Addressing the $1.5 Trillion in Federal Student Loan Debt

Ben Miller, Colleen Campbell, Brent J. Cohen, and Charlotte Hancock

About 43 million adult Americans—roughly one-sixth of the U.S. population older than age 18—currently carry a federal student loan. Collectively, they owe $1.5 trillion in federal student loan debt. Additionally, there is an estimated $119 billion in outstanding student loans from private sources that are not backed by the government.¹ This debt burden fails disproportionately on the backs of young adults, as approximately one-third of people ages 25 to 34 hold a student loan.² And while it is true that not every student borrower is in distress, student debt is an issue that both has a tangible effect on many borrowers’ lives and raises broader concerns for the overall economy. It affects us all.

Though Millennials are just as educated as Generation X—and hold just as much student loan debt—their work careers have been marred by the Great Recession.³ As the job market retracted, it became more difficult for Millennials to jump-start their economic futures.⁴ Consequently, Millennials have felt the crunch of student loan debt more acutely than other generations, and this has sparked interest in bold ideas to address the twin issues of college affordability and outstanding student debt.

As a policy response to rising tuition costs, the Center for American Progress has proposed Beyond Tuition, a plan that moves toward debt-free higher education.⁵ Under the plan, families pay no more than what they can reasonably afford out of pocket, with additional expenses covered by a combination of federal, state, and institutional dollars. Tackling affordability challenges for tomorrow’s students is an essential task for public policy to address, but it should be paired with new ideas to provide relief to current borrowers. A number of different approaches for addressing the high level of federal student loan debt should be considered.

Designing an effective policy response requires understanding the different ways outstanding student loan balances impact different types of borrowers, since stress points to repay vary depending on individual characteristics. For example, two-thirds of those who default on their student loans are borrowers who either did not finish college or earned only a certificate.⁶ At 45 percent, the average default rate for these individuals is three times higher than the rate of all other borrowers combined.⁷ While defaults are clearly impacted by whether or not a borrower completes a degree, the size of the outstanding balance appears to exert less influence, as reflected in the relatively low amount of debt owed by the typical defaulter, which is $9,625.⁸

By contrast, borrowers who completed a degree, especially at the graduate level, are less likely to default but may still face struggles related to repayment. For instance, the U.S. Department of Education projects that just 6 percent of the dollars lent to graduate students ultimately go into default, compared with 13 percent of funds lent to college juniors and seniors or a quarter of loans for students in their first or second year at a four-year institution.⁹ However, graduate borrowers face a different set of challenges related to having higher debt burdens. More than one-third of borrowers who owe $40,000 or more—an amount of debt that only graduate students or independent undergraduates can obtain in principal—are paying their loans back on a repayment plan that ties their monthly payments to their income, suggesting that their student loan debt otherwise represents too large a share of their income. If borrowers fail to stay on the plan or if their payments do not fully satisfy outstanding interest, they can accumulate large amounts of additional interest.

Broad breakdowns of borrowers by debt level and attainment status can also mask particular challenges related to equity. For instance, Black or African American students who earned a bachelor’s degree had a default rate nearly four times higher than their similarly situated White peers.¹⁰ Students who are veterans, parents, or first-generation college students, or have low incomes, are likely to face higher risk of default.¹¹

Given this landscape, this chapter considers different options for addressing the $1.5 trillion in outstanding federal student loan debt. These solutions are meant to be independent of broader loan reforms, such as giving relief to borrowers whose schools took advantage of them. These options also presume keeping and preserving key existing benefits, such as Public Service Loan Forgiveness (PSLF).

Specifically, four options to tackle federal student loan debt are considered:

• Forgive all federal student loan debt.
• Forgive up to a set dollar amount for all borrowers.
• Reform repayment options to tackle excessive interest growth and provide quicker paths to forgiveness.
• Change repayment options to provide more timely forgiveness.

Understanding the potential implications of each of these policies can provide policymakers with a clearer sense of the different ways to address the nation’s $1.5 trillion in outstanding student debt

Policy Goals for Helping Current Borrowers

Rather than endorsing a specific approach here, our hope is that policymakers and the public can examine the trade-offs and merits of each proposal, especially by considering a range of policy goals, including equity, simplicity, extent of impact, and providing a meaningful level of relief.

