Nick Hillman on the Federal Student Loan Forgiveness Act

Judith Siers-Poisson [00:00:02] Hello, and thanks for joining us for the Poverty Research and Policy podcast from the Institute for Research on Poverty at the University of Wisconsin, Madison. I’m Judith Siers-Poisson.

One of the biggest current news stories is the Biden administration’s federal student loan debt relief plan, which was announced on August 25th. Estimates are that approximately 43 million Americans will be eligible to have their debt reduced, and almost half of those will have their debt wiped out completely. Not surprisingly, this move has many supporters and also many critics. For context and analysis of this initiative and the issue of student debt. We’re pleased to have Professor Nick Hillman with us today. Nick Hillman is a professor in the Department of Educational Leadership and Policy Analysis here at the University of Wisconsin–Madison. He also directs the Student Success through Applied Research Lab, which is a research-practice partnership with the university’s Division of Enrollment Management and Office of Student Financial Aid. He’s also a faculty affiliate here at IRP and at the La Follette School of Public Affairs. Nick, thanks so much for taking the time to talk with us today.

Nick Hillman [00:01:06] Thank you for the invitation.

Siers-Poisson [00:01:08] Well, let’s jump right in and lay out the most important aspects of the Biden administration’s Federal Student Loan Forgiveness Act. Can you give us the highlights?

Hillman [00:01:18] There are three big parts to this, and the first one is the one that you probably see the headlines on the most. That is the $10,000 in student loan debt cancelation. If you have a family income of less than $250,000 or an individual income of less than $125,000, that’s the big headline. There’s also an extra headline here that $20,000 of forgiveness is available to borrowers who also took out a federal Pell Grant while they were undergraduates. The Pell Grant is targeted towards lower income students. And so that’s the headline that we hear the most often is the ten or $20,000 in debt forgiveness.

There are two other headlines, though, that I think are also important. One is that the pause on student loan payments, which has been in effect for over two years now, this pause is going to end after the new year. So in January 2023, student loan repayments are going to begin again. So that’s big news for people who either have never paid yet—they may have graduated last year, during the pause and have never had to make a payment—or for people who have been on pause for two years’ time, to get those payments to begin again. The third piece, though, is some are some changes to the Income Driven Repayment plan. So this is a type of repayment that is tied to monthly earnings to make student loan debt more affordable. And the Biden administration is offering a new kind of model for doing that. And it’s a little bit more generous than some of the current models. So just a quick summary. The three things: the money, ten or $20,000 of forgiveness, the repayment part is ending, and there are going to be changes to what are called income driven repayment plans.

Siers-Poisson [00:03:05] And I definitely want to get into this current landscape more. But first I want to back up just a little bit and lay the groundwork for how we got to where we are today and why such a significant action was needed. For example, how has the cost of attending college and the amount of student debt changed in the last 50 years or so?

Hillman [00:03:25] There are so many pieces to this puzzle, and I think it’s right to start with the affordability piece of the puzzle. College is getting more expensive over time. It’s more than doubled just since the 1990s. And what I mean by double, it’s not just the tuition that’s increased, but it’s also the non-tuition expenses, the room and the board and all the different fees, the books and supplies that you have to also buy when you enroll in college. And so all of those expenses, even after adjusting for inflation, have doubled or even gone higher since the 1990s at least. And I guess maybe some people might not see that as a problem if family incomes were keeping pace. But they’re not. And family incomes during that same period of time have either declined or really plateaued. And it’s been very uneven in terms of economic growth for families. At the same time, the college get more expensive. So those are two big pieces of the puzzle.

Siers-Poisson [00:04:18] So, Nick, you’re saying that a lot of the different costs of attending college have gone up, but why specifically has tuition gone up? What’s been driving that?

