Policymakers, citizens ponder possibilities behind student loan forgiveness

By Bethel Habte

Nationally, the tab is $1.3 trillion and climbing.

With 25 percent of the outstanding student loan debt already in deferment, forbearance or default, policymakers in Washington are wondering: should the federal government forgive it?

Borrowers and non-borrowers in Chicago chimed in with their thoughts.

“Either way someone’s going to have to pay, right?,” said 30-year old Chicago resident Karen Craig, one of 40 million Americans with student loan debt.

With a bachelor’s degree under her belt, Craig is now working on a graduate degree. While Craig has loans “out the wazoo,” she said she believes the debt is her cross to bear. “I would not want to put the burden on [other] people,” she said. “I’d rather deal with it myself.”

A survey by the Department of Education ranks Illinois 12th in average student loan debt per borrower in the 50 states and Washington D.C., with an average of $27,303.21 per borrower.

Chicago resident Michelle Moratillo, 24, said she wouldn’t want the debt burden to roll over to taxpayers. “I wouldn’t want to pay for someone else’s student loans,” she said, adding that she worries for a friend who’s heavily burdened. “All this is going to catch up to her.”

While outright forgiveness is rare, income-driven repayment plans currently exist to allow borrowers to make payments between 10 to 20 percent of their discretionary income, and allow total forgiveness of the balance after 20 to 25 years. That difference would roll over to the government’s balance sheet.

Some economists and think tanks have argued against income-driven repayment and its subsequent loan forgiveness. In a comprehensive April 2014 report, Brookings Institution fellows Beth Akens and Matthew Chingos argued that income-driven repayment plans are unnecessary for ensuring affordability and that they create incentives for excessive borrowing, “potentially contributing to rising college prices for everyone.”

Their research found that the most lenient pay-back option – 10 percent of disposable income and forgiveness after 20 years – led to the highest projected shortfall, $14 billion per year, versus $11 billion per year for another attractive plan that requires 15 percent of disposable income and forgiveness after 25 years.

“In the case of income-based repayment programs, the moral hazard is that students take on more loans than they otherwise would because they know they won’t have to pay the full cost if they experience low incomes later on,” Akens and Chingos concluded. “There is no way to get rid of moral hazard entirely, but eliminating the forgiveness provisions would reduce the potential for over-borrowing by requiring borrowers to eventually pay off their debt, while protecting them from unaffordable payments at any given point in time.”

But in Chicago, Staci Muhammad, 42, with no student loan debt of her own, feels as though sharing the debt through the greater tax base would be a favorable alternative.

“I think it’s moving more toward free education, which is a human right,” she said, adding that the cost of education is unfairly misaligned with real earnings after graduation.

This month the Obama administration issued A Student Aid Bill of Rights and several proposals to ensure that loan servicers treat borrowers fairly. In 2012, the White House partnered with the IRS to ease income-based repayment sign-ups. According to the National Student Loan Data System, enrollment grew in the final two quarters of 2013 by nearly 40 percent to 1.3 million borrowers. According to the White House, that number’s up to 2.4 million today.

The White House issued “A Student Aid Bill of Rights” that outlines the rights of borrowers, including the right to an affordable repayment plan.


Senate Democrats, including Sen. Elizabeth Warren (D-Mass.), took the debate a step further in a letter to Department of Education Secretary Arne Duncan, urging the government to find more ways to help borrowers buried in debt.

“The Higher Education Act, for example, directs the Department of Education to implement a plan to cancel student loan borrowers’ debts when their colleges act in ways that hurt the quality of their education or their finances,” the letter states. “To date, however, the Department of Education has yet to give borrowers a clear idea of how to exercise this option.”

In February, the U.S. Department of Education forgave more than $480 million borrowed by students of Corinthian Colleges Inc., the company behind three for-profit colleges. Consumer Financial Protection Bureau in a legal filing said the publically-traded company “deceptively and unfairly induced students to incur significant debt.”

Chicago resident Michael Pavelich, 29, said that while he believes there’s already too much government spending, he wouldn’t argue with measures to help borrowers dig themselves out of debt.

“I think a lot of times when people are 18 they don’t actually realize how much debt they’re taking on,” he said.

Photo at top: According to a survey by the Department of Education, student loan borrowers from Illinois owe an average of $27,303.21. (Bethel Habte/Medill)