Biden’s Student Loan Freeze Shows Path To Erase Billions Of Debt

Thanks to vagaries of the accounting world, Donald Trump’s administration had a chance in the final weeks of the presidential race to cancel more than $200 billion of student loans with no immediate hit to the Department of Education’s massive portfolio. Biden’s Student Loan Freeze Shows Path To Erase Billions Of Debt

Yet it didn’t do it.
Now, perhaps Joe Biden will.

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For years, bean counters at the department have been writing down the value of its $1.4 trillion portfolio of student debt as they adopted ever-more-pessimistic views of how much borrowers will repay.

In September, the analysts made their biggest adjustment yet, valuing loans at just 82 cents on every dollar owed, down from 104 cents in 2015, records show. The debt is now worth $258 billion less than the amount outstanding.

Had officials under Education Secretary Betsy DeVos decided to identify some of the borrowers least likely to repay, and then forgiven those debts, it wouldn’t have put a major dent in the remaining portfolio’s value. Such losses were, theoretically, already reflected anyway.

By Wall Street standards, the government’s loan writedowns are gigantic, amounting to $98 billion in September alone. While they have gone virtually unnoticed in the political realm so far, they are almost sure to attract attention now, as consumer advocates urge Biden’s new administration to ease the burden on young professionals and jump-start the pandemic-stricken economy.

Some are starting to ask: If the government doesn’t expect to collect hundreds of billions of dollars from borrowers, why not try to erase it now?

“Betsy DeVos has already decided that a bunch of this debt is not going to be paid back,” said Mike Pierce, director of policy at the nonprofit Student Borrower Protection Center and a former official at the federal Consumer Financial Protection Bureau. “That makes it much easier for the Biden administration to justify canceling.”

The Education Department didn’t respond to messages seeking comment both before and after the change in administration.

Loans or Rent

Shortly after his inauguration as U.S. president on Wednesday, Biden asked the department to extend his predecessor’s pandemic policy of waiving interest and to continue letting borrowers skip monthly payments on government-owned student loans until at least the end of September. About 24 million borrowers have stopped payments, department data show.

Biden has expressed sympathy for borrowers but suggested he’s reluctant to wipe away debt without an act of Congress. In November, he said student-loan burdens are “holding people up. They’re in real trouble. They’re having to make choices between paying their student loan and paying their rent.”

While Wall Street often values its debt holdings based on the prices they would fetch in the market, the government’s markdowns mainly reflect “amounts not expected to be recovered.”

From a valuation perspective, that means there wouldn’t be much immediate difference between forgiving doomed loans and waiting for borrowers to turn out their empty pockets.

Still, there’s the issue of moral hazard: If authorities offer relief to struggling borrowers, it could create an incentive for others to stop repaying too, causing more of the portfolio to sour.

Rush For Relief

Much of the gap between what is owed and what the government reckons will be repaid stems from loan programs that cap monthly payments relative to borrowers’ incomes.

Income-based repayment plans promise the possibility of loan forgiveness after two decades of steady payment, or one decade for public-service workers.

As annual borrower defaults climbed past 1 million, Barack Obama’s administration made the repayment plans increasingly generous. Enrollment has tripled since 2014.

The anticipated cost of income-based plans has risen, too. The Education Department recently realized borrowers in the plans were earning “substantially” less than it had forecast. So the government cut its projections of borrowers’ future income by 35%, boosting the estimated tab to be forgiven in later years.

“There already is significant loan forgiveness,” said Constantine Yannelis, who researches student debt and teaches finance at the University of Chicago’s Booth School of Business. “We’re just talking about moving it up or giving it to borrowers who wouldn’t qualify for it under current rules.”

Yannelis said he recently found that debt owed by lower-income borrowers had a lower present value to the federal government than debt owed by high-income borrowers.

Rising Odds

Across-the-board loan cancellations make little sense, but the government has all the information it needs to target forgiveness, said Adam Looney, a finance professor at the University of Utah whose research on student loans dates to his time as a tax official at the U.S. Treasury Department. In fact, he said, the Education Department’s own valuation reflects a belief the government will eventually cancel large amounts owed by people earning little or at least too little relative to their debts.

