The Radical Idea to Forgive all Student Loans

This interesting article in New York Magazine about the proposed economic benefits of forgiving all of the outstanding $1.4 trillion in student loans has been making the rounds recently:

According to the Levy Institute paper, authored by economists Scott Fullwiler, Stephanie Kelton, Catherine Ruetschlin, and Marshall Steinbaum, canceling all student debt would increase GDP by between $86 billion and $108 billion per year, over the next decade. This would add between 1.2 and 1.5 million jobs to the economy, and reduce the unemployment rate by between 0.22 and 0.36 percent.

So, the macroeconomic upside of canceling all student debt would be substantial. The primary (supposed) downsides of such a policy would be a higher deficit, the potentially regressive distributional consequences of debt forgiveness, and (relatedly) the unfairness of rewarding certain well-off borrowers who don’t “deserve” it. Of course, all of these critiques would apply more powerfully to the recently passed tax cut bill. Few people would argue that increasing Harvey Weinstein’s after-tax income was a laudable public policy goal. But no one thinks that we should judge the merits of a tax cut on the basis of whether it rewards any unsavory individuals.

Forgiving $1.4 trillion in debt sounds nuts, but as a convenient near-perfect foil, we instead have a $1.5 trillion tax cut that probably won’t do a whole lot to help anyone who needs it.

The government theoretically profits from the Direct loan program, but the currently rising and soon to be endemic rates of default now predict that the government will start losing a lot of money in the near future.

What most people don’t realize when it comes to the alarmingly rapid rise of student loan default is that the most common culprits are not big borrowers attending expensive private schools (though that happens too, and certainly the need to repay large amounts of debt can be crippling and limits consumption). It’s actually people who borrow less than $10,000. It’s the people, many of whom who never completed a degree program or who received technical training at an unsavory for-profit “institution” like Trump University, who are unable to find the good steady work needed to pay off even a relatively small loan.

As with tax breaks, the biggest winners of the definitely-not-going-to-happen universal loan cancellation would, at least on paper, be high-debt high-income professionals like business school graduates and physicians. But unlike a tax break, not needing to use IDR would result in the same return of 10%+ from every borrower’s income, year after year—a much bigger and likely much more meaningful change, and it would also mean that those who default would finally be able to take steps to rebuild their credit.

Trump hasn’t killed PSLF yet

There are a lot of headlines talking about what Trump is doing to PSLF.

But, to be clear, Trump isn’t doing anything to PSLF.

What Trump has done is release a budget proposal, as the sitting president does every year. This proposal is meant to signal policy goals for the administration, but nothing in it is binding. Presidents don’t make budgets; Congress does. President Trump made similar student loan requests for 2018 as he has for 2019, and they were roundly ignored last year. President Obama recommended capping PSLF during his last years in office, and that was ignored as well.

Don’t get me wrong, I don’t think PSLF is going to last forever. It’s going to be much more expensive than the government realized, and pulling out the rug from “rich” doctors may one day prove to be relatively good optics for budget savings.

But, there’s a big difference between PSLF being shuttered in the future (or even next year), and PSLF going away for those are already counting on it.

PSLF is still available, and there’s no reason to ignore it.

Make no mistake, Trump absolutely does want to kill PSLF. However, this is the actual language of the Trump FY2019 budget proposal, and it’s pretty clear that it does not affect old borrowers (emphasis mine):

Reforms Student Loan Programs. In recent years, income-driven repayment (IDR) plans, which offer student borrowers the option of making affordable monthly payments based on factors such as income and family size, have grown in popularity. However, the numerous IDR plans currently offered to borrowers overly complicate choosing and enrolling in the right plan. The Budget proposes to streamline student loan repayment by consolidating multiple IDR plans into a single plan. The single IDR plan would cap a borrower’s monthly payment at 12.5 percent of discretionary income. For undergraduate borrowers, any balance remaining after 15 years of repayment would be forgiven. For borrowers with any graduate debt, any balance remaining after 30 years of repayment would be forgiven.

To support this streamlined pathway to debt relief for undergraduate borrowers, and to generate savings that help put the Nation on a more sustainable fiscal path, the Budget eliminates the Public Service Loan Forgiveness program, establishes reforms to guarantee that all borrowers in IDR pay an equitable share of their income, and eliminates subsidized loans. To further improve the implementation and effectiveness of IDR, the Budget proposes auto-enrolling severely delinquent borrowers and instituting a process for borrowers to consent to share income data for multiple years. To facilitate these program improvements and to reduce improper payments, the Budget proposes to streamline the Department of Education’s ability to verify applicants’ income data held by the Internal Revenue Service. These student loan reforms would reduce inefficiencies and waste in the student loan program, and focus assistance on needy undergraduate student borrowers instead of high-income, high-balance graduate borrowers. All student loan proposals would apply to loans originating on or after July 1, 2019, except those provided to borrowers to finish their current course of study.

“…except those provided to borrowers to finish their current course of study” further supports that students in the middle of the course of study will get grandfathered into PSLF.

So, new borrowers starting in 2019 at the earliest would be part of the new program.