Prioritize Equity

The worries and challenges facing student loan borrowers are not uniform. For some, a student loan represents a significant risk of delinquency and default. Such an outcome can be catastrophic—ruined credit; garnished wages and Social Security benefits; seized tax refunds; denial of occupational and driver’s licenses; and the inability to reenroll in college.¹² For other borrowers, student debt constrains or delays their ability to access and sustain the most basic markers of the middle class, such as saving for retirement and purchasing a home, which can, in turn, increase wealth. Student loan debt may also deter family formation, as couples may be concerned about covering the additional expense of having a child.

Individual circumstances vary, and repayment hardship can be different even for borrowers who otherwise have the same levels of educational attainment and/or income. This can be due to other factors, such as the presence or absence of familial wealth or discrimination in housing or employment. It is crucial, therefore, that any policy aimed at current student loan borrowers include an equity lens to acknowledge and address these differences. The continued unaffordability of higher education has forced too many students into debt that a rational financing system would support only with grant aid. An equity lens should consider the following groups of borrowers and be used to assess how well a given proposal would serve them:

• Borrowers who do not complete college. About half of all individuals who default on their student loans never earned a college credential.¹³ These individuals typically owe relatively small balances, with about 64 percent owing less than $10,000 and 35 percent owing less than $5,000.¹⁴ While the exact reason these borrowers struggle is unknown, a likely explanation is that they did not receive a sufficient earnings boost to pay off their debt, meaning they have all of the expense and none of the reward of attending college.
• Black or African American borrowers. Research shows that the typical Black or African American borrower had made no progress paying down their loans within 12 years of entering college, and nearly half had defaulted. This inequity persists even among those who earned a bachelor’s degree, with Blacks and African Americans defaulting at a rate four times higher than their White peers.¹⁵
• Borrowers who have dependents. Student-parents make up 27 percent of all undergraduates who default on their federal loans.¹⁶ What’s worse, roughly two-thirds of student-parents who default are single parents, meaning that the negative repercussions of default have the potential to weigh more heavily on borrowers’ children.
• Pell Grant recipients. More than 80 percent of Pell Grant recipients come from families who earn $40,000 annually or less.¹⁷ Pell Grant recipients constitute an exceptionally high share of defaulted borrowers. Roughly 90 percent of individuals who default within 12 years of enrolling in college received a Pell Grant at some point.¹⁸ And Pell Grant recipients who earned a bachelor’s degree still have a default rate three times higher than that of students who never received a Pell Grant.¹⁹

There is significant overlap among these populations. For example, nearly 60 percent of Black or African American students also received a Pell Grant, as did almost half of Hispanic or Latinx students.²⁰ Similarly, about 60 percent of students who are single parents received a Pell Grant, and about 30 percent of single-parent students are Black or African American—versus 15 percent of all students.²¹ The result is that a policy specifically aimed at one population—such as relief for Pell recipients—will also affect many but not all of the individuals in these other groups.

Ensure Simplicity

Too often, public policy may seem effective in the abstract but ineffective in reality if its implementation is too complex. Public Service Loan Forgiveness is a prime example. The basic idea of forgiving federal student loans for individuals who work a decade in a public service job is easy to communicate. But when overlaid with four gating criteria—qualifying loans, employment, repayment plans, and payments—the policy has led to borrower frustration and lost benefits.²²

Therefore, a successful policy for current borrowers should be clear and simple, both in its message and in its execution. That means striving, wherever possible, for approaches—such as automatic enrollment or reenrollment—which ensure that government employees and contractors, not borrowers, shoulder the complexity of a policy’s implementation.

Aim for Broad Impact

Reaching as many people as possible can help build support for an idea. Striving for a broad impact interrelates with simplicity. For example, broader eligibility definitions that reach more people could result in less work to figure out who should be eligible for relief. Additionally, aiming for broader impact increases the chances of capturing the people who desperately need relief but whose situation may not be as clear from just a look at their income, educational attainment, or other easily measurable characteristics.

Provide Meaningful Relief

Student debt is not just an abstraction that lives on a spreadsheet. For borrowers in debt, a loan can feel like an unending, stressful obligation with no relief in sight. For this reason, an effective policy will provide a meaningful level of relief. It is important for borrowers to see and feel actual relief under any program solution for current student debt. In some cases, this might entail addressing potential unintended consequences. As an example, income-driven repayment (IDR) may solve unaffordable monthly payments by aligning borrowers’ payments with how much money they earn. However, because interest keeps accumulating, borrowers who make smaller payments on these plans may watch their balances grow—leaving them with the sense of digging a deeper hole, even if forgiveness is an option.

