|I am sure most of my readers are aware of the Biden Administration’s plans to forgive student loans. However, what may have gone under the radar is the way the current administration is staking a lot of money on an attempt to re-build the country’s student loan system.
The basics are this: the Democrats want to make student aid repayment easier in three ways. The first is by raising the repayment threshold – that is, the income level at which students must repay student debt from 150% of the official poverty line to 225% of the line (very roughly, from a bit over $20,000 US to a bit over $30,000 US, which is about where our repayment threshold is). The second is that they also wish to reduce the maximum rate of repayment above that level from 10% to 5% (for undergraduate loans, at least; graduate loans would stay at 10%). The third is that for anyone under the threshold, government will pay the interest so that loans will not face accumulating interest (Canada has been doing this for 40 years, and it’s a major reason our loan system works so well). And, for those loans under $22,000, forgiveness will kick in earlier than the current 20-year mark, bottoming out at just 10 years for those with debt of $12,000 or less (which would include a very substantial fraction of those earning associates’ degrees).
Now, the basic upshot of all these changes is that by design most students will not pay back their student loans in full. Just do the math. Someone with a $60,000 income will only be required to $1,500/year in student loans, or $125 per month. That would be enough to repay a loan of $19,000 over 20 years, but for something close to the median loan – say $30,000 – it would leave at least a third to be forgiven at the end of 20 years. That’s pretty generous! In fact, according to an analysis done by a group of authors at the Urban Institute in Washington, only 11% of borrowers with typical debt levels at the associates level and 22% of those at the bachelor’s level would be expected to pay off their loans in full; meanwhile 38% and 20% of those with typical debt levels, respectively, would pay nothing at all.