Forgiving loans could encourage future students to over-borrow on the hope that their debts will be wiped away, advisers to the federal consumer bureau warned in a report this month. And that could, in turn, remove some of the pressure on colleges to lower their costs.

But there is a growing expectation in the public anyway that relief is coming. In a December survey by the Federal Reserve Bank of New York, respondents estimated there is a 39% chance — more than ever in five years of polling — that the federal government will cancel some amount of student loans over the next year.

Updated: 12-22-2021

Joe Biden’s Student-Loan Reprieve Eases $1.6 Trillion Worry, For Now

Americans who were dreading the burden of resuming student-loan repayments in February got a reprieve from President Joe Biden, but they aren’t feeling entirely at ease yet.

“That’s a huge relief for now. But it still interrupts my ability to plan long term,” said Chloe Cross, 29, who works in the film and television industry in Los Angeles and owes $32,000 in federal student loans. “I keep thinking he has the plan to cancel more long-term debt but it’s so messy. I’m exhausted and it’s like our lives are pawns. We’re here for them to play with and sacrifice.”

Cross was speaking after Biden on Wednesday announced the extension of federal student loan forbearance, giving borrowers — whose $1.6 trillion in debt remains an overhang on the economy — until May 1 to start repayments.

It’s the second such extension and comes as the omicron variant of the Covid-19 virus has forced some businesses to close over the holidays, and consumers to pull back on spending and going out.

She noted that the latest action would likely add to the savings consumers have accrued from government transfers over the past two years of the pandemic.

Student loans have been the fastest-growing debt category in the U.S. over the past decade as more Americans seek higher education and school costs accelerate.

About one in eight people in the U.S. currently have student loans, with the federal total skyrocketing to a record $1.6 trillion in the third quarter this year. Some groups, including Black Americans and women, are more likely to hold school-related debt.

The economic drag caused by student loans has prompted policy makers to call for broad relief, and former presidential candidate Bernie Sanders even called for a cancellation of all student debt. Studies have found that it can delay homeownership, marriage, having kids and attending a higher-degree program.

Loan Forgiveness

“I hope between now and May, things drastically improve or they come up with a solution, whether that’s slashing interest rates on loans or some sort of loan forgiveness,” said Emily Courter, 27, from New Hampshire, who owes $350 a month in federal loan payments.

Borrowers also generally struggle to pay student-debt back: even pre-pandemic, 1 in 5 with school-related debt were behind on payments. While the majority of the debt is held by those in their 30s, it tends to follow people late into life with $130 billion held by people over the age of 60, according to Federal Reserve data.

The Biden administration’s extension is set to help 41 million people save $5 billion each month, reducing the risk of delinquency and default, the Education Department said in a statement Wednesday. Those borrowers are relieved, but still concerned about May 1, when the suspension is lifted.

About 90% of school loan debt holders aren’t financially stable enough to resume payments, according to one study from the Student Debt Crisis Center.

Targeted Assistance

While the original 2020 pause made sense, the continued extensions don’t have a means or income test and don’t limit the relief to only those who need it, according to Jason Delisle, a senior policy fellow in the Center on Education Data and Policy at the Urban Institute.

“At this phase, we should think about targeted assistance rather than this very broad approach and it’s creating a lot of windfall benefits,” Delisle said. “Policy makers have had plenty of time to come up with some sort of alternative.”

Even so, for 36-year-old Mel Mills, a freelance digital marketer who works for Wayne State University, the latest news is a godsend. He owes more than $100,000 in student debt, about five times the U.S. average.

While the majority of his debt is private, he’ll be using the extra months of cash saved from the government loans to pay for a leaky roof and add to savings.

“Anything that puts more money back in your pocket — even for the short term — it’s relieving,” he said. “I know that whatever I owe is still coming due but it gives me more time to prepare and to just get my footing.”

Updated: 12-22-2021

Joe Biden’s Student-Loan Reprieve Eases $1.6 Trillion Worry, for Now

* President Extends Pause On Student Loan Repayments Until May
* School Debt Still Seen As Long-Term Problem For The Government

Americans who were dreading the burden of resuming student-loan repayments in February got a reprieve from President Joe Biden, but they aren’t feeling entirely at ease yet.