Four Policy Options to Assist Existing Student Loan Borrowers

Rather than recommending a specific proposed option, we offer a combination of both commonly proposed ideas and new ones generated by the staff at the Center for American Progress and Generation Progress.

These options are intended to be one-time solutions that could pair with a larger plan for ensuring affordability going forward, such as CAP’s Beyond Tuition. Combining a prospective affordability plan with this relief should cut down on the number of future loan borrowers and lessen the need for subsequent large-scale relief policies.

Option 1. Forgive All Federal Student Loan Debt

The federal government would forgive all outstanding federal student loans, and waive the taxation of any forgiven amounts.

Estimated cost: $1.5 trillion in cancellation plus an unknown amount of anticipated interest payments, both of which would be adjusted by whether the Education Department already expected them to be repaid. For example, a $10,000 loan that the agency did not expect to be repaid at all would not cost $10,000 in forgiven principal. There would also be costs associated with not taxing forgiven amounts, which also must be part of the policy.

Estimated effects: It would eliminate debt for all 43 million federal student loan borrowers.²³

Does it address equity? Forgiving all debt would get rid of loans for all the populations identified in the equity goal described above. It will also end up providing relief to some individuals who are otherwise not struggling or constrained by their loans.

How simple is it from a borrower standpoint? This policy should be easy to implement for borrowers, since it should not require any opting in or paperwork.

How broad is its impact? This policy would help all 43 million federal student loan borrowers.

Will it feel like relief? Yes—borrowers will not have to make any payments, so they will feel the change.

Who are the greatest beneficiaries? From a dollar standpoint, the highest-balance borrowers have the most to gain from this proposal—especially those who also have higher salaries. They would experience the greatest relief in terms of reduction of monthly payments while also having the wages to otherwise pay back the debt. This is because undergraduate borrowing is capped in law at $31,000 or $57,500, depending on if they are a dependent or independent student, whereas there is no limit on borrowing for graduate school.²⁴ Those who have higher incomes would also feel larger benefits by freeing up more of their earnings to put toward other purposes. Therefore, those with debt from graduate education, especially for high-paying professions such as doctors, lawyers, and business, would significantly benefit.

What is the biggest advantage? The policy is universal, and it could be implemented without the need of action on the part of borrowers as long as there are no tax implications for forgiveness.

What is the biggest challenge? This option carries the largest price tag by far. It also would result in forgiving a substantial amount of loan debt of individuals who have the means to repay their debt. This includes borrowers with graduate degrees and potentially high salaries.

How could this option be made more targeted? Limiting forgiveness to only undergraduate loans would help target the plan’s benefits, because there are many graduate students studying in fields linked to high incomes who have no undergraduate loan debt.²⁵ The Education Department unfortunately does not provide a breakdown of the amount of outstanding undergraduate student loan debt; thus, it is not possible to know the cost of this policy revision.

Option 2. Forgive Up to a Set Dollar Amount for All Borrowers

The federal government forgives the lesser of a borrower’s student loan balance or a set dollar amount, such as $10,000, $25,000, $50,000, or some other amount. The proposal would include waiving any required taxes on the forgiven amounts. Doing so provides a universal benefit which ensures that loan debt will be completely wiped away for borrowers who have a balance below the specified level, while those with higher debts also get some relief.

Estimated cost: The total cost varies depending on the dollar level chosen. For example, forgiveness of up to $40,000 for all borrowers would result in canceling $901.2 billion, while forgiveness of up to $10,000 would cancel $370.5 billion. Both cases would also have additional costs in the form of expected future interest payments, but it is not possible to calculate this amount with current Education Department data. These amounts would be adjusted by the Education Department’s existing expectations around which loans would be repaid. Finally, there would be costs associated with not taxing forgiven amounts.

Estimated effects: Effects vary by dollar amount chosen. Forgiveness of up to $10,000 would eliminate all student loan debt for an estimated 16.3 million borrowers, or 36 percent of all borrowers, and reduce by half the balances for another 9.3 million, or 20 percent of all borrowers.²⁶ Forgiveness of up to $40,000 would wipe out debt for 35 million borrowers—about 77 percent of borrowers. The number of borrowers who would have all their debt canceled under this plan might be a bit lower, depending on the dollar amount, because some individuals who currently appear to have low debt levels are in school and are thus likely to end up with higher loan balances as they continue their studies. Table 1 shows the estimated effects and costs across a range of maximum forgiveness amounts.

