March 25, 2021
A Lot of Student Debt May Never Be Paid Off
For half to two-thirds of the college loans made over the past decade, the former students owe more than they initially borrowed.
This is the result of a federal program that bases monthly student loan payments on the borrowers’ income if they aren’t earning enough to afford the standard payments. But the monthly payments in these much-needed Income Driven Repayment (IDR) plans are often less than is required to fully service the principal and interest on the loans. So instead of getting ahead, borrowers are perennially behind and never chip away at the balances.
People who go into the repayment plans are “trying to bail out a boat with a bucket that has a hole in it,” said Betsy Mayotte, president of The Institute of Student Loan Advisors, a non-profit that gives free information and advice to people needing help with their loans.
Marshall Steinbaum, an economist with the University of Utah, estimates that at least half of all student loans might never be repaid, based on his back-of-the-envelope calculation. That share is also growing, he said in an email, because more and more former students are enrolling in IDR programs.
The inability to pay “is baked into the system,” Steinbaum wrote in The Appeal.
The good news is that, under the federal repayment plans, any unpaid debt will be extinguished in 20 or 25 years, depending on the specific terms of the plan. (Under a standard plan, the repayment window is 10 years.)
But the loan forgiveness in IDR repayment plans has a catch-22. Once the debt is forgiven, borrowers are still required to pay federal income taxes on their unpaid balances, which can add thousands of dollars to their income in a single tax year. To pay this “tax bomb,” people often save money in a separate account for years, at the same time they’re making loan payments.
The financial stress on borrowers is relentless, Mayotte said. She added that “student loans aren’t the problem. Student loans are the symptom. The problem is the cost of higher education.”
In the pandemic relief bill signed into law this month, Congress temporarily suspended the tax liability on loan forgiveness. This provision is in addition to President Biden’s suspension of required student loan payments through September. During this period, the loans have also stopped accruing the interest but borrowers can pay down the principal.
Mayotte said suspending the tax bomb won’t help most people, however. This provision of the relief bill expires on Jan. 1, 2026, but most of the debt in IDR plans won’t be eligible for forgiveness until at least 2030, because the earliest repayment plans didn’t come into existence until 2009, she said.
The relief is a short-term fix for a longer-term problem.
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