Hillman [00:04:29] Tuition’s going up for a few different reasons in the public sector. So for state universities like University of Wisconsin or any state university, one of the big reasons why tuition is rising there is because state appropriations have not kept pace, and states have cut appropriations, or they haven’t invested in appropriations as much as they were, say, in the 1980s. And so that’s a big factor, because with fewer state appropriations, the cost of delivering education then kind of gets shifted over to the consumer. In this case, the student pays the tuition. What we call the balance wheel. When state support drops, tuition typically rises. And that’s the case in the public sector. Now, not all colleges are public. And there are a lot of private nonprofit colleges. And tuition is rising there as well. And so part of it is, just because of the way that the economics of higher-education finance work, it’s just an expensive enterprise. Universities are made up of a lot of highly trained, very specialized professionals that require a lot of very expensive equipment to do their work. And so because of that, tuition is also rising.

And another mystery is that sometimes we don’t really know what we’re buying when it comes to a college education. And so similar to maybe like wine, sometimes we think that if it’s more expensive, it must be good. And so there is this weird part to it that also kind of like allows tuition to grow because there’s not a good measure of quality when it comes to higher education and what you’re buying. So you can kind of get away with charging squishy prices.

Siers-Poisson [00:06:05] So let’s turn our attention now to those people who are holding the student debt, the borrowers. What do we know about who borrows and why they do it?

Hillman [00:06:17] We don’t know enough. And it’s largely because our data systems don’t really give us what we need when we need it. That said, there are some pretty clear trends. I think there’s research consensus that students who are from lower income families tend to be more likely to borrow and to borrow more, and not just students of color. I think sometimes I hear this blanket statement “students of color are more likely to borrow.” That’s not quite true. It’s very specific. And especially with Black men and women, that particular people group is more likely to borrow and borrow more. When it comes to, for example, Hispanic families and individuals, they’re less likely to borrow, and to borrow less. But I think one of the things that regardless of those contexts really matters is that students who stayed enrolled the longest tend to borrow the most. So the students who go to undergrad, finish for years, and go on to grad school, they’ve been in the longest. They have the most opportunity to borrow. They tend to be the ones who have the most debt.

Siers-Poisson [00:07:17] So who are they borrowing from? Because not all debt is held by the federal government.

Hillman [00:07:25] Great point. So probably about 10% of loan volume currently is held by private banks or private lenders. So think credit unions and so forth. And so you could go and borrow directly from them. Now, the thing is, if you were to do that, this announcement that the Biden administration just made about debt cancelation would not count for you. So you’re not operating in that world. And some borrowers go through that path for a number of reasons. But most borrowers are borrowing directly from the federal government. The U.S. Treasury gives the Department of Education money to lend, and the U.S. Department of Education allows students to borrow if they’re at accredited universities or colleges. So there are rules in place about how much you can borrow each year and whether your college is eligible for lending in the federal aid program. But basically, the federal loan program is the big one, and there’s about $1.6 trillion outstanding of federal student loan debt today.

Siers-Poisson [00:08:27] Wow, that’s a pretty hefty amount.

Hillman [00:08:30] 40-some million people. Absolutely.

Siers-Poisson [00:08:34] So especially in light of the Biden administration’s Federal Student Loan Forgiveness Act, a lot of people have been sharing their personal stories. And there seem to be a lot of people who took out an amount of loans, who had been paying on them for years, and paid what the initial loan was, but still owe sometimes that entire amount or even more. How common is that and how does that happen?

Hillman [00:08:59] This is a big problem. It’s negative amortization, that’s what the phenomenon is called. You owe more than what you originally borrowed. It happens for a number of different reasons, and it’s a big problem in the student loan area. I don’t know the exact percentage or the amount of dollars that are negatively amortized in this case, but it happens for a few different reasons. The largest reason is because of interest rates. The interest rates on federal student loans, they’re set every so often, every year, I think, and they get upped occasionally. But they’re right around 4%, I believe, right now, depending on the loan. Historically, they’ve bumped up as high as six or 8%, which, you know, is high, not as high as a credit card, but still it’s high. And what happens is that you when you borrow for federal loan, you have to get your origination fee. You have these interest payments that all kind of add up to be more than the principal amount that you originally took out. Another side of the story, though, is that the Income Driven Repayment plans that the federal government is really promoting and trying to get more borrowers to participate in, by design, they’re going to make you negatively amortized. So it’s a little bit of both of those things.