Table 1: Estimated amount of canceled debt and impact of different levels of federal student loan forgiveness

Note: Data are based on the status of the federal student loan portfolio in the first quarter of the 2019 federal fiscal year. These estimates include borrowers who are currently enrolled and thus might incur greater debt loads in the future. These figures do not include foregone future interest payments, costs associated with not taxing forgiven debt, or adjustments based on the U.S. Department of Education’s assumptions of how much student loan debt will be repaid.

Source: Office of Federal Student Aid, "Portfolio by Debt Size," 2019.

Does it address equity? Yes, though the exact equity implications will vary somewhat based on the level chosen. Table 2 breaks down the percentage of borrowers in a given racial/ethnic category based upon the cumulative amount of federal loans borrowed. Table 3 flips this analysis to show the distribution of debts within a given racial or ethnic category. Both tables are based on borrowers who entered higher education in the 2003–04 academic year and their cumulative federal loan amounts within 12 years. While this is the best picture of longitudinal student loan situations by race and ethnicity, the fact that these figures represent students who first enrolled prior to the Great Recession means it is possible that, were they available, newer numbers might show different results. In considering these tables, it is important to recognize that higher amounts of forgiveness would still provide benefits for everyone at the lower levels of debt as well. That means that increasing forgiveness by no means leaves those with lesser balances worse off.

Hispanic or Latinx borrowers, for example, will disproportionately benefit from a forgiveness policy that picks a smaller dollar amount, because this group makes up an outsize share of borrowers with $20,000 or less in student debt.²⁷ These same individuals would still benefit from forgiveness at higher dollar amounts, but their concentration among lower-balance borrowers means the marginal benefits of forgiving greater dollar amounts are smaller.

The story is different for Black or African American borrowers. They make up a roughly proportional share of low-balance borrowers but a disproportionate share of those who took out between $40,000 and $100,000.²⁸ That means the marginal effect on Black or African American borrowers will be greater for higher dollar amounts.

Looking at borrowers based on Pell Grant receipt tells a slightly different story. Individuals who have received a Pell Grant are proportionately represented among lower-balance borrowers and underrepresented among those with the highest balances. But they are most overrepresented among those who took out between $20,000 and $60,000.²⁹

Table 2: Hispanic or Latino borrowers make up a disproportionate share of low-balance borrowers, while black or African American borrowers are overrepresented among those who borrowed between $40,000 and $100,000

Note: The racial and ethnic breakdown of different ranges of cumulative federal student loan debt acquired by 2015 for borrowers who entered higher education in the 2003–2004 academic year.

Source: National Center for Education Statistics, “2003-04 Beginning Postsecondary Students Longitudinal Study, Second Follow-up (BPS:04/09),” Table gebmn0e.

Table 3 presents a different way of considering this issue by showing the distribution of debts within a given racial or ethnic category. For example, though Black or African American borrowers make up a disproportionate share of borrowers with balances between $40,000 and $100,000, 77 percent of these individuals had debt balances below this amount. This highlights the importance of considering not just the marginal effects of different forgiveness plans on equity, but also how many individuals within a given group might benefit at varying benefit levels.

Table 3: Cumulative amount of federal loans borrowed

Note: Nearly half of Hispanic or Latino borrowers took out $10,000 or less, while a majority of black or African American borrowers took out between $10,000 and $60,000 The percentage distribution of the cumulative federal student loan debt acquired by 2015 for borrowers of the same race or ethnicity who entered college in the 2003–2004 academic year.

Source: National Center for Education Statistics,”2003-04 Beginning Postsecondary Students Longitudinal Study, Second Follow-up (BPS:04/09),” Table gebmpce5.

Looking at the effects of cancellation only from a distributional standpoint can, however, miss other dimensions of equity that merit consideration. For example, borrowers at the same indebtedness level may be in quite different circumstances. Discrimination in housing and employment, a lack of familial wealth, or other conditions could mean that a borrower who otherwise might seem less in need of assistance would still benefit in a meaningful way that could spur wealth building and address generational asset gaps.

