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1/ Student loan *interest* is simultaneously central to the lives of borrowers, but somewhat removed from policy discussions, esp. when we just talk about the size of individual and total debt. We need to talk about student loan interest more. {THREAD}
2/ One reason we both need to talk about it more, and that we don’t, is b/c it is actually incredibly complicated. But its complexities also end up revealing some deeper policy choices and contradictions around student loans generally.
3/ First, interest is set by statute, not the market. And the rates have little relationship to actual risk. PLUS loans—for parents and grad students—have the highest rates, but only so govt makes more money from lower-risk borrowers. Not too long ago those rates hit 7% or more.
4/ To underscore that these interest rates are just policy choices, note that