Student loan safety net needs mending: How simplifying can help

This fall, Suzette Kinslow, a mother of three from Indiana, got a letter that would change her life: The federal government, it said, was wiping out $50,000 in debt she’d taken on a decade earlier for a health information technology degree at ITT Technical Institute because of “misrepresentations” by the now-defunct for-profit college chain.

For Ms. Kinslow, who has been unable to find work in the field, the news was both a relief and a vindication. For years, she’d been saying that the school misled her about her job prospects and failed to prepare her for the state certification exam.

But Joseph White, a tech support specialist in Missouri who has made similar claims against the company, is still waiting for relief from the $120,000 he owes for two ITT degrees.

“It’s a huge burden and a huge weight,” Mr. White says of the debt.

Amid unrelenting pressure from his party’s progressives to provide up to $50,000 per borrower in blanket student loan forgiveness, President Joe Biden has begun canceling the debt of some of those most vulnerable, including thousands of disabled borrowers and victims of for-profit college fraud. All told, the administration has erased more than $12.5 billion in loans owed by more than 650,000 borrowers.

The one-off cancellations have delivered desperately needed and long-awaited relief to those like Ms. Kinslow, who can finally refinance her home and co-sign student loans for her two older children, who are now in college themselves.

But such targeted loan forgiveness does little to address long-standing problems with the student loan system. And for those like Mr. White, it can feel unfair, says Persis Yu, policy director and managing counsel at the Student Borrower Protection Center.

“It’s leaving a lot of folks wondering, ‘When is it going to be my turn?’” she adds.

For every borrower who has had his or her financial slate wiped clean, there are dozens still struggling with unmanageable debt. While impressive, the $12.5 billion forgiven thus far by the Biden administration represents less than 1% of the $1.6 trillion in outstanding federal loans.

Is dramatic redress the answer?

Some borrower advocates say the only just approach is to cancel everyone’s debt.

“Trying to draw a line between ‘worthy’ and ‘unworthy’ is just arbitrary and cruel,” says Thomas Gokey, co-founder of the Debt Collective. “Nobody should be forced into debt for an education, and Biden can cancel all this debt with a signature.”

On the other side, those opposed to universal loan forgiveness argue, in part, that it would benefit some wealthy borrowers capable of repaying their loans, while providing no help to those who never attended college, possibly because they couldn’t afford to.

President Biden, who campaigned on canceling $10,000 in debt per borrower, has yet to do so and has said he doesn’t think he has authority to unilaterally cancel more than that. Instead, he has taken a focused approach to loan forgiveness, while extending a pause on repayment and interest accumulation put in place by his predecessor at the start of the pandemic.

But both sides of the debt relief debate agree on one thing: The student loan safety net is badly torn, and in dire need of mending.

To that end, the Biden administration has begun rewriting the rules that govern federal loan forgiveness programs, with the aim of making them simpler, fairer, and more generous.

Making the current system more user-friendly

Under existing law, certain borrowers already have access to assistance:

• Those who are displaced by abrupt school closures, defrauded by predatory schools, or permanently disabled and unable to work are entitled to immediate loan cancellation.
• Public servants who make monthly payments on their loans are supposed to have their remaining debt discharged after 10 years.
• Low-income individuals who repay their debt as a percentage of income should have their balance forgiven after 20 to 25 years.

In practice, though, few have received this promised relief. Ninety-eight percent of applications for relief under the Public Service Loan Forgiveness Program have been denied, many for paperwork errors. Just 32 borrowers have been granted forgiveness under the oldest income-based plan, which was created by Congress in 1995, even though 4.4 million Americans owe debt that is more than 20 years old. And tens of thousands of borrowers who attended now-shuttered for-profit colleges have been waiting years for relief.

Former President Barack Obama tried to make it easier for those who attended shoddy for-profit schools to qualify for debt relief, issuing a series of regulations and policy changes that were subsequently rewritten or repealed by the Trump administration.

When Mr. Biden took office in January, he pledged to restore the Obama-era rules and fix the public service and income-based repayment programs, which advocates say have been chronically mismanaged by the federal Department of Education and its student loan servicers. This fall, a committee of negotiators is meeting to draft regulations that would extend debt relief to many more borrowers. The new rules are set to take effect in the summer of 2023.

Extending forgiveness more broadly

In the meantime, the Education Department is taking stopgap measures to expand student loan forgiveness. Since March, it has discharged the loans of more than 200,000 borrowers who attended for-profit colleges, including ITT Technical Institute.

In August, the agency announced that it would automatically forgive the debt of 323,000 borrowers identified by the Social Security Administration as being permanently disabled, removing a requirement that they submit an application for relief.

Colin Lovvorn, who has been diagnosed with multiple sclerosis and is legally blind, was among them.

“I was in disbelief,” says Mr. Lovvorn, who got word in October that his $60,000 in debt would be discharged. “My mental stress is going to be down so much, I’m probably less likely to have an MS-related relapse.”

Then, in October, the Education Department announced that it would temporarily allow all prior payments made by public servants to count toward the 10-year repayment requirement, not just payments made on time and in full on government-issued loans. The yearlong waiver, which expires next Halloween, was expected to put a half-million borrowers closer to forgiveness and result in at least 22,000 borrowers receiving immediate forgiveness.

Ms. Yu and other borrower advocates are asking the administration to apply these same principles – automation and retroactivity – to the other loan forgiveness programs.

“We want a shorter, easier pathway to forgiveness and relief for those left behind” by restrictive eligibility criteria and changing rules, she says.

What’s the right balance?

But advocates haven’t given up on wholesale debt relief, and point to pitfalls in the president’s piecemeal approach.

“It’s incredibly confusing for our clients,” says Robyn Smith, an attorney with the Legal Aid Foundation of Los Angeles. “They see the stories [in the media] and don’t know if it’s them or not.”

Mike Pierce, executive director and co-founder of the Student Borrower Protection Center, says the president’s moves carry political peril, too. Though Mr. Pierce welcomed the expansion of forgiveness, he’s worried it will “be overshadowed because they’re not delivering on big-ticket debt cancellation.”

Even if the administration ultimately cancels more dollars in debt than if it had forgiven $10,000 outright per borrower, “the perception is still there that he didn’t do what he promised,” Mr. Pierce says.

Many advocates are anticipating a rocky return to student loan repayment on Jan. 31, when the nearly two-year pause is set to expire – especially since several student loan servicers have stopped participating in recent months.

Wiping out debt now could be “an elegant solution” to the looming administrative nightmare, suggests Mr. Pierce.

Nicole Brun-Cottan, a physical therapist in Oregon with $130,000 in graduate school debt, has another, perhaps simpler solution to the problem of unmanageable debt: lower interest rates. Current rates range from 3.73% for undergraduate loans to 6.28% for some grad student and parent loans.

“Lump-sum forgiveness is a great idea, but I don’t know if there is the political will,” says Ms. Brun-Cottan, who is enrolled in the public service loan repayment program. “But dropping interest rates into a not-usurious range is a completely reasonable thing to do.”