How simple is it from a borrower standpoint? This option is fairly simple and could be implemented administratively with no affirmative work required from borrowers as long as there are no tax consequences for forgiveness.

How broad is its impact? This policy would provide at least partial relief for all federal student loan borrowers.

Will it feel like relief? Yes, borrowers would see a reduction in their balances and payments, though that relief would be proportional to their outstanding balances.

Who are the greatest beneficiaries? At lower dollar amounts, the biggest beneficiaries are smaller-balance borrowers who are more likely to have all their debt wiped away. As the amount of forgiveness rises, those individuals will already have no balance and thus have no additional debt to forgive. This means that those who have the full dollar amount forgiven will increasingly be borrowers with higher balances.

What is the biggest advantage? This is a way to hit a target level of relief that could wipe away debt for those in the greatest distress, while providing a more universal benefit. There may also be benefits for the overall economy, allowing people to purchase homes, save for retirement, and attain the traditional middle-class staples that may be harder for borrowers with student loan debt to obtain.

What is the biggest challenge? Because the benefit is universal, it will end up providing partial relief to a large number of individuals who may not need assistance, unless other elements are added to the policy to target it as described below. Those receiving relief would include individuals with graduate loans working in the areas of finance, law, business, and medicine.

How could this option be more targeted? In addition to varying the dollar amount forgiven, there are a few ways to improve targeting and reduce costs, although these approaches would add some complexity to the overall plan and its administration. One way would be to apply the policy only to undergraduate loans. Another would be to tie the forgiveness amount to a borrower’s earnings so that higher-income individuals receive less forgiveness.

Option 3. Reform Repayment Options to Tackle Excessive Interest Growth and Provide Quicker Paths to Forgiveness.

Twelve years ago, Congress created the income-based repayment plan as its answer to unaffordable student loans.³⁰ With the creation of additional plans, there is now a suite of income-driven repayment (IDR) options available to borrowers. The exact terms vary, but the basic idea is to connect monthly payments to how much money borrowers earn and provide forgiveness after some set period of time in repayment.

Though IDR plans are increasingly popular, there’s a sense among some policymakers that in their current form, they do not fully provide relief for borrowers. Part of this is due to the complex and clunky program structure. Borrowers must fill out paperwork to get on the plan and then reapply each year. Failure to do so can kick them off the plan, leading to capitalized interest, delayed forgiveness, and a larger balance.³¹

But IDR’s other major problem relates to accumulating interest. While borrowers can lower their monthly payments on IDR, even paying nothing each month if they are earning little to no income, interest continues to accrue. The result is that borrowers can feel like they are trapped with their loans and with a balance that keeps growing even as they make payments—the only way out being forgiveness that is potentially two decades down the line.

This option would make IDR more attractive by changing the terms so that borrowers no longer have any interest accumulating on their debt. Borrowers would make a monthly payment equal to 10 percent of their discretionary income, even if that would result in repayment taking longer than the 10-year standard repayment plan. Borrowers with no discretionary income would not have to make monthly payments, just as in the past. However, any interest not covered by that payment would be forgiven, ensuring that borrowers’ balances never increase. Undergraduate debts would be forgiven after 15 years, while graduate borrowers would have to wait five years longer—20 years.

Forgiving all interest would be an expansion of some benefits that currently exist. For instance, the federal government covers all unpaid interest on subsidized Stafford loans for the first three years of repayment on most IDR plans.³² And on the Revised Pay As You Earn plan, the federal government covers half of unpaid interest for the duration of repayment for all loan types. This includes interest on subsidized loans beyond the three-year period.³³

Estimated cost: Unfortunately, there are not enough available data to get a sense of the overall cost of this proposal. Calculating the cost of this option would require at least knowing more information about the distribution of borrowers using IDR, in terms of their income and debts. Currently, the Education Department provides information only on the distribution of debt balances in IDR. Without better data, it is not possible to know what share of borrowers on IDR make payments below the rate at which interest accumulates and would benefit from a greater subsidy. Moreover, the costs of this change are affected by the amount of subsidized loans a borrower has, because those carry different interest accumulation rules. The net result is that there is no clean way to get an accurate cost estimate.

Estimated effects: There are currently about 7.7 million borrowers using an IDR plan to repay $456 billion.³⁴ It is unfortunately not clear what share of these individuals would benefit from these suggested changes.

