The federal student loan forgiveness plan announced by the Biden administration in late August has the potential to help thousands of Tennesseans with debt. People with student loans may be eligible to have up to $20,000 of their debt forgiven, and the application for loan forgiveness will be released in October, according to a tweet from the U.S. Secretary of Education Miguel Cardona.
However, since the plan is the first of its kind, borrowers and current and future college students have numerous questions about how this impacts their finances. On Wednesday, University of Tennessee labor economics professor Celeste Carruthers and D.J. Rausa, an attorney who specializes in student loan issues, joined This Is Nashville to answer questions submitted by listeners and explain what will change as part of the plan.
This Is Nashville Host Khalil Ekulona: What is the economic rationale for having student loans in the first place?
Celeste Carruthers: Going to college can be thought of as making an investment in yourself (and) in your future, which hopefully will pay off with better job opportunities and higher earnings than you would have realized had you not gone to college.
In a more fully private lending market, it’s really difficult to borrow against those future earnings. So when you take out a loan to purchase a car or a house, the car or the house kind of act as collateral in case you can’t pay off the loan. But it’s hard to have to point to specific concrete collateral in case you can’t pay off a student loan. In a private market, lenders would rely on things like family income or GPA, and this would leave a lot of people out — people who could do just fine in college. This is an example of what we might call a market failure or an underprovided market. The federal government can absorb and smooth out some of these uncertainties.This is the classic economic rationale for publicly-backed student loans.
KE: What was your reaction to President Biden’s announcement?
D.J. Rausa: You know, initially, I thought it was more of a delivery of a campaign promise. A $10,000 or $20,000 forgiveness is going to help a lot of people, and I certainly applaud that. I also think that the salary caps that that were placed on the forgiveness is incredibly appropriate.
The backlash is: well, who’s going to pay for the $10,000 or $20,000 per family forgiveness? And I certainly don’t want to get into that debate. But I think there’s a significant amount of people who are going to benefit from this. I think that there’s going to be a significant amount of people who are going to be able to move forward with their lives, with children and savings and that type of thing, by getting out from underneath this student loan debt.
KE: What do you think the impact will be for most borrowers?
DR: All we really have to look at is what does the average student loan borrower take out. … I think the national average is about $37,000. So if you have $37,000 worth of debt and you get relief of $10,000, we still have $27,000 to deal with.
Where I live is in those programs that are available to federal student loan borrowers to get in the right place. For example, when you graduate college, you have about a six-month grace period before your student loans start to be coming due. But once they become due, you have to start paying on that. The default payment per month is paying the balance off in 10 years. Therefore, your payment per month could be significant. What I try to do is get them into available programs that turn that equation upside down and base the payment per month, not on the balance but on the household size and the household income. That makes the payments more affordable.
Understand that once this program gets implemented and off the ground, if you have (debt) north of $10,000, you’re going to be in repayment. And I want to help people be prepared for that. … Because absent an act of Congress, the student loan problem and the student loan debt issues for these families is not going to go away.
The next question is from a tweet by listener Ashley Bachelder. She asked:
DR: You go to undergrad school. And you take out XYZ loans, and it’s at a lower interest rate. When you go to grad school and take out a grad plus loan, the interest rate on a grad loan is higher. When you consolidate undergrad and grad (loans), the interest rate then is blended. …
But here’s the issue. When you when you enter into public service loan forgiveness (PSLF), you have to get away from thinking about a balance and you have to get away from thinking about the accumulated interest because public service loan forgiveness is a debt management tool as well as a debt forgiveness tool.
If you work in public service and you make 120 qualified payments in the public service loan forgiveness system, the balance is forgiven, so there’s no taxable incident. So what is forgiven? At the end of 10 years of public service, loan forgiveness really becomes immaterial in the perspective of the student loan borrower.
The next question was in a tweet by listener Melissa Cherry. She asked:
DR: If you took out a federal student loan, it’ll always be a federal student loan unless you specifically refinance it. Navient is a servicer for non-government-held student loans.