“That’s a huge relief for now. But it still interrupts my ability to plan long term,” said Chloe Cross, 29, who works in the film and television industry in Los Angeles and owes $32,000 in federal student loans.

“I keep thinking he has the plan to cancel more long-term debt but it’s so messy. I’m exhausted and it’s like our lives are pawns. We’re here for them to play with and sacrifice.”

It’s the second such extension and comes as the omicron variant of the Covid-19 virus has forced some businesses to close over the holidays, and consumers to pull back on spending and going out.

“It’s just kicking the can down the road, really,” said Bloomberg economist Yelena Shulyatyeva. “At some point, the administration will have to make a decision of what to do with student debt.” She noted that the latest action would likely add to the savings consumers have accrued from government transfers over the past two years of the pandemic.

Student loans have been the fastest-growing debt category in the U.S. over the past decade as more Americans seek higher education and school costs accelerate.

About one in eight people in the U.S. currently have student loans, with the federal total skyrocketing to a record $1.6 trillion in the third quarter this year.

Some groups, including Black Americans and women, are more likely to hold school-related debt.

Loan Forgiveness

About 90% of school loan debt holders aren’t financially stable enough to resume payments, according to one study from the Student Debt Crisis Center.

Targeted Assistance

While the majority of his debt is private, he’ll be using the extra months of cash saved from the government loans to pay for a leaky roof and add to savings.

Updated: 1-5-2022

Student-Loan Burdens Upend the American Homeownership Dream

* Higher Earners With Large Debts Are Less Likely To Buy A Home
* Jain Study Shows Borrowers In Asian, Black Areas Are Hit Hard

A central part of the “American Dream” is to buy a house, pay it off over time and retire with hundreds of thousands of dollars of equity in the home.

Student-loan burdens are upending this scenario, according to a study from the Jain Family Institute that found the rise in student debt has become a major obstacle to purchasing a home — especially among relatively high-income young borrowers.

The research brings into question the value of a college degree. For young adults earning $100,000 or more, higher student debt corresponds with lower homeownership in each year of the 10-year study.

Overall, the rate of homeownership among student borrowers age 18 to 35 has dropped 24% in the decade through 2019, the report shows. People living in Black and Asian communities saw the biggest declines — even as they started with the lowest rates back in 2009.

Owning a home has traditionally played a key role in building financial security for millions of Americans. In 2019, homeowners had a median net worth of $255,000, compared with $6,300 for renters or others, according to a 2020 Survey of Consumer Finances from the Federal Reserve.

Researcher Eduard Nilaj, author of the Jain report, said by email that the freeze in student-loan payments since the beginning of the pandemic — recently extended by another three months — may have enabled some mid- and high-income student-loan borrowers to buy a home. But the surge in house prices has also been a deterrent.

Only debt cancellation or a large reduction in interest rates would likely make an impact on home ownership.

As the pool of Americans attending college increases, the average student borrower is getting poorer, Nilaj found. And as higher-education fees have increased, so have the amount of student loans.

From 2009 to 2019, the median estimated income of student debtors in the Jain sample shrank to $67,364 from $82,765. At the same time, the share of people with outstanding student-loan balance of $25,000 or more soared.

“Rather than paying a mortgage for a house, young people pay student-loan debts that are mortgage-like, both in the scale of outstanding balance and length of term,” Nilaj, who tracked more than 800,000 student-loan borrowers, wrote in his report. “While a decline in homeownership is just one of the many concerning trends shaping the lives of young Americans, its pervasiveness may signify a new normal.”

Updated: 1-13-2022

Student-Loan Processor Navient To Cancel $1.7 Billion of Debts

Agreement to forgive private loans for 66,000 borrowers resolves state lawsuits against company.

A former unit of student-loan giant Sallie Mae said it would cancel $1.7 billion in private student debt for about 66,000 borrowers to resolve claims that it engaged in deceptive lending practices.

Navient Corp., a student-loan servicer that split off from Sallie Mae in 2014, agreed to the sum in a settlement with 40 state attorneys general. The loans are private loans, so the losses will be covered by Navient’s investors rather than the federal government.

Nearly all the canceled loans originated at Sallie Mae from 2002 to 2010, at a time when student debt soared, on its way to becoming the second-highest form of household credit after mortgages.