Does it address equity? Available data are insufficient to fully answer this question, because there is no information on the usage of IDR by the groups described in the equity goal section. However, the answer at least partly depends on what is done to make the plans more attractive for lower-balance borrowers. That group includes nearly half of Hispanic or Latinx borrowers as well as large numbers of individuals who have debt but did not finish college and are at significant risk of defaulting. Meanwhile, current IDR plans might be beneficial for Black or African American borrowers on paper, just by looking at their disproportionate representation on an analysis of debt levels. But that presumes that payments viewed as affordable through the formula are actually feasible.

The accompanying table illustrates the challenge of making IDR work for borrowers who have a low balance and a low income by showing their repayment plan options. Under the current options for these borrowers, the graduated plan combines the most initial monthly payment relief with the shortest repayment term. Of the four IDR plans, these borrowers are not eligible for one because of their debt and income levels; two plans offer a monthly payment amount that is just a dollar less than the standard plan; and one has the same initial monthly payment as the graduated plan but has them in repayment for almost 20 years.

Table 5: Low-income borrowers with small loan balances may not benefit from income-driven repayment plans

Note: These figures are based on repayment options for a borrower with a $5,000 undergraduate loan balance and a starting adjusted gross income of $25,000 per year, a 5 percent interest rate, and assume that income grows 5 percent every year.

Source: Office of Federal Student Aid, “Repayment Estimator,” 2019.

Even if the borrower had a lower income, and therefore a lower monthly IDR payment, the plans would not provide a great deal of relief (see Table 6). Instead of seeing a decreasing balance, the borrower will instead see it balloon, because they are not able to pay down interest as fast as it is accruing. Forgiving the interest on IDR plans will make the option more attractive, but the requirement of having to wait as long as 20 years to retire a debt that came from a semester or two of school is not going to be an easy sell. This solution still has technical and gatekeeping issues, as borrowers need to opt in to use IDR plans.

Table 6: Very low-income borrowers with small loan balances can receive forgiveness, but only after at least 20 years of repayment

Note: These figures are based on repayment options for a borrower with a $5,000 undergraduate loan balance and a starting adjusted gross income of $15,000 per year, a 5 percent interest rate, and assume that income grows 5 percent every year.

Source: Office of Federal Student Aid, “Repayment Estimator,” 2019.

How simple is it from a borrower standpoint? It would be very simple for borrowers who are on IDR. But the paperwork complications of applying for and staying on IDR plans remain a challenge that needs to be addressed.

How broad is the impact? About one-fourth of borrowers in repayment currently use an IDR plan; thus the effect will be somewhat limited unless changes result in increased usage of these plans.³⁵ In particular, this option would need to boost usage among borrowers who owe $20,000 or less. Currently, less than 10 percent of borrowers with debt of $20,000 or less use an IDR plan, compared with 38 percent of those with debts of $60,000 or more.³⁶ Though this slightly understates usage of IDR by low-balance borrowers because some of these individuals are still in school, the fact remains that there are more borrowers with debts greater than $100,000 on IDR than those who owe $10,000 or less.³⁷

Will it feel like relief? Psychologically, yes—borrowers would still be making the same monthly payment, but they would not feel like they are digging themselves into a deeper hole. Borrowers encouraged to enroll in IDR as part of this change would likely see monthly payment relief.

Who are the greatest beneficiaries? The biggest winners are individuals who make payments through IDR but are not paying down their interest each month. Within that group, the amount of relief will be greater for those with larger debt balances, higher interest rates, or both.

What is the biggest advantage? This solution makes IDR a more viable and attractive long-term plan.

What is the biggest challenge? It may still not be enough to help borrowers with very low balances or who are likely to default, because they still need to navigate the paperwork challenges to sign up for IDR, or the timeline to pay down the debt will still be viewed as too long relative to the amount of time it took to incur the debt. It also presumes that 10 percent of discretionary income is affordable, or that 150 percent of the poverty level is a large enough income exemption.³⁸

How could this idea be more targeted? Capping the maximum dollar amount of interest that can be forgiven each year would better target the benefits of the option, because it would provide less relief for borrowers with larger loan balances. Reducing forgiveness time frames for lower-balance borrowers or adding opportunities for interim forgiveness—such as $5,000 forgiven after five years on the plan—would especially help lower-balance borrowers and make IDR a more attractive option for them.

