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Policymakers increasingly recognize the importance of bold ideas to address college affordability. Those ideas include Beyond Tuition, a plan that moves toward debt-free higher education, rolled out by the Center for American Progress.¹ Under the plan, families pay no more than what they can reasonably afford out of pocket, with additional expenses covered by a combination of federal, state, and institutional dollars. There are also strong proposals for debt-free college from Sen. Brian Schatz (D-HI) and for tuition-free college, including one from Sen. Bernie Sanders (I-VT), as well as calls for free community college championed by Sen. Tammy Baldwin (D-WI) and Rep. Bobby Scott (D-VA).²

As policymakers think about solving college affordability for future students, they must not forget about the tens of millions of borrowers already holding college debt. Fortunately, the policy community is starting to develop new ideas for current borrowers as well. For instance, multiple presidential campaigns have outlined policy proposals that forgive some student loans or make changes to repayment options.

No matter the proposal, solutions for current borrowers must go hand in hand with tackling affordability for tomorrow’s students. About 43 million adult Americans—roughly one-sixth of the U.S. population older than age 18—currently carry a federal student loan and owe $1.5 trillion in federal student loan debt, plus an estimated $119 billion in student loans from private sources that are not backed by the government.³ Moreover, college debt is even more concentrated among young people. An estimated one-third of all adults ages 25 to 34 have a student loan.⁴ And while it is true that not every student borrower is in distress, student debt is an issue that both has an acute effect on many borrowers’ lives and raises broader concerns for the overall economy.

Effectively targeting key stress points when it comes to the student debt crisis requires understanding the different ways student loans can and do create challenges for borrowers. For example, two-thirds of those who default on their student loans are borrowers who either did not finish college or earned only a certificate.⁵ At 45 percent, the average default rate for these individuals is three times higher than the rate of all other borrowers combined.⁶ The median cumulative student loan debt for all defaulters is rather low, at $9,625.⁷

By contrast, borrowers who completed a degree, especially at the graduate level, are less likely to default but may still face struggles related to repayment. For instance, the U.S. Department of Education projects that just 6 percent of the dollars lent to graduate students ultimately go into default, compared with 13 percent of funds lent to college juniors and seniors or a quarter of loans for students in their first or second year at a four-year institution.⁸ Graduate borrowers, however, might face a different set of challenges related to having unsustainably high debt burdens. More than one-third of borrowers who owe $40,000 or more—an amount of debt that only graduate students or independent undergraduates can obtain in principal—are paying their loans back on a repayment plan that ties their monthly payments to their income, suggesting that their student loan debt otherwise represents too large a share of their income.⁹ If these plans are not well managed by the federal government and easy for borrowers to use, they could put millions of individuals in financial distress. This could take a few forms, one of which is causing borrowers who use these plans to accumulate large amounts of additional interest that they must repay if they fail to stay on the plan or if their payments do not fully satisfy outstanding interest.

Broad breakdowns of borrowers by debt level and attainment status can also mask particular challenges related to equity. For instance, black or African American students who earned a bachelor’s degree had a default rate nearly four times higher than their similarly situated white peers.¹⁰ Students who are veterans, parents, first-generation college students, or are low income are also likely to face higher risk of default.¹¹

This report considers different options for addressing issues for current borrowers of federal student loans. These solutions are meant to be independent of broader loan reforms, such as giving relief to borrowers whose schools took advantage of them. These options also presume keeping and preserving key existing benefits such as Public Service Loan Forgiveness (PSLF). Intentionally, this report does not endorse or recommend a specific policy. Rather, it assesses the benefits and potential considerations around a range of ideas, going from the most aggressive—forgiving all student debt—to more technical changes involving interest rates or repayment plans. By examining the trade-offs and the targeting of each policy, the hope is that policymakers and the public can make the most informed decision when it comes to selecting which policy best supports their goals and values.

Overall, this report considers six options to tackle student debt:

1. Forgive all student loans
2. Forgive up to a set dollar amount for all borrowers
3. Forgive debt held by former Pell recipients
4. Reform repayment options to tackle excessive interest growth and provide quicker paths to forgiveness
5. Change repayment options to provide more regular forgiveness
6. Allow student loan refinancing

Understanding the potential implications of each of these policies, overlaid with considerations about equity, simplicity, aiming for broad impact, and whether the solution provides tangible relief, can provide policymakers with a clearer sense of the different ways to address the nation’s $1.5 trillion in outstanding student debt.

