Evolution Of Education Debt

The facts are astounding. The figure now exceeds 43 million student borrowers, who are in debt by an average of $39,351 each. In an effort to attain a bachelor’s degree, the average public university student borrows at least $30,000. And now, the largest it has ever been, the outstanding Federal Loan Portfolio of $1.56 trillion constitutes the majority of the outstanding $1.70 trillion national student loan debt. Unfortunately…these figures grow by the day.

Alarming facts and an eye on the labor force have ultimately motivated the Federal Government to act swiftly toward a resolution in reduction of student debt, beginning with the CARES Act of 2020. In March 2020, the Trump administration announced a student loan repayment freeze which, after many extensions, will finally terminate January 2022 with payments resuming February 1, 2022. The Act placed a 0% interest rate on all outstanding federal loans owned by the Department of Education. Some borrowers found this as an advantageous way to compound long-term savings – if their income was unchanged and expenses were constant – by continuation of monthly payments, saving significantly on lifetime interest. Alternatively, relief was also given to those who had previously defaulted on their student loan – billing statements and collection calls were entirely suspended – granting those in financial distress a second chance.

Making recent waves, the US Department of Education announced it will cancel $5.8 billion in student debt for more than 320,000 borrowers. The debt forgiveness, however, will be allocated only toward borrowers with total and permanent disability. Information from the Social Security database will be used to identify these individuals, who will see relief beginning this September.

Most recently, the Education Department canceled debt for thousands of students who attended for-profit schools, or institutions of higher education which are owned and operated by private, profit-seeking businesses. Controversial action by the Department of Education on many levels, but nonetheless action was taken.

Although these actions seem like very small chips off a large block, it is clear the Education Department is showing interest in the issue and has a willingness to act, beginning with those borrowers who are simply unable to apply their degree in the labor force. Significant pressure remains on the current administration to go even further. One notion is to cancel $50,000 per borrower in student debt for all. This could possibly take effect through an Executive Order.

Student borrowers still facing hardships as a result of COVID-19 should review their budget to ensure liquidity is available to make payments. If not, there are other options:

Switching the loan to an income-based repayment plan in an effort to potentially reduce monthly payments.

Refinance the student loan into a product with a lower interest rate (current all-time lows). Be careful not to act on this option too quickly. If the refinance brings your loan into a private student loan, eligibility for any Federal benefits would be eliminated.

The heat remains on this growing topic and recent actions have confirmed the Department of Education and current administration are both willing to compromise. By just how much is yet to be seen, but don’t ruin your credit in the meantime: make the on-time monthly payments or contact the loan provider directly with a request for deferment or loan extension, if needed.