Option 4. Change Repayment Options to Provide More Timely Forgiveness.

Income-driven repayment plans guarantee that borrowers have an eventual way out of debt by forgiving any balances remaining after a set number of years. While this is a crucial benefit, taking as long as 20 years or 25 years, depending on the plan, to get forgiveness can make the promise feel abstract and like something that might not happen. This proposal would change forgiveness terms to provide interim principal relief for borrowers.

Estimated cost: Unfortunately, there are not enough available data to get a sense of the overall cost of this proposal. Calculating that cost would require at least knowing more about the distribution of borrowers using IDR in terms of their income and debts, as well as how long they have been on IDR.

Looking at the number of borrowers on all IDR plans might provide one way to ballpark the possible cost. For example, by the end of 2016, 5.6 million borrowers were on an IDR plan. If they were all still on those plans by the end of 2018, it would cost $11.2 billion to forgive $2,000 for each of them.³⁹ If those who were on IDR at the end of 2018 stayed on, the cost of forgiving $2,000 for each of them at the end of 2020 would be $14.4 billion. This assumes that the two-year clock for forgiveness would only start going forward.

Estimated effects: For most borrowers on IDR, small forgiveness would be helpful but not transformative. However, there are about 1 million borrowers on these plans who owe $10,000 or less, meaning they would receive a substantial amount of forgiveness in percentage terms. The more likely effect is that interim forgiveness could make IDR more attractive for lower-balance borrowers who may be discouraged from using it today, because waiting up to 20 years for forgiveness on small amounts of debt may not seem worth it.

Does it address equity? There are not enough data to definitively answer this question. However, an interim relief system, if paired with other reforms to accumulating interest on IDR, would make this repayment option much more effective for lower-balance borrowers. This is particularly important for targeting help to individuals who did not finish college, or to Hispanic or Latinx borrowers. Low-balance borrowers currently do not have much incentive to use IDR, because waiting two decades to unload debt accumulated over a semester or a year does not seem like a good deal. Under this option, those low-balance borrowers could retire their debt much faster, while higher-balance borrowers would keep paying for longer. The data are less clear for other groups on whom policies should focus, such as Black or African American borrowers. However, these solutions overall increase the generosity of IDR in a way that should make this option better for anyone who has high levels of debt relative to their income. That, in turn, should help individuals whose earnings do not match the expected return on their debt, such as due to wage discrimination.

How simple is it from a borrower standpoint? There would be some work involved to ensure that borrowers apply for IDR and are making necessary payments. But the relief itself could be handled by the Education Department and student loan servicers.

How broad is the impact? Slightly more than one-quarter of borrowers in repayment currently use an IDR plan, so the effect will be somewhat limited unless interim principal forgiveness encourages increased usage of these plans.⁴⁰ As discussed in the prior option, it would particularly need to boost usage among lower-balance borrowers.

Will it feel like relief? Yes—providing help at interim periods will show that forgiveness is not an abstract concept years in the future. It will also strengthen support for IDR.

Who are the greatest beneficiaries? Though this policy targets everyone, interim relief will help borrowers with lower balances get rid of their debt faster than those who owe more.

What is the biggest advantage? Interim relief employs a universal benefit to provide more targeted relief to those who owe the least.

What is the biggest challenge? Borrowers would still have to navigate IDR, which can be time consuming and confusing.

How could this idea be more targeted? The tiered relief could be limited to undergraduate loans only.

Conclusion

Student loans were initially implemented as a policy innovation to help middle- and upper-middle-income families finance part of the cost of college while lower-income individuals received robust grant aid. Unfortunately, a tool meant to help individuals secure a brighter future has morphed into one associated with years of financial struggle. It is imperative that this problem be fixed for future generations by implementing bold ideas that make it possible to access and succeed in higher education without the burden of excessive debt. Yet policy solutions must not neglect those already being crushed by student debt, the result of decades of declining state investment and rising tuition prices.

While tackling the existing $1.5 trillion in student debt is a major challenge, the good news is that there are multiple paths to relief. As our analysis shows, a range of options exists at various levels of cost and complexity that can take the sting out of student debt. Whatever policy is pursued, it should keep a sharp focus on equity and simplicity, as well as on the recognition that borrowers must feel that meaningful help is on the way.