Forgiveness on student loans not a sure thing

Analysis: Hoped-for windfall might not be that generous.

Nearly half of college students surveyed earlier this year said they expected to be helped by the federal government’s various student loan forgiveness programs. But new government figures suggest that their hopedfor windfall won’t be that generous.

In a first-of-its-kind public analysis, the U.S. Department of the Education projects that borrowers who next year enroll in loan forgiveness programs would, on average, repay every penny they borrowed, and then some. Some debtors in the programs, which cap monthly payments relative to earnings and offer the possibility of debt forgiveness, are projected to pay as much as 76 percent more than they borrowed.

The forgiven amount would largely be interest that accrued over what could be as long as 25 years of making payments.

In fact, the feds project that just 53 percent of debtors who’d enroll in these plans in the 2018 fiscal year would receive any forgiveness at all, according to estimates made public on Wednesday. Even that estimate may be too high, separate government figures suggest. Less than half of all government-owned student debt (by dollar volume) belongs to people enrolled in income-based repayment plans, Education Department data show.

The projections raise the possibility that many borrowers hoping for debt relief will instead make payments for so long that they’ll end up paying off their debt. For others lucky enough to experience debt forgiveness, the repayment plans effectively amount to a long-term loan that charges less interest than originally advertised.

“We have never felt that these programs are perfect. There are a lot of problems with them,” said Natalia Abrams, executive director of Student Debt Crisis, a borrower advocacy group. Chief among them, she said, is how forgiveness plans are administered.

Federal student loans, unlike other forms of consumer debt (think mortgages, car loans and credit cards), allow debtors to make payments based on their income, rather than the amount they borrowed. After 20 or 25 years of steady payment (or 10 years for nonprofit and government workers), whatever remains is forgiven.

To enroll, borrowers need to complete some paperwork that confirms their income, a process they need to repeat annually. But a 2015 analysis by the Education Department showed that more than half of borrowers fell out of the plans — driving up required payments for some by hundreds of dollars — after they failed to confirm their income to the government each year, or re-certify.

For borrowers who don’t re-certify, the government adds accrued interest to their principal balance, ballooning the amount due and magnifying the overall amount of interest that’s charged. For a lot of borrowers, Abrams said, “it’s a never-ending cycle.”

The Education Department previously estimated that some $108 billion in loan principal for debt incurred between 1995 and 2017 would be forgiven under the various income-based repayment plans, but the Government Accountability Office last year severely criticized the accounting and various assumptions that produced that figure. For example, the federal auditor said, the Education Department “unrealistically assumes that no borrower will fail to re-certify their income.”

Alexander Holt, a Washington-based independent consultant who advises clients on higher education and student loan issues, said the Education Department’s recent projection of borrowers’ total payments should be viewed skeptically because they’re averages and could be based on faulty accounting.

The possibility that the federal government eventually will forgive a large chunk of student debt is worrying a lot of people on Wall Street and in Washington. The Trump administration is so concerned about the fiscal threat loan forgiveness programs pose to the U.S. budget that it wants to slash them and make them less generous “to help put the nation on a more sustainable fiscal path,” budget documents show. But the latest projections from the Education Department suggest that the government’s loan forgiveness programs aren’t really meant to forgive debt; rather, they’re meant to help borrowers weather tough times by simply extending the amount of time they have to pay off what they owe.

Debtors can make payments based on income.