And by new, I mean the US government’s definition of “new,” which really means having no federal loans prior to this date.

So:

  • Current students need not panic.
  • Former students currently in repayment need not panic.
  • Future borrowers who plan to only attend college need not panic (because the new proposal is actually pretty favorable to undergraduate loans).
  • Future borrowers who plan to attend expensive graduate schools like medical school should cross their fingers.

And, none of this matters if Congress does this year what they did last year and ignores the problem. Student debt is a hot-button bipartisan issue. Whatever reform, if any, does get passed is unlikely to look like a carbon copy of the Trump plan.

 

Splash Financial is now a true forbearance alternative

In 2015, DRB (now Laurel Road) began offering private student loan refinancing to medical residents with a set monthly payment of $100. This was substantially lower than what the calculated payment for any resident would be under an income-driven repayment plan like PAYE or REPAYE but apparently too hard on the budget for a lot of residents who continued to forbear.

Not long after, LinkCapital joined the resident refinance ranks ($75 a month, eligible after intern year), followed by the very recent addition of SoFi ($100/month for up to four years of training). But for anyone who felt like every buck counted, private refinancing was still more costly to the monthly budget than forbearing.

Of course, forbearing is actually by far more costly in the long term because accruing interest grows unabated and then capitalizes while the borrower enjoys exactly none of the many wonderful benefits of participating in an income-driven repayment plan like IBR/PAYE/REPAYE.

To be absolutely clear, most residents should not be refinancing their federal loans. The vast majority of residents should be in REPAYE or—if spousal income makes REPAYE untenable—PAYE. But for those who feel forced to forbear in anticipation of a career in private practice, then refinancing is something really worth taking seriously.

Splash Financial has now made it possible for this subselected group of trainees to shave thousands off their loans painlessly: the required monthly payments during training are a token $1. They offer a single fixed rate to trainees (recently 5.54%), so you don’t even have to complete the really quick application to know if it’s even worth considering. If your rate is in the low 5s already? Of course not! You might as well forbear and keep the flexibility of federal loans. If you have loans in the high 6s and a balance of $200k? Well, that’s a difference of a couple grand for every year of training. There’s no autopay discount during the training period.

When Splash first started offering their product last summer, they tacked on a hefty origination fee, which is unusual in the refinancing industry, where no cost-refinancing is essentially standard.  A few months later and they saw the light, nixing the fee. Now the product is a no-fee no-cost alternative that’s competitive with everyone else and the only one that allows for refinancing without the $75-100 monthly payment during training that even the other resident-friendly companies require. You can, of course, pay more per month like any other company (and the more you pay per month, the less you’ll owe later, so that’s highly recommended).

Student loans are a $1.5 trillion dollar industry, and every student loan company has referral programs. Splash’s program offers $500 for loans greater than $30k.

Splash FinancialUnless you are in financial straits now and require loan forbearance but also plan on working at a 501(c)(3) non-profit after training, then forbearance is unlikely to be the right choice for you financially. IDR is the solid option for most people and REPAYE often offers the best rates around for many residents, but that doesn’t apply if you can’t or won’t make the payments. Those just forbearing to free up cash during training probably shouldn’t be forbearing in the first place.

Be aware that with any of the resident refinancing companies the interest accrued during training does capitalize at the end of training, so trying to pay down some of that interest prior to this step is always a good idea.

 

Department of Education decides that loan holders aren’t really consumers and that students don’t need protection

Last month Betsy DeVos’ (Trump’s) Department of Education ended their cooperation with the Consumer Finance Protection Bureau, because, you know, the CFPB was “overreaching” in trying to actually protect student loan borrowers.

Shocking that the same DOE that wanted to consolidate the entire servicing industrial complex into one giant government contract with a shortlist that included a company currently being sued by the CFPB for defrauding students would now be cutting ties with the agency charged with dealing with exactly this kind of detritus.

The Single Student Loan Servicer That Wasn’t

InsideHigherEd on the rapidly abandoned plan to consolidate all student loan servicing into a single monolithic “too-big-too-fail” mega contract:

DeVos has taken heat since May from members of Congress and representatives from the loan-servicing sector over the plan to pick a single servicer that would hire subcontractors to collect loan payments. Department officials at the time argued that the plan would make oversight of servicers by the government more efficient.

But the proposal found critics among both Republicans like Senator Roy Blunt of Missouri, who argued that the system would remove choice and competition, and Democrats like Massachusetts Senator Elizabeth Warren, who warned against creating a federal contractor “too big to fail.”

Blunt and Warren were part of a bipartisan group of senators who introduced legislation ahead of the department’s announcement Tuesday to block the single-servicer plan. Their bill would instead require the participation of multiple loan servicers.

Instead, 2019 will still see the consolidation of the different servicer websites to a single portal that interacts with the borrowers (which was the original Obama-era plan already in motion). Everything else will remain separate. How that will happen basically remains a mystery, but the site itself will be developed and managed by the Office of Federal Student Aid.

Hopefully, they don’t take any tips from Navient, because their website is singularly terrible.