Overall, the purpose of any policy proposal for current student loan borrowers has to be about reducing the negative effects of these debts. That said, each policy idea may attempt to address a different negative effect. For example, policies focused on interest rates target negative effects related to the size of monthly payments, which can help with faster repayment over time. Meanwhile, policies focused on immediate forgiveness are about reduction in the amount owed right away, while those with longer-term forgiveness may be about creating a safety net for those with perpetual struggles.

Regardless of which problem a given policy tries to solve, it is important that it consider four factors: equity, simplicity, striving for broad impact, and providing a sense of meaningful relief. Understanding how a given policy idea lines up against each of these goals can help policymakers ensure they optimize their solutions for the problems they want to address and in a manner that would be effective. More on each of these goals follows below.

Address equity

The worries and challenges facing student loan borrowers are not uniform. For some, a student loan represents a significant risk of delinquency and default. Such an outcome can be catastrophic—ruined credit; garnished wages and social security benefits; seized tax refunds; denial of occupational and driver’s licenses; and the inability to reenroll in college.¹⁵ For other borrowers, student debt constrains or delays their ability to access and sustain the most basic markers of the middle class, such as saving for retirement and purchasing a home, which can, in turn, increase wealth. Student loan debt may also deter family formation, as couples may be concerned about covering the additional expense of having a child.

While the various challenges student loans present may be clear for certain individuals who are in different situations and financial circumstances, meaningful variations exist even for borrowers who otherwise have the same levels of educational attainment and/or income. This can be due to other factors such as the presence or absence of familial wealth or discrimination in housing or employment.

It is crucial, therefore, that any policy aimed at current student loan borrowers include an equity lens to acknowledge and tackle these differences. The continued unaffordability of higher education has forced too many students into debt that a rational financing system would support only with grant aid. These students then experience significant challenges repaying their loans, which can, in turn, affect their ability to build wealth and access a middle- class lifestyle.

More specifically, an equity lens should consider the following groups of borrowers and how well a given proposal would serve them. These are individuals who are traditionally not well served by the higher education system or who data show are highly likely to struggle with student loans. While the exact reason why they struggle is unknown, it may because of factors such as an absence of generational wealth or the economic safety nets from their family that their peers have.

• Borrowers who do not complete college: About half of all individuals who default on their student loans never earned a college credential.¹⁶ These individuals typically owe relatively small balances, with about 64 percent owing less than $10,000 and 35 percent owing less than $5,000.¹⁷ While the exact reason these borrowers struggle is unknown, a likely explanation is that they did not receive a sufficient earnings boost to pay off their debt, meaning they have all of the expense and none of the reward of attending college.
• Black or African American borrowers: Research shows that the typical black or African American borrower had made no progress paying down their loans within 12 years of entering college, and nearly half had defaulted. This inequity persists even among those who earned a bachelor’s degree, with black and African Americans defaulting at a rate four times higher than their white peers.¹⁸
• Borrowers who have dependents: Student-parents make up 27 percent of all undergraduates who default on their federal loans.¹⁹ What’s worse, roughly two-thirds of student-parents who default are single parents, meaning that the negative repercussions of default have the potential to weigh more heavily on borrowers’ children.
• Pell Grant recipients: More than 80 percent of Pell Grant recipients come from families who earn $40,000 annually or less.²⁰ Pell Grant recipients comprise an exceptionally high share of defaulted borrowers. Roughly 90 percent of individuals who default within 12 years of enrolling in college received a Pell Grant at some point.²¹ And Pell Grant recipients who earned a bachelor’s degree still have a default rate three times higher than that of students who never received a Pell Grant.²²

There is significant overlap among these populations. For example, nearly 60 percent of black or African American students also received a Pell Grant, as did almost half of Hispanic or Latino students.²³ Similarly, about 60 percent of students who are single parents received a Pell Grant, and about 30 percent of single-parent students are black or African American—versus 15 percent of all students.²⁴ The result is that a policy specifically aimed at one population—such as relief for Pell recipients—will also affect many but not all the individuals in these other groups.

