Thanks to the vagaries of the accounting world, Donald Trump’s administration had a chance in the final weeks of the presidential race to cancel more than $ 200 billion in student loans without immediately touching the massive portfolio of the ministry. Education. Yet he did not.
Now maybe Joe Biden will.
For years, the ministry’s bean counters have noted the value of its $ 1.4 trillion portfolio of student debt as they took an increasingly pessimistic view of how much borrowers will repay. In September, analysts made their biggest adjustment yet, valuing loans at just 82 cents for every dollar owed, down from 104 cents in 2015, according to the records. Debt is now worth $ 258 billion less than outstanding.
Had officials at Education Secretary Betsy DeVos decided to identify some of the borrowers least likely to repay and then forgive those debts, it would not have significantly reduced the value of the remaining wallet. Such losses were, in theory, already reflected anyway.
By Wall Street standards, government loan write-downs are gigantic, amounting to $ 98 billion in September alone. While they’ve gone virtually unnoticed in the political arena so far, they’re almost sure to gain attention now, as consumer advocates urge Biden’s new administration to ease the burden on young professionals and revive the economy hit by the pandemic.
Some are starting to wonder: if the government doesn’t expect to raise hundreds of billions of dollars from borrowers, why not try to erase it now?
“Betsy DeVos has already decided that some of this debt will not be repaid,” said Mike Pierce, director of policy at the nonprofit Student Borrower Protection Center and a former official with the Federal Office of Consumer Financial Protection. . “This makes it easier for the Biden administration to justify the cancellation.”
The education department did not respond to messages seeking comment before and after the change of administration.
Loans or rent
Shortly after his inauguration as US president on Wednesday, Biden asked the department to extend his predecessor’s pandemic interest waiver policy and continue to let borrowers skip monthly payments on government-held student loans. until at least the end of September. About 24 million borrowers have stopped payments, according to department data.
Biden expressed sympathy for the borrowers but suggested he was reluctant to write off the debt without an act of Congress. In November, he said the student loan burden was “holding people back. They have real problems. They have to make choices between paying their student loan and paying their rent. “
While Wall Street often values its debt holdings based on the prices they would reach in the market, government markdowns primarily reflect “amounts that should not be collected.” From an appraisal perspective, this means that there wouldn’t be much immediate difference between canceling failed loans and waiting for borrowers to empty their pockets.
Still, there is the moral hazard issue: if authorities offer relief to distressed borrowers, it could cause others to stop repaying as well, leading to further deterioration of the portfolio.
Rush for Relief
Much of the gap between what is owed and what the government estimates to be repaid comes from loan programs that cap monthly payments against borrowers’ income. Income-based repayment plans promise the possibility of a loan forgiveness after two decades of regular payments, or a decade for public servants. As annual borrower defaults exceeded one million, Barack Obama’s administration made repayment plans more and more generous. Registrations have tripled since 2014.
The expected cost of income-tested plans has also increased. The Department of Education recently realized that borrowers enrolled in the schemes were earning “much” less than expected. The government therefore reduced its projections for future borrower income by 35%, thereby increasing the estimated amount to be forgiven in subsequent years.
“There is already a significant loan forgiveness,” said Constantine Yannelis, who studies student debt and teaches finance at the Booth School of Business at the University of Chicago. “We’re just talking about increasing it or giving it to borrowers who wouldn’t qualify under the current rules.”
Yannelis said he recently discovered that the debt of low-income borrowers has a lower present value to the federal government than the debt of high-income borrowers.
Blanket loan cancellations make little sense, but the government has all the information it needs to target forgiveness, said Adam Looney, a professor of finance at the University of Utah whose research on student loans dates back to his time as a tax official at the US Treasury Department. In fact, he said, the education ministry’s own assessment reflects the belief that the government will eventually write off large sums owed by people earning little or at least not enough on their debts.
Loan forgiveness could encourage prospective students to over-borrow in the hope that their debts will be wiped out, Federal Office of Consumer Affairs advisers warned in a report this month. And that could, in turn, remove some of the pressure on colleges to cut costs.
But the public increasingly expects relief to come. In a December survey by the Federal Reserve Bank of New York, respondents estimated that there is a 39% chance – more than ever in a five-year survey – that the federal government will cancel a certain amount of student loans in Canada. over the next year.