Americans owe the federal government and private lenders about $1.75 trillion in student loans, a growing debt burden that is shaping the lives and finances of a generation of students.
During the pandemic, the federal government granted forbearance on the majority of that debt, a pause that President Joe Biden extended for the sixth time in April and which was set to expire on August 31.
Now Biden is seriously considering canceling some of that debt, with a successful campaign to promise to deal with the student loan crisis.
The proposal has been the subject of heated debate among lawmakers, advocacy groups and borrowers. Some argue that loan forgiveness is unfair. Others say it’s a much-needed solution to the mounting debts that unfairly burden millions of Americans who have sought college degrees.
How did the issue of student debt become a political controversy? And why did the pause in payments last so long? Here is a breakdown.
How many borrowers are affected?
In the United States, approximately 46 million borrowers have student debt. By early 2022, those borrowers collectively owed $1.75 trillion, according to the Federal Reserve Bank of St. Louis.
In North Carolina, about 1.3 million borrowers have student loans and owe about $48 billion, according to the Center for Responsible Lending.
What is the difference between federal and private student loans?
The vast majority – around 92% – of student debt in the United States is made up of federal student loans, borrowed from the government at a fixed interest rate. These are low-interest, potentially subsidized loans you get by completing the Free Application for Federal Student Aid (FAFSA).
The rest is private student debt, taken out with lenders such as banks or other financial institutions. Borrowers with private loans have not had their payments cut off during the pandemic and will not see their debt wiped out if the president cancels federal debt.
The federal government contracts with some loan servicers, private companies that collect and track student loan repayments from borrowers.
Why has the pause on federal student loan repayments lasted so long?
Officials suspended federal student loan payments in March 2020; borrowers did not have to make any payments and interest did not accrue. At the time, it was one of many measures aimed at helping an economy brought to a halt by the COVID-19 outbreak.
But the abstention lasted a long time in the country’s economic recovery.
Part of that has to do with logistics, said Rochelle Sparko, director of NC policy at the Center for Responsible Lending.
Since the start of the payment pause, major loan servicers such as Navient and Granite State have said they will drop federal contracts. That means the US Department of Education will have to transfer millions of borrowers to new services, Sparko said.
Now, restarting student loan repayments will be “challenging at the best of times”, she added.
The looming midterm elections could also factor into Biden’s decision: Democrats currently hold only a narrow majority in the US House and Senate.
What is the case for canceling student debt?
Proponents of student debt forgiveness argue that the loans have unfairly burdened millions of Americans.
Senator Elizabeth Warren, a Democrat from Massachusetts, says students have gone into debt pursuing careers they believe will pay off and earn them “a ticket to the middle class.”
Instead, for a number of reasons – be it a tough job market, financial hardship or the impact of generational poverty – the loans they took out to fund their education weigh on borrowers for years and sometimes decades, leaving them “barely there”. Warren said.
Sparko added that canceling student debt could help address greater racial and economic inequalities.
Indeed, some groups are more likely to take on more debt and be burdened with loans for longer, according to a 2022 report from the Brookings Institution, which indicates that black families are more likely to borrow to attend college. .
“We know black borrowers still owe an average of 95% of student debt after 20 years of repayment,” Sparko said. “This is generally not true for white borrowers.”
For historically disadvantaged groups, she said, student debt is an additional and disproportionate barrier to building generational wealth.
“The cancellation … serves as a big piece of the puzzle to closing the racial wealth gap,” she said.
What is the argument against student loan forgiveness?
Critics argue that forgiveness of federal loans is an unfair policy that would hurt the economy.
Marc Goldwein, ssenior policy director at the Committee for a Responsible Federal Budget, believes that canceling student debt could create increased spending that would worsen inflation, driving up prices that are already the highest in decades.
Others warn against moral hazard – an economic term that can refer to the creation of an incentive to take unusual risks. According to this argument, canceling debt now could cause more borrowers to take on debt that they cannot afford or are unlikely to be able to repay.
Goldwein also noted that canceling student debt would address a symptom rather than a cause: In the United States, a college education is expensive.
Unlike other countries — where students can attend college for free or just a few thousand dollars a year — a year at a public university will cost American families $22,690 on average, according to the College Board.
According to The Heritage Foundation, a conservative think tank, there are also arguments that canceling student debt would create inflationary pressure for colleges to raise tuition fees. The researchers there pointed to previous studies that increased federal student aid leads to higher tuition costs.
“The ideal situation is that we would have an affordable college in the first place,” Goldwein said.
What did the president say about canceling student loans?
On the campaign trail, Biden call for $10,000 in student debt per borrower to help address the economic fallout from the COVID-19 pandemic.
“It’s holding people back,” he said of student loans in November 2020. “They have real issues. They have to make choices between paying their student loan and paying the rent.
In the White House’s April announcement extending forbearance, Biden said resuming payments this spring could have led to “economic hardship, defaults and defaults” that “could threaten the financial stability of Americans”.
“I ask all student borrowers to work with the Department of Education to prepare for a return to repayment,” he said in the announcement. “Vice President (Kamala) Harris and I are focused on supporting borrowers in need.”
When will we know if the debts have been cancelled?
It’s unclear if, when and how the president would write off student debt, though the president’s aides say he will make a decision before the end of August, The New York Times reported.
The Washington Post reported Biden is considering canceling $10,000 in student loan balances per borrower, though his administration is concerned about the economic effects.
Some cancellation supporters have asked for more than that, saying $50,000 of debt per borrower is more effective at dealing with the impact of student loans.
“$10,000 would be nice,” Sparko said. “$50,000 would be a game changer.”