Ensure simplicity

Too often, public policy may seem effective in the abstract but suffers from overly complex execution. Public Service Loan Forgiveness is a prime example. The basic idea of forgiving federal student loans for individuals who work a decade in a public service job is easy to communicate. But when overlaid with four gating criteria—qualifying loans, employment, repayment plans, and payments—the policy in practice becomes a complex nightmare, which leads to borrower frustration and delayed or lost benefits.²⁵

Therefore, a successful policy for current borrowers should be clear and simple, both in its message and in its execution. That means striving wherever possible for approaches—such as automatic enrollment or reenrollment—that ensure that government employees and contractors, not borrowers, bear any complexity that might exist in the policy.

Aim for broad impact

While it is crucial that every policy option for current student loan borrowers contain a focus on equity, striving for broad impact is also important. Reaching as many people as possible can help build support for an idea. It also interrelates with simplicity; broader eligibility definitions that reach more people could result in less work to figure out who should be eligible for relief. Finally, aiming for broader impact also increases the chances of capturing additional people who desperately need relief but whose situation may not be as clear from just a look at their income, educational attainment, or other easily measurable characteristics.

Provide meaningful relief

Student debt is not just an abstract thing that lives on a spreadsheet. For borrowers in debt, a loan can feel like an unending, stressful obligation with no relief in sight. For this reason, it is important for borrowers to see and feel actual relief under any program solution for current student debt. In some cases, this might entail addressing potential unintended consequences. For example, income-driven repayment (IDR) may solve unaffordable monthly payments by aligning borrowers’ payments with how much money they earn. However, because interest keeps accumulating, borrowers who make smaller payments on these plans may watch their balances grow—leaving the borrowers with the sense of digging a deeper hole, even if forgiveness is an option.

In other cases, meaningful relief might require the reform to be sufficiently substantive so the borrower notices. For example, a borrower who owes $30,000 at a 5 percent interest rate will pay less in total if their rate goes down by half a percentage point. But that only translates into savings of $7.28 a month, which is unlikely to feel like a meaningful difference.

Rather than recommending a specific proposed option, this report offers a combination of both commonly proposed ideas and new ones generated by the Center for American Progress and Generation Progress staff.

It is also worth noting that these options are intended to be one-time solutions that could pair with a larger plan for tackling affordability going forward, such as CAP’s Beyond Tuition. Combining a prospective affordability plan with this relief should cut down on the number of future loan borrowers and lessen the need for subsequent large-scale relief policies.

1. Forgive all federal student loan debt

Under this proposal, the federal government would forgive all outstanding federal student loans. This option would also require waiving taxation of any forgiven amounts.

Estimated cost: $1.5 trillion in cancellation plus an unknown amount of anticipated interest payments, both of which would be adjusted by whether Education Department already expected it to be repaid. For example, a $10,000 loan that the agency did not expect to be repaid at all would not cost $10,000 in forgiven principal. There would also be costs associated with not taxing forgiven amounts, which also must be part of the policy.

Estimated effects: It would eliminate debt for all 43 million federal student loan borrowers.²⁷

Considerations

Does it address equity? Forgiving all debt would get rid of loans for all the populations identified in the equity goal outlined above. That said, by helping every student loan borrower, it will also end up providing relief to some individuals who are otherwise not struggling or constrained by their loans. In other words, while helping eliminate loans for all single parents, it will also provide a windfall for borrowers with higher balances who are having no trouble with repayment.

How simple is it from a borrower standpoint? This policy should be easy to implement for borrowers, since it should not require any opting in or paperwork.

How broad is its impact? This policy would help all 43 million federal student loan borrowers.

Will it feel like relief? Yes—borrowers will not have to make any payments, so they will feel the change.

Who are the greatest beneficiaries? From a dollar standpoint, the highest-balance borrowers have the most to gain from this proposal—especially those who also have higher salaries. They would experience the greatest relief in terms of reduction of monthly payments while also having the wages to otherwise pay back the debt. This is because undergraduate borrowing is capped in law at $31,000 or $57,500, depending on if they are a dependent or independent student, whereas there is no limit on borrowing for graduate school.²⁸ Those who have higher incomes would also feel larger benefits by freeing up more of their earnings to put toward other purposes. Therefore, those with debt from graduate education, especially for high-paying professions such as doctors, lawyers, and business, would significantly benefit. That said, this proposal would help anyone who is particularly worrying about or struggling with their student loans—whether they are in or nearing default. In addition, research suggests loan cancellation would help stimulate national gross domestic product, which has broad-based societal benefits.²⁹

What is the biggest advantage? The policy is universal, and it could be implemented without the need of action on the part of borrowers as long as there are no tax implications for forgiveness.

