Should feds forgive student loan debt?
Posted
Aug 28 2009, 10:57 AM
by
Karen Datko
Rating:
Some people are talking about a federal bailout for former college students. Forgive student loan debt, they say, and the economy will be instantly energized.
The Baltimore Sun's Eileen Ambrose polled readers of Consuming Interests about this, and, last we checked, readers were hugely in favor -- even though her post presented a solid argument about why it wouldn't work as advertised.
We voted no. "JLP" at All Financial Matters, who directed his readers to the poll, also said no. "Actually, I say HELL NO!" he wrote.
A public proponent of this idea is lawyer Robert Applebaum, creator of ForgiveStudentLoanDebt.com. He graduated with a law degree and $65,000 in student loan debt, then took a low-paying job as a prosecutor and put his debt in forbearance for five years, which caused it to grow. Now, after five years of payments, he still owes 85 grand.
True, many students borrowed more than they could afford. The College Board says 10% of last year's graduates had more than $40,000 in student loan debt, according to U.S. News & World Report. A third had no debt, and the median debt was about $20,000.
Let's assume that the government forgives all student loan debt (don't hold your breath). Would that stimulate the economy?
Eileen interviewed Mark Kantrowitz, publisher of FinAid.org, who said that forgiveness would cost Uncle Sam $730 billion -- $598 billion in federal loans plus $132 billion in private loans.
But, in fact, he said, only 4% of the outstanding debt -- or $28.8 billion -- is being repaid each year. Assuming all of that money would instead be spent on consumer goods, that's not much of a boost to the economy.
What are some possible solutions to help those who are overextended -- and to prevent it from happening? Here are some ideas that have been tossed around:
- Allow student loan debt to be discharged in bankruptcy court. (Another site, StudentLoanJustice.org, has made that part of its mission.)
- Provide more education to young borrowers. "Even if someone would have told me 10 years ago that my payments would be $880/month, at that point, could I have really understood the consequences?" reader "Saddled_With_Debt" said at Consuming Interests.
- Increase grants to needy students.
- Provide more federal aid for those who face huge student loan debt to fill essential occupations, like family practitioners, internists and geriatricians in the medical field.
- Encourage students to avoid private loans.
- Make student loan forgiveness even more available for those who take public service jobs. "I've heard of programs that forgive student loans to insure a supply of doctors and teachers for rural areas. That makes economic sense as it is a bonus to attract new applicants, not a bailout," All Financial Matters reader Rick Francis wrote.
Graduates, meanwhile, can take advantage of another new program. In an article at MSN Money, Liz Pulliam Weston described how it works:
(Graduates) have the option to limit payments on federal loans to no more than 15% of their discretionary income or 15% of the amount of their income that exceeds 150% of the federal poverty level. (For example, the 2009 poverty level for a single person is $10,830, so payments would be capped at 15% of his or her income over $16,245.) Unpaid interest and principal are added to the loan, but any balance would be forgiven after 25 years of payments.
What do you think? Should the federal government wipe the slate clean? Do students overburdened by the debt they took on deserve some kind of help? What are other solutions?
Related reading:
Ask for student loan forgiveness
An insider's guide to student loans
How much college debt is too much?
College students get a break on costs