Siers-Poisson [00:10:12] You just mentioned the Income Driven Repayment program. And it seems like that and others are geared towards lower income students, whether from lower income backgrounds or lower income after they graduate. Can you talk a little more about what parts of this huge structure of student loan debt is geared towards students who are coming from less advantaged backgrounds?

Hillman [00:10:37] It’s a great question. I think our student loan system historically has not prioritized what you just described. It’s really been designed, in the 1960s and seventies in particular, kind of as a mortgage model of repayment. So a standard repayment plan would go on a ten-year fixed schedule. Your payments would be the same the day after you graduate as they would be ten years into your career. And we know that earnings’ trajectories take time to really develop. And so we have a lending system that’s expecting students, former students, to repay basically at their lowest point of their earnings career. So that income driven repayments are kind of designed to fix that where your payment is tied to your monthly income. Now what’s interesting is there are some requirements or criteria, I suppose, that take a share of your income that is below the poverty level and protects that. And then only incomes that are that are above a certain threshold get sort of accounted for in your repayment plan. And so the idea is to protect a base of money so that payments are at least less than 10% of your discretionary earnings each month.

Siers-Poisson [00:12:01] So let’s go back to the idea of the $10,000 that is forgiven for everyone who qualifies, and then the additional $10,000 that is forgiven for people who received a Pell Grant at some point in their studies, so a total of $20,000 in debt forgiveness for them. Why is Pell Grant receipt being used as a trigger for more debt relief?

Hillman [00:12:25] I think the policy logic is that Pell students, or students who received the Pell Grant, come from lower income families and they basically wouldn’t have gone to college without a loan. I think that’s part of the logic here. And there is good evidence that loans help you stay enrolled in college, even though that might sound counterintuitive. But without a loan, maybe a lot of students would never have enrolled in the first place. And so it’s designed in some respects to be compensatory in that way, too, to help target resources to the students who maybe were more likely to borrow in the first place. There’s another argument, and this one is kind of more on the political side of the house than anything else. The Biden administration was inspired to adopt this policy largely from Senator Warren and Senator Sanders, and they really promoted debt forgiveness as a way to reduce racial wealth gaps. And the federal government does not collect data on student lending by race and ethnicity. The only proxy that they have for any kind of social demographic grouping is going to be maybe your age, the college you went to, or whether you receive a Pell Grant. There’s not a whole lot they have available, not many data tools available, to decide this. So there’s, I think probably an assumption, whether it’s accurate or not, that more Pell students would also be more people of color and Black students in particular might be overrepresented. So maybe that’s a back way to kind of address the wealth gaps.

Siers-Poisson [00:14:04] In fact, the White House put out a statement that I saw just today that Black student loan borrowers are twice as likely to have received Pell grants compared to their White peers. So that’s addressing the point you said. And there is a significant wealth gap between White Americans and particularly African Americans on an average of a factor of 8 to 1. So how does forgiving, you know, basically the equivalent of probably a car payment or mortgage every month, how does that contribute to maybe, like you said, lessening that wealth gap, not just income gap, but wealth gap.

Hillman [00:14:40] It contributes and certainly is a tool in the toolbox, but not a lot. It doesn’t contribute a whole lot because, like you said, these racial wealth gaps, especially between Black and White wealth, are just so vast that, you know, $10,000 in instant loan forgiveness is a drop in the bucket when it comes to trying to close those gaps. Some estimates are between three and 7% of racial wealth gap to be closed by this type of loan forgiveness, which certainly helps. But I think that the research consensus that I’m aware of is saying that having race-blind policies like blanket debt forgiveness or using Pell Grant as a proxy, for example, are not going to go quite far enough as having race-conscious policies. So a reparations type policy or something like that is what I believe would be the greatest mechanism for closing racial wealth gap. Without that, we won’t see large progress, but it is still something that can help.

Siers-Poisson [00:15:46] Nick, one group that I’ve been thinking about are people who took out loans to go to college, but for whatever reason, didn’t finish their degree. And in some ways, they seem like they are in the worst position. They have the debt of a college education, but not the improved earning potential that often comes with a degree. How much does that group figure into this?

