Student loan debt doubles, is progressive call for forgiveness best option?
Like millions of Americans, Palm Beach County paralegal Melanie Kovar is saddled with hefty student loans.
Kovar unwittingly ran up $60,000 in debt while going to college as a single mom. She’s one of the 45 million Americans who owe $1.6 trillion in student loans, a financial overhang that’s being blamed for everything from tepid formation of new households to modest sales of homes to first-time buyers.
“I will never pay off my student debt,” Kovar said. “I’m only paying my interest.”
Her cautionary tale is a familiar one. Through good times and bad, Americans can be counted on to borrow for college.
Even in the depths of the Great Recession, Americans kept borrowing for school. Debt loads more than doubled, soaring from less than $750 million in mid-2009 to $1.64 trillion in mid-2019, according to the Federal Reserve. (By contrast, auto loans outstanding have risen far more modestly in recent years and fell during the economic downturn.)
The outsized numbers have caught the attention of the progressive wing of the Democratic party. Presidential candidates Elizabeth Warren and Bernie Sanders advocate forgiving large chunks of student debt.
Warren, a U.S. Senator from Massachusetts, proposes canceling up to $50,000 in student loan debt for 42 million Americans. She says the move would prove “truly transformational.”
She offers full loan forgiveness to borrowers making less than $100,000. Americans making more than that would have only a portion of their loans forgiven.
Warren calls for a tax on the wealthy to pay for the loan cancellations.
Sanders, a Senator from Vermont, goes even farther. He wants to cancel all student debt — some $1.6 trillion in loans held by 45 million Americans. He also would cap interest rates on future student loans at 1.88 percent, well below current levels.
The interest rate for federal student loans for undergraduates is 4.53 percent for the 2019-20 school year. Rates for federal loans to graduate students and parents are higher, and rates charged by private lenders are higher still.
Sanders last year introduced a bill that also would spend $48 billion a year to eliminate tuition and fees at all public four-year-colleges and universities, community colleges, tribal colleges, trade schools and apprenticeship programs. Neither the loan forgiveness nor the free education would be limited by family income.
Sanders proposes paying for the program with a tax on trades of stocks, bonds and derivatives.
On Democratic debate stages, the proposals have drawn pushback from more moderate candidates, including former Vice President Joe Biden, Pete Buttigieg, the mayor of South Bend, Indiana, and U.S. Sen. Amy Klobuchar of Minnesota.
They argue those proposals are not affordable, and they advocate less expansive solutions to student debt.
Student-loan experts are likewise skeptical that Warren’s or Sander’s plans are politically feasible.
“It’s just hard to waive all student loan debt,” said Paul Beltrun, co-founder of Credit Brain Student Loans in West Palm Beach. “You’re talking about $1.6 trillion.”
There’s also the reality that Republicans hold a comfortable majority in the U.S. Senate, so even if a progressive Democrat were to win the White House, loan forgiveness would be no sure thing.
“When you face a divided Congress, nothing gets done,” said J.L. Winn, head of TrustRight Student Loan Services in Boca Raton.
Kovar, the student loan borrower, offers a different perspective: She’s unlikely ever to repay her full balance, so forgiving the entire amount wouldn’t be especially devastating.
Kovar hired Credit Brain Student Loans to help her negotiate an income-based repayment plan. Credit Brain was able to reduce her monthly payment from $600 to $136. So long as Kovar makes payments for 20 years, the balance will be forgiven. However, the IRS will consider the amount that’s canceled taxable income.
Because Kovar was a single mom and needed the flexibility of night classes and online courses, she chose to study at the Palm Beach campus of Strayer University, rather than going for a more affordable option like Florida Atlantic University.
“I thought I was getting financial aid,” Kovar said. “I wasn’t getting financial aid; I was getting student loans.”
Such confusion is common, considering that student loans are complicated instruments marketed to young people with little experience consuming financial products. Surveys have found many borrowers are uncertain about how much they’ve borrowed in student loans, unsure about what interest rates they signed up for, and baffled about whether they took federal or private loans.
In Kovar’s case, however, she had been working in the legal field when she took the loans, and she now focuses on tax issues.
After negotiating an income-based repayment plan, Kovar had enough room in her budget to become a homeowner.
In another twist, there’s no limit to how much debt a student can take. While auto loans and mortgages are backed by collateral, and credit card lines of credit are based on income, student loans are untethered to the borrower’s ability to repay.
Kovar, like many of the 45 million Americans with student loans, wishes she had made different choices while studying. Beltrun, of Credit Brain Student Loans, says many of his clients are saddled with loan balances of $60,000.
“There’s a degree of buyer’s remorse,” Beltrun said. “If they had to do it all over again, they’d investigate the cost of education.”
This story originally published to palmbeachpost.com, and was shared to other Florida newspapers in the new Gannett Media network.