Sallie Mae was at the forefront of that boom, both as the biggest originator of private loans as well as the biggest lender under a federal program that guaranteed student loans.

The loans primarily went to borrowers with poor credit, and who attended schools with shaky records, including many for-profit schools, according to a website run by the settlement administrator. All of the loans forgiven in the agreement were in default.

“For too long, Navient contributed to the national student debt crisis by deceptively trapping thousands of students into more debt,” said New York Attorney General Letitia James.

As part of the agreement, Navient continued to deny the claims or that the company has harmed any borrowers. “The company’s decision to resolve these matters, which were based on unfounded claims, allows us to avoid the additional burden, expense, time and distraction to prevail in court,” said Mark Heleen, Navient’s chief legal officer.

Navient has faced numerous lawsuits in recent years that alleged the company engaged in unfair and deceptive conduct against borrowers, including steering those with federal loans toward plans that would allow them to stop making payments but in which interest continued to accrue, rather than toward plans in which monthly payments are tied to borrowers’ income.

Last March, a Seattle-area judge ruled that the company had broken a consumer-protection law in a case brought by Washington’s attorney general.

“Navient repeatedly and deliberately put profits ahead of its borrowers—it engaged in deceptive and abusive practices, targeted students who it knew would struggle to pay loans back and placed an unfair burden on people trying to improve their lives through education,” Pennsylvania Attorney General Josh Shapiro said.

Lindsay Clark is hopeful that the settlement will apply to her.

Mrs. Clark, 32 years old, who works in Washington, D.C., says she accrued about $100,000 in student loans while earning an undergraduate degree from Yale University and a master’s degree from Columbia University, where she studied international affairs.

Her debt has since ballooned to $206,000 after she repeatedly placed her loans in forbearance, which limited her monthly payments while they racked up interest.

She said she was credulous when it came to her student debt but blames Navient for steering her toward the forbearance plan without fully informing her of the consequences.

When she heard about the settlement she was initially elated.

“I thought great, they are finally being brought to justice,” she said.

The agreements resolve all six outstanding state lawsuits against Navient, the company said. As part of the settlement, the company will make a one-time payment of approximately $145 million to the states.

In addition to loan cancellation and some restitution for borrowers with private loans, Navient will pay $95 million to about 350,000 federal loan borrowers—or about $260 each—who were placed into certain types of forbearance programs that caused them to accumulate more debt rather than entering income-based repayment plans, the states said.

States will distribute restitution to borrowers within their jurisdictions. Massachusetts, for example, will receive more than $6 million, including $2.2 million in restitution for more than 8,300 federal loan borrowers, state Attorney General Maura Healey said.

Federal loan borrowers eligible for restitution will be notified by mail this spring, with checks going out in the middle of the year, according to the settlement administrator’s website. Private borrowers who qualify for discharge will be notified by July.

Private loans without federal backing make up less than 10% of the total $1.7 trillion student-loan industry. About 43 million people owe $1.6 trillion in federal student debt, Education Department data show. About 5.2 million of those federal borrowers are in default. Those borrowers, unless they also held private student loans, aren’t affected by Thursday’s settlement.

Navient recently announced its exit from federal student-loan processing. It had been one of the primary federal contractors, serving around six million borrowers. Its accounts were transferred to a new contractor, Maximus, whose role was approved by the Education Department.

The Education Department also has taken steps to forgive billions in debt held by disabled borrowers, as well as borrowers who went to institutions that federal regulators say practiced deceptive recruiting practices, such as ITT Technical Institute.

The piecemeal moves have resulted in $11.5 billion in canceled debt for around 600,000 borrowers over President Biden’s first year in office. Student loan payments have been suspended by the government during the pandemic, with the latest extension now set to expire on May 1.

The Biden administration is in the midst of restructuring its student-loan processing system. In November it announced it was ending its relationship with private collection agencies that had been tasked with recovering payments from federal student-loan borrowers in default to improve collections and provide borrowers with more support.

The Consumer Financial Protection Bureau has been suing Navient since 2017 over allegations that it steered borrowers into postponing payments instead of entering lower-cost, income-driven repayment plans. The CFPB has said the practice cost borrowers $4 billion in interest expense. Navient has disputed the government’s claims.

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