So what needs to be done is you need to get out of the old system that existed before 2010 and get it into the new direct student loan system. You do that by consolidation. Once you get your old FFEL loan into the direct system, then that opens up all the federal repayment options that you have.
KE: So based on what you know now, should Melissa be eligible for that $20,000 forgiveness?
DR: My understanding of the announcements last week out of the Department of Education is that she would be (if she took out a Pell Grant).
She may not be eligible for some other things, but as far as across-the-board forgiveness, I think that would be correct because the the announcement was it was not going to really matter much whether it’s a federal loan or direct loan, you’re still going to get the forgiveness.
That being said, I would proceed with an abundance of caution. I would get this into the direct system. When the application for forgiveness comes out next month, … I would apply for it regardless of what’s on the Internet, regardless of the experts and others that write articles about student loans and see what happens. … It’s a brand new rollout. There’s no policy for the implementation of this, and the timing is going to be a moving target.
KE: The $10,000 to $20,000 of debt cancelation has been making a lot of headlines. Celeste, what are some other aspects of Biden’s plan that we might not be hearing about as much?
CC: This is a big plan. It’s getting a ton of attention, so it’s hard to say that anything is going undiscussed. But a couple things come to mind that might be under-discussed.
A fair critique of the plan is that it doesn’t do a lot to address the root causes of high college costs. By one estimate, we’ll be right back to $1.7 trillion in student debt within 10 years. So the White House statement included mention of plans for larger Pell Grants, another go at free community college and tightened accountability for schools and programs whose graduates accumulate high debt and are most likely to default. But the details were kind of fuzzy, and the viability of so many of these things is uncertain to me.
A second thing that is going under-discussed is the public service loan forgiveness program. It has some really time-limited changes that’s making it more lenient and available to more people and available to more debt that’s already been paid back. But folks have to apply to that by the end of October if they’re in a qualifying nonprofit or public sector job. That urgency might be getting drowned out by the pause on payments that’s going on through the end of the December and the bigger and splashier news about the cancelation of $10,000 or $20,000 in debt.
This kind of relates to both points and relates to the factors aside from college costs that are responsible for this unwieldy situation that we’re in with student loans, which has just been a fairly long history of dysfunctional administration, of income-driven repayment and PSLF and other aspects that are supposed to serve as kind of a safety net when individuals think their monthly payment is just accounting for too much of their income. … I’d like to see more on plans to just improve the administration of student loans so that future borrowers can have more certainty around what they owe and how they’re going to pay it back.
KE: Cookeville High School senior Quentin Ding asked if there’s any feasible plan to reduce interest rates on these loans or even do away with interest. What do you think, Celeste?
CC: I haven’t seen any mention of changing the interest rates for the federally backed student loans. Last I checked, the federal student loan interest rates were in like the 4% to 6% range, depending on if it was an undergraduate or graduate loan. … A private loan can be lower. It can also be a lot higher, over 10%, and it would depend a lot on individual’s credit scores. But I haven’t heard of any changes to that interest rate for these federally backed loans.
What will change going ahead is aspects of income-driven repayment. So for people who have left or graduated from college, when their monthly loan payment accounts for what’s judged to be too large a share of their monthly income, their payments are reduced to what will going forward be an amount equal to 5% of discretionary income. That’s roughly half, for most people, of what they would have been paying under the current income-driven repayment rules, and then, if they make regular payments after, I believe, 10 years, the remaining balance can be forgiven.
KE: What do you think is the future of student loans in the United States?
CC: I wish I knew. I really wish I knew. I think it is too early to tell. I’m certainly reserving judgment on my own.
But, some of these changes going forward may influence how much students elect to borrow for college, may influence decisions about where they want to enroll. If I know that the downside risk of taking out a big loan is like half of what it is today, I’m more likely to take risks or take bigger risks in my decisions about going to college. There’s a fuzzy distinction between beneficial risk taking, like getting a college degree and a better and more fulfilling career because of it, and what we might call moral hazard or going to a much pricier college … that maybe doesn’t have those accountability incentives because I know I’m not probably going to end up responsible for the loans.
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