Forgiven or Not, Report Suggests Many Student Loans Will Never Be Repaid

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The U.S. Supreme Court waited until the last minute to make a ruling on President Joe Biden’s federal student loan forgiveness plan — and that minute has arrived. The SCOTUS struck down the plan, as many legal experts predicted, in a 6-3 verdict. Due to this outcome, a spike in student loan delinquencies may be imminent.

As previously reported by GOBankingRates, late last year a high-ranking member of the U.S. Department of Education issued a warning about the risk of blocking the forgiveness program, saying doing so could lead to a “historically large increase” in delinquencies and defaults.

The comments were made in a Nov. 15, 2022, court filing by James Kvaal, Under Secretary of Education at the Education Department. The document was tied to a lawsuit challenging the legality of the loan relief program.

In the filing, Kvaal said that if the Education Department can’t provide debt relief, “we anticipate there could be an historically large increase in the amount of federal student loan delinquency and defaults as a result of the COVID-19 pandemic. This could result in one of the harms that the one-time student loan debt relief program was intended to avoid.”

Federal student loan payments are due to restart in October following a payment pause that began in March 2020. But as Fortune recently reported, the government “will never see” most of the $1.8 trillion borrowers currently owe, regardless of how the forgiveness plan shakes out.

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That opinion is based on a new study from the Jain Family Institute that analyzed the credit reports of 1 million people ages 18 to 34 with student loan balances between 2009 and 2019. One of the study’s conclusions is that regardless of the legal status of loan relief, “much of outstanding federal student loan balances aren’t ever going to be repaid.”

“What the federal government considers an asset on its balance sheet (outstanding student loans) is worth less than currently valued, perhaps far less,” the authors wrote. “The government is poised to take a bath on its student loan portfolio over the long term, even as that portfolio expands in size every year as the higher education system sucks up more federal funding.”

If there is a steep rise in defaults and delinquencies tied to student debt, the problem will extend into the economy at large. One of the co-authors of the Jain Family Institute report, University of Utah economics professor Marshall Steinbaum, addressed the topic of student debt in a previous report that appeared on the Phenomenal World website in 2020.

In that report, titledThe Student Debt Crisis is a Crisis of Non-Repayment,” Steinbaum noted that what was considered “economic prosperity” during the previous decade, prior to the COVID-19 pandemic, was actually “economically punishing” to younger cohorts with heavy student debt and dim job prospects.

“The fact that [student debt] balances continue to grow and not be paid back shows that shifting the cost of higher education onto the backs of students, through state budget cuts, slack labor markets, and employer monopsony power, has resulted in a structural attenuation of the economic life cycle,” Steinbaum wrote.

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Student loan balances now carry “further into mid-life,” he added, or are “taken on later in life to finance further education or a family member’s education.” This in turn impairs “economic wellbeing for a widening and diversifying swathe of the population, inhibiting savings, increasing precarity, and draining the very incomes the student debt was supposed to increase.”

Although the SCOTUS has ruled against loan forgiveness, that might be a mistake over the long term.

“The policy question is then not whether to cancel student debt, but how?” Steinbaum wrote. “Are we going to rely on increasing [income-driven repayment plans] and thus kick the ball further into the future … or can we honestly confront and solve a past policy failure in the present by cancelling debt now (and not taxing it), to prevent the debt spiral from getting any worse and rectifying the damage student debt does to household wealth?”

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This story has been updated with additional information.


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