Hillman [00:16:08] Largely, that’s a huge part of the seven and a half million federal student loan borrowers who have defaulted on their student loans, seven and a half million out of the 44 million more. These are huge chunks of the portfolio, the median amount of debt. So the person in the middle of that seven half million, they have defaulted. The median amount is right around $10,000. So this whole idea of canceling $10,000 in student loan debt, it could have maybe small effects on somebody who has a really big loan, let’s say a $100,000 loan. But oftentimes, those are the people who stuck around in school for the longest got advanced degrees. So that the borrower you just described is on the opposite end of that spectrum. They may be enrolled in a semester or year, had the debt but no degree, and they have less than $10,000 in loan debt and they’ve defaulted on that. And that can affect their credit ratings. It can affect their chances of getting, you know, other types of credit. And it can hang with them for a lifetime in some places. So removing that would go a very long way. And I think disproportionately is going to benefit borrowers who are in that same situation of debt and no degree.

Siers-Poisson [00:17:22] So let’s talk about some of the criticisms of this plan. Some people have said that the salary limit of $125,000, as you said, for an individual or $250,000 for a household, means that high wage earners who might have come from more affluent families and now have good paying jobs, are going to benefit when they don’t really need the help that it’s a handout to the wealthy. What’s your take on that argument?

Hillman [00:17:48] I think there’s some truth to it. I mean, I think that that’s the politics of all of this, that, you know, who deserves subsidies? I mean, this is kind of bread-and-butter politics of how do you design a policy? And I think that my understanding is that the Biden administration is very committed to having a means testing component, even if it doesn’t really save a lot of money, even if it creates administrative hurdles, administrative burdens for people to now navigate. So I think that was more of a political calculus than anything else. And whether or not that’s the right threshold is, again, a political question. So it could have been $125,000. Maybe it should have been $100,000, maybe it should have been $75,000. Who knows? But the interesting point is that the U.S. Department of Education doesn’t have a lot of data sharing that happens between the department and the IRS. And so in order to verify earnings, the U.S. Department of Education, they don’t see your earnings. They’ll have to have borrowers verify their earnings. Now, if you’re already in an Income Driven Repayment plan, maybe the Department has your money or I’m sorry, has your information about your money. But if you’re not in those programs or if they need updated information, it’s going to require an application process. So we have now a potential rationing mechanism so that not everybody is going to get it automatically. And that could also be a way to save costs, at least administratively, for the Department.

Siers-Poisson [00:19:14] Speaking of costs, other critics argue that this is a tremendous burden on taxpayers. Because of a variety of ways that portions of loans, it seems like, are already forgiven or the interest paid may be more than covers the initial loan amount. Or like you said, that there have been defaults for a certain percentage of borrowers anyway, is it possible to estimate how much this will actually cost in the end? And where is the money coming from, or is it really just on paper?

Hillman [00:19:43] That’s a great question. I don’t think I have a great answer, except I can recall one recent analysis by some researchers at the Wharton School at the University of Pennsylvania, where they estimated about 300 billion of the 1.6 or 1.7 trillion, however you want to measure it, outstanding. So about 300 billion is subject to this cancelation or forgiveness. And so what’s really interesting about the way student loan debt is allocated in the U.S. is you have a whole lot of individuals who have really small loans or relatively small loans. So about 30% of all outstanding student loans are less than $10,000. So you have a lot of people who maybe are getting a relatively small cancelation. And then you have just the opposite. Relatively few people, or relatively small shares of the borrowers, holding very large amounts of student loan debt. And so canceling a little bit for a lot of people is probably going to make the overall expenses not too big in the grand scheme of things.

Siers-Poisson [00:20:50] So we’ve been talking a lot about money on the side of the government, and on the side of borrowers. Are there non-monetary benefits for society as a whole when more people are able to get more education, than their economic background might allow otherwise? Or maybe who have had to make life choices based on how to pay back their loans. What should we be considering on balance for the money that is surrounding this issue?

Hillman [00:21:17] That’s a great question. The thing I’ve heard often is that it’s more expensive to not go to college than to go into debt to go to college. So the opportunity cost is real. And so I think the investment is worth it on average for most students who go to college. It does pay off in the long run, individually, but socially it pays off because that individual now is an economically more productive individual and can generate more tax revenue for a state or for the nation. So that’s one part. But also, there are health benefits, not just physical health, but mental health benefits and civic engagement benefits of having more educated society. And so higher education plays a really important role, not just for promoting individual income, but also for these non-monetary social benefits of just kind of having a democracy function and work well. You know, things like critical thinking, and volunteering, and things that we value also are oftentimes a product of our higher education system. So with that in mind, I think the takeaway is that we’re better off when our neighbors have higher levels of education. So when our nurses and our teachers and our plumbers, for example, all have more formal education, then we all benefit from their greater productivity or their greater overall contributions to our communities.

Siers-Poisson [00:22:45] So on the other side of the spectrum of criticism, there are some who say that while it’s a nice gesture and may be a good start, that this doesn’t go nearly far enough, and that the system as a whole is just broken. You’ve been studying student debt for quite a while now. How significant do you see this Debt Forgiveness act and how would you rate it?

Hillman [00:23:07] Well, that’s a great question. It is a big moment. It is a big moment that’s going to be tested legally. Whether or not forgiveness actually happens, I think is a big question mark. It’s going to go through the courts. Eventually, somebody will have standing and bring a lawsuit, I’m sure, to this. So we might not ever know if this ends up happening. But if it does—I don’t want to be pessimistic—but if it does and when it does, it will be, I think, a moment that we refer to from now on when it comes to how we design our lending system. I think it has brought to the fore the questions about interest rates. Is it fair, is it right, is it just for our federal government to charge interest rates, especially at such punitive costs? So it brings together a lot of big questions about why are we using this lending system in the first place? And I think that’s a very positive development because it might help us think differently about other ways to pay for college. So that’s one piece of it.

I think another piece of this, though, is that our infrastructure, basically our systems that operate to make our lending possible, are very much broken and they have been so for years. And this policy change, this cancelation, doesn’t necessarily fix some of those existing barriers. What I mean by this is that we have what are called student loan servicers. They’re kind of like third parties that the federal government contracts with and then the servicer is supposed to then work with the borrower to help navigate repayment options. It’s just overly complex, burdened all over the place, where it just makes repayment very difficult to navigate. And I think this is helping us imagine different ways to go about that task.

Siers-Poisson [00:24:55] So you said that obviously debt is a huge issue, but it’s not the whole problem. If you had the power to make other changes in our higher education system relating to this, relating to the experience of students who are trying to afford it, what would be your top priority?

Hillman [00:25:11] Oh, my goodness. Well, you know, finances are a big part of this. And of course, I’m biased. I study this stuff and I’m motivated by it. So when it comes to investing in your education, I think about the next generation of people who are going to be going to college. They should be making their educational decisions based off of their educational goals, not off of their finances. So we have to get finances off of the table. And whether we do that through a completely free and completely subsidized post-secondary system, or whether we do it through a variation of what we have now, where it’s kind of like a shared responsibility, where individuals do borrow a little bit to pay for college, whatever that mix ends up being, we have to have it be a humane way to finance our education systems. Our current lending system is not designed that way. So if we’re going to have one in the future, and I’m not opposed to it out of principle, I think we’d have to make sure that it’s just designed in a way that keeps people whole, that has robust consumer protections and is extremely generous. So that finances are not a barrier to college. It could, you know, loans could play a role in helping people stay enrolled and pursue college. But it’s the repayment process that really needs to be fixed.

Siers-Poisson [00:26:26] Well. Nick, thank you so much for taking the time to talk with us today. It was so helpful to get your perspective on this.

Hillman [00:26:32] Well, it’s my pleasure. Thank you for the invitation.

Siers-Poisson [00:26:35] Nick Hillman is a professor in the Department of Educational Leadership and Policy Analysis here at the University of Wisconsin–Madison. He also directs the Student Success through Applied Research Lab. Nick is also a faculty affiliate here at IRP and with the La Follette School of Public Affairs. The production of this podcast was supported in part by funding from the U.S. Department of Health and Human Services Office of the Assistant Secretary for Planning and Evaluation. But its contents don’t necessarily represent the opinions or policies of that office. Any other agency of the federal government or the Institute for Research on Poverty. Music for the episode is by dog pondering. Thanks for listening.