Debt Forgiveness

The conversation around higher education in the 2020 Presidential campaign has been a robust one. While candidates differ on their stances on tuition-free college, they have also incorporated policy ideas into their platforms on addressing outstanding student debt, many with varying ideas for debt forgiveness. President Trump has not released a campaign platform related to student debt, though he proposed changes to income-driven repayment on the campaign trail in 2016.

Currently, there is one primary path to student loan forgiveness available to student borrowers—income-driven repayment. Income-driven repayment (IDR) plans are meant to protect borrowers from unpredictable income or in the unfortunate chance their education has not yielded an income sufficient to repay. Under these plans, student loan payments are set to a percentage of a borrower’s discretionary income, currently defined as their income above 150 percent of the federal poverty line. Depending on income and family size, borrowers pay 10 percent of their discretionary income (spread across 12 monthly payments) towards their student loan balance. After 20 or 25 years—depending on the specific plan and whether they have debt from graduate school—borrowers who have been unable to fully repay their loans with have their remaining balance forgiven.

There are a few criticisms of these plans currently. One view is that IDR plans are not sufficient to provide necessary relief to borrowers. Another major critique is that even though payments are reduced, interest on the full balance still accrues and can lead to negative amortization. (One plan forgives some interest.) A borrower making a lower-income at the beginning of their career could quickly see their balance balloon because their payments are insufficient to cover interest and make a dent in their principal. This can lead to situations where borrowers in IDR could end up paying significantly more than they would under standard repayment. Research has found some plans are so generous that many borrowers—especially high-debt graduate borrowers—will receive significant benefits under the plans, adding greatly to the costs of the student loan program. And under current law, any amount forgiven under IDR is considered taxable income in contradiction with the intent of the law, to provide struggling borrowers needed relief. A borrower who has had to have reduced payments for 20 or 25 years should not be punished with a massive tax bill, especially struggling borrowers whose income never increased while their balance continued to balloon.

Other candidates want to reform this going forward. Former Vice President Joe Biden would create a new IDR plan that requires payments of 5 percent, not 10 percent, of discretionary income, and would not require payments or allow interest to accrue if a borrower earns $25,000 or less (though it’s unclear whether that income threshold would change with family size, as it does now). If the income threshold doesn’t increase with family size, his plan would provide individuals more relief than borrowers who have families to support. Biden provides for forgiveness after 20 years of repayment (as under some current plans) and, importantly, changes the tax code so forgiveness is not taxable. Former South Bend Mayor Pete Buttigieg would also ensure that forgiveness is not taxable.

Another current type of loan forgiveness offered to borrowers is based on the time a borrower makes payments in a certain type of employment. The first is the Teacher Loan Forgiveness program that provides up to $5,000 to teachers working in low-income schools for five years. Teachers in high-need fields like math, special education, and science can receive up to $17,500 in forgiveness. The other forgiveness program is the Public Service Loan Forgiveness PSLF program. This provides loan forgiveness to people after 10 years of repayment while working full-time in public service—employment by a local, state, or federal government or a non-profit organization—no matter the occupation. However, this program is very complicated with very specific requirements including being enrolled in certain repayment plans and verifying employment. Some borrowers have also been confused thinking their employment qualifies based on their occupation, though their employer does not make them eligible, like a social worker at a for-profit hospital.

Several of the candidates have mentioned fixing and streamlining the PSLF program. Senator Amy Klobuchar says she will overhaul the program to make it easier, but she also says she will expand loan forgiveness in a new program for people employed in “in-demand occupations.” It is unclear from her plan how she would define or identify those occupations or if they are based on local, state, or national needs. The fastest-growing occupations all differ in education levels from home health aides and physical therapist aides to nurse practitioners and software developers, all with wildly different salaries. It is also important to note the difference from the current system with occupation-based forgiveness, rather than employer-based. With a program already overly complicated, this could bring additional complications, as the type of occupation is hard to identify and verify.

Former Vice President Biden would create a new PSLF program where borrowers could get up to $10,000 forgiven annually for up to five years—unlike the current plan, which has no limit on forgiveness. However, this would allow borrowers to see immediate relief in a much shorter time frame. It would also provide borrowers with the flexibility to receive partial forgiveness for a shorter time, allowing them to take a job in the private sector but still benefit from the program. Biden says up to five years of prior public service would qualify under this plan. He also says he would also reform the existing program by adopting the What You Can Do For Your Country Act of 2019 from Senators Gillibrand and Kaine which would fix certain problems of PSLF but allow for forgiveness of half their loan balances after five years. (Senators Booker (no longer a candidate), Harris (no longer a candidate), Klobuchar, Sanders, and Warren are all cosponsors of this legislation.) It is unclear how the two would interact.

Both Mayor Pete Buttigieg and Tom Steyer have suggesting reforming PSLF, but also proposed new National Service plans that would provide for forgiveness. Buttigieg would provide accelerated forgiveness for students in PSLF, providing for 5 percent of balances to be forgiven in each of the first three years, 10 percent in each of the next four, and 15 percent (leading to full forgiveness) in the last three; and would improve the administration of the program. Steyer’s national service plan says people who work in national service jobs for “five years would see all their student loan debt forgiven,” though the plan appears to cap debt forgiveness at “roughly equivalent to the tuition cost of a public in-state college or university” rather than covering borrowers’ full debt loads, including borrowing for living expenses, more expensive institutions, or graduate school.

Related to entrepreneurship rather than public service, Senator Kamala Harris (no longer a candidate) has proposed forgiving up to $20,000 for Pell Grant recipients who start a business in a disadvantaged community and maintain it for three years, though as part of a plan to address the opportunity gap, not student debt broadly. Buttigieg introduced a similar idea as part of his Douglass Plan that would defer and forgive the loans of Pell recipients who start and maintain a business for five years.

Another path to forgiveness available to students is through the Borrower Defense rule, a regulation that provides relief to borrowers who were defrauded by their school. Under the Trump and DeVos Administration, this rule has been changed to make it harder to provide relief to students seeking forgiveness. Biden’s plan calls for returning to the regulation as written under the Obama administration and Senator Klobuchar calls for restoring and strengthening rules to protect defrauded borrowers. Others, like Senator Harris, call for cracking down on for-profit schools that defraud students, presumably referencing the same rule. Buttigieg calls for the cancellation of “the debts of borrowers in low-quality, overwhelmingly for-profit programs,” namely programs that fail the gainful employment test. He also references loan cancellation for “students whose colleges lied to them” and automatic loan cancellation “for borrowers whose colleges close before they can graduate,” both pieces of the Obama Administration’s rule.

Just like in the free college space, Senators Bernie Sanders and Elizabeth Warren have proposed much more expansive plans to address student debt. Both have proposed universal or near-universal student debt forgiveness plans. In addition to eliminating undergraduate tuition and fees at public colleges and universities, Sanders called for canceling “the entire $1.6 trillion in outstanding student debt for the 45 million borrowers.”

Warren, though still proposing very generous forgiveness, doesn’t go as far. She would forgive up to $50,000 of student debt for every student borrower. The forgiveness would be reduced for borrowers earning more than $100,000 annually. For every $3 over that income, the forgivable amount would be reduced by $1. That means eligibility is phased out for borrowers ending at $250,000, with the income threshold doubling to $500,000 for families. Warren says her plan would provide some debt cancellation for 95 percent of borrowers. Warren’s maximum forgiveness amount ($50,000) covers more than the average amount graduates borrow for a four-year degree (just under $30,000), and just under the maximum aggregate federal limits on borrowing for undergraduate loans ($31,000 for dependent students and up to $57,500 for independent students). It is important to note that students of color and low-income students often have to borrow more than the typical graduate.

Universal forgiveness would make little sense on its own without pairing it with a plan to address the cost of college, as the candidates do. But neither candidate would end the student loan program, so people can and will still borrow after the one-time forgiveness. Eliminating tuition and fees will mean those who might have borrowed before to cover those costs will not need loans to cover them going forward, but much of this existing debt comes from expenses beyond undergraduate tuition and fees. Living expenses beyond tuition and fees make up 52 percent of the cost of a four-year degree at a public institution and 70 percent at a community college. Sanders says he will provide Pell Grants to low-income people to help cover these costs (as they are today). However, the current Pell Grant has a maximum award of $6,195 and not all students will qualify for the maximum based on their family income, leaving a gap in need to cover the full cost of attendance. Sanders acknowledges that and says states will have to cover the remaining living costs for low-income families, namely those earning under $25,000 a year. This means anyone without a Pell Grant—and many with—will still have to pay something for living costs and many will still borrow to do so, in contrast to his one-time massive forgiveness proposal.

Warren addresses paying for some living costs in her affordability proposal by investing an additional $100 billion in the Pell Grant program over the next 10 years to increase the maximum Pell Grant award amount, as well as expanding who can qualify. This allows more students to cover a larger share of their living costs with Pell Grants, though the platform does not specify what the largest grant would be or how many students would newly qualify for Pell.

Neither candidate would make graduate school tuition-free, although graduate education debt accounts for a significant portion of the cumulative debt—40 percent last year. Sanders’s plan would provide everyone currently with graduate school debt forgiveness, though he does not address the high costs of those programs going forward. Given that, Sanders’ and (to a lesser extent) Warren’s plans for one-time forgiveness that would be a boon to students with graduate debt, particularly those with professional doctorates like those in law school and medical school who have an average debt of over $117,000.