What is the biggest challenge? This option carries the largest price tag by far. It also would result in forgiving a substantial amount of loan debt of individuals who have the means to repay their debt. This includes borrowers with graduate degrees and potentially high salaries in law, medicine, or business.

How could this option be made more targeted? Limiting forgiveness to only undergraduate loans would help target the plan’s benefits, because there are many graduate students studying in fields linked to high incomes who have no undergraduate loan debt.³⁰ The Education Department unfortunately does not provide a breakdown of the amount of outstanding undergraduate student loan debt; thus, it is not possible to know the cost of this policy tweak.

2. Forgive up to a set dollar amount for all students

This option forgives the lesser of a borrower’s student loan balance or a set dollar amount, such as $10,000, $25,000, $50,000, or some other amount. It would also require waiving any required taxes on the forgiven amounts. Doing so provides a universal benefit that ensures loan debt will be completely wiped away for borrowers who have a balance below the specified level, while those with higher debts also get some relief.

Estimated cost: The total cost varies depending on the dollar level chosen. For example, forgiveness of up to $40,000 for all borrowers would result in canceling $901.2 billion, while forgiveness of up to $10,000 would cancel $370.5 billion. Both cases would also have additional costs in the form of expected future interest payments, but it is not possible to calculate this amount with current Education Department data. These amounts would also be adjusted by the Education Department’s existing expectations around which loans would be repaid. Finally, there would be costs associated with not taxing forgiven amounts.

Estimated effects: Effects vary by dollar amount chosen. Forgiveness of up to $10,000 would eliminate all student loan debt for an estimated 16.3 million borrowers, or 36 percent of all borrowers, and reduce by half balances for another 9.3 million, or 20 percent of all borrowers.³¹ Forgiveness of up to $40,000 would wipe out debt for 35 million borrowers—about 77 percent of borrowers. The number of borrowers who would have all their debt canceled under this plan might be a bit lower, depending on the dollar amount, because some individuals who currently appear to have low debt levels are in school and are thus likely to end up with higher loan balances as they continue their studies. Table 1 shows the estimated effects and costs across a range of maximum forgiveness amounts.

Considerations

Does it address equity? Yes, though the exact equity implications will vary somewhat based on the level chosen. Table 2 breaks down the percentage of borrowers in a given racial/ethnic category based upon the cumulative amount of federal loans borrowed. Table 3 flips this analysis to show the distribution of debts within a given racial or ethnic category. Both tables are based on borrowers who entered higher education in the 2003-04 academic year and their cumulative federal loan amounts within 12 years. While this is the best picture of longitudinal student loan situations by race and ethnicity, the fact that these figures represent students who first enrolled prior to the Great Recession means it is possible that, were they available, newer numbers might show different results. In considering these tables, it is important to recognize that higher amounts of forgiveness would still provide benefits for everyone at the lower levels of debt as well. That means increasing forgiveness by no means leaves those with lesser balances worse off.

Hispanic or Latino borrowers, for example, will disproportionately benefit from a forgiveness policy that picks a smaller dollar amount, because this group makes up an outsize share of borrowers with $20,000 or less in student debt.³² These same individuals would still benefit from forgiveness at higher dollar amounts, but their concentration among lower-balance borrowers means the marginal benefits of forgiving greater dollar amounts is smaller.

The story is different for black or African American borrowers. They make up a roughly proportional share of low-balance borrowers but a disproportionate share of those who took out between $40,000 and $100,000.³³ That means the marginal effect on black or African American borrowers will be greater for higher dollar amounts.

Looking at borrowers based on Pell Grant receipt tells a slightly different story. Individuals who have received a Pell Grant are proportionately represented among lower-balance borrowers and underrepresented among those with the highest balances. But they are most overrepresented among those who took out between $20,000 and $60,000.^{https://www.americanprogress.org/issues/education-postsecondary/reports/2019/06/12/470893/addressing-1-5-trillion-federal-student-loan-debt/}