The hidden local impact of student loan forgiveness

During a conversation earlier this week with a good friend, the topic turned to President Biden’s student loan forgiveness executive order. Paulina Guerrero has a doctoral degree, has essentially worked her entire adult life at healthcare-related nonprofits, and has even testified before Congress. Folks like her are exactly the kind of people the public sector relies upon to supplement its work and yet she’s never been eligible for any kind of loan relief program. Until now. Her perspective on her student debt opened my eyes to a few things and made me think about the more subtle impacts to state and local governments that the executive order potentially has.

Photo by Pang Yuhao on Unsplash 

The state and local impact of student loan relief

Biden’s executive order does three key things:

• Forgives up to $20,000 in federal student loan debt for individuals currently earning up to $125,000 annually.

• Cuts in half the income-based repayment plan by capping monthly payments for undergraduate loans at 5% of a borrower’s discretionary income. It also accelerates the timeline for the additional $12,000 in loan forgiveness under this repayment plan. 

• Extends eligibility for the Public Service Loan Forgiveness (PSLF) program to more workers in the nonprofit, military and public sectors.

Moody’s Investors Service has said that the debt relief component is “modestly credit positive” for the higher education sector because debt reduction will give borrowers more financial flexibility to return to college to finish their degrees or pursue additional programs. 

The state impact: The increased repayment flexibility could boost enrollment, which has been stagnating, and in many cases declining, at public colleges and universities. This is mainly because of lower birth rates over the last 30 or so years. The enrollment situation, in combination with reduced state aid to higher education (more on that below), are the two biggest reasons the cost of college has skyrocketed.

The hidden local impact: By itself, the changes to the repayment plan could actually discourage some borrowers from being able to build their long-term wealth, buy property, and contribute more to their local economies. Guerrero is on the current 10%-of-discretionary-income repayment plan which has made her payments more affordable. But in her case, it also means her timeline for full repayment on this plan is long. If she takes advantage of the new cap in payments, she’ll be on track to start collecting social security before she pays off her student debt. 

“There isn’t a light at the end of the tunnel,” she said. “So instead of thinking you can actually pay it all off, you go for the lowest possible payment plan and accept that’s what you're paying for the rest of your life.”

What’s more, this also prolongs her debt, which has been the primary reason she has not bought a home. “I have good credit at this point but my debt-to-income ratio is so high, I would never qualify for a good mortgage,” Guerrero told me. “I would have bought a house or condo a long time ago if not for that.”

The game changer: Biden’s expansion of the PSLF program to more workers means that Guerrero could be eligible to see her debt-to-income ratio reduced in a meaningful way. She has spent years working at mental health and other nonprofits, but because she wasn’t a nurse she wasn’t eligible for loan forgiveness. Now she’s going through the steps to get qualified and is almost afraid to hope about what could happen for her future financial security. “This is potentially life-altering,” she said. 

Who’s to blame for the high cost of college?

There’s a lot of blame to spread around here but let’s go through the biggies.