proposed regulations and I am happy to respond to any questions that ED staffers may have.

[1] All opinions reflected in this commentary are solely my own and do not represent the views of my employer.

[2] Blagg, K. (2018). Underwater on student debt: Understanding consumer credit and student loan default. Washington, DC: Urban Institute.

[3] Kelchen, R. (2017, March 8). Do financial responsibility scores predict college closures? https://robertkelchen.com/2017/03/08/do-financial-responsibility-scores-predict-college-closures/.

[4] Kelchen, R. (forthcoming). Do financial responsibility scores affect institutional behaviors? Journal of Education Finance.