Drowning in Student Loan Debt

The federal deficit reached just over $1 trillion last year, is expected to top $1.3 trillion this year, and will likely be at least $1 trillion every year for the rest of the decade.

And that’s if everything goes right. Throw in a recession or unforeseen circumstance (cough, coronavirus, cough), and things could get worse.

Which makes me wonder why in the world we’re running a deficit to do things like forgive student loans when the unemployment rate sits at 50-year lows?

I’m not talking about a presidential candidate’s proposal to wipe the slate clean at some date in the future. I’m pointing out income driven repayment (IDR) programs in place today. Under these programs, borrowers can commit to pay a portion of their income toward their student loans for 10 to 20 years (the details depend on their employment) and any balance left over is “forgiven” by the federal government.

I put “forgiven” in quotes because the debt doesn’t disappear, it’s transferred to you and me, the American taxpayers.

The worst part is that most people joining IDR programs aren’t struggling young people who racked up some debt during undergrad; they’re people who went to graduate school, which is much more expensive and you can borrow to pay for living expenses in addition to tuition and fees.

The numbers are staggering.

The Congressional Budget Office (CBO) recently reported that American taxpayers will be on the hook for just over $200 billion in forgiven student loans over the next 10 years. It’s worth noting that in 2011, we were expected to cough up $1.4 billion, a number that had ballooned to $11.5 billion by 2016.

By the end of the decade, the CBO expects 81% of the IDR participants to be graduate students, with an average of $92,000 in loans.

No one’s minding the store. No one is saying “no” to the schools or the borrowers. And they have no reason to shut this off themselves. Schools are raking in billions, and students don’t care, because after a certain level, the money doesn’t matter.

If you’re in graduate school pursuing your master’s in social work, then I applaud you for dedication. But I also understand that you won’t make much money. (And you should understand that, too!) If you plan to enroll in an IDR plan after school, then you know that the most you’ll ever pay toward your student loan is 10% of your income each month. At $60,000 per year, that’s $500 a month.

With that as a backdrop, where’s the motivation to hold loans to a minimum? As long as your borrowing exceeds the balance by one dollar that puts your loan payments over $500 per month, then you might as well borrow $1,000, $100,000, or even $200,000 more than that, because your payment will never change. Grad students who expect to be in IDR programs would be crazy to do anything other than borrow all they can. Why work during school when you can simply borrow more and hand the bill to taxpayers?

It’s a mess of a system that’s made worse by the complicated nature of the law and regulations surrounding it.

Through last June, the Department of Education reported it had processed 102,051 applications for loan forgiveness under income-based repayment plans. The department approved 1,216 and rejected over 100,000. Most were kicked out because their types of loans don’t qualify, even though their loan servicer confirmed that they did.

So now we have tens of thousands of borrowers who made payments according to the law as explained to them by their servicers, who now owe the principal and interest they didn’t pay, as well as interest on those amounts.

I’ve got an idea. How about we kick IDR programs to the curb completely, require schools to bear the weight of graduates who don’t pay back their loans, and make the legal requirements for any program clear enough to be understood by an eighth-grader?

Of course, that would require an act of Congress, whose members are otherwise engaged in political infighting for re-election… which always seems to be the case.

While they fight, our debts pile up. One day, those debts will drown us all.