Student debt forgiveness is finally here

Everything about student debt is big. There are more than 40 million borrowers and they owe an astronomical $1.6 trillion. By comparison, the major increase in military aid to Ukraine announced this week will cost only $3 billion. 

President Biden’s announcement today forgives $10,000 for millions of borrowers and up to $20,000 for recipients of the Federal Pell Grant program, which provides grants to students who have demonstrated significant financial need. Before the different rates for Pell Recipients was added to the equation, this plan was estimated to cost about $300 billion.

The Biden administration deserves much credit for targeting debt forgiveness for the neediest students. This is an important step to help those struggling the most with student debt — those in default, 60 percent of whom owe less than $10,000.

But our government is on the hook for the student loans forgiven today because it borrowed the money and lent it to the students — and we haven’t done enough to fix the problem for future students.

We need to find a better way.

One way we can protect borrowers is to address the crippling role interest plays in their debt burden. Due to negative amortization, interest payments are taking up a larger portion of student loan payments than ever before — with nearly one-quarter of all payments made in 2019 going to interest. Interest payments alone skyrocketed from $13.1 billion in 2015 to $22.4 billion in 2019.

Biden and his team rightfully acknowledge this problem by proposing changes to the Income-Based Repayment loan plans. But these changes are going to be very costly — with the taxpayers shouldering the cost. One solution to ease the debt burden is to stop collecting interest altogether — with a cost offset mechanism embedded to protect taxpayers.

To offset the loss of interest payments, we should invest the principal payments students make. It could amount to a lot more than what the government collects in the interest students pay now.

While the plan from the White House takes steps to address the impact of negative amortization, it does not include a cost offset. If we don’t figure out a way to make the student loan system pay for itself, it may collapse and take down with it the hopes of millions of students to earn a college degree.

There is no doubt that the debt burden on low-income students has grown too large as evidenced by defaults and late payments. Today’s forgiveness is an important step, but we can do even better.

Robert Hildreth is a former International Monetary Fund economist whose professional work involved restructuring South American debt and marketing sovereign debt loans. He founded the Hildreth Institute dedicated to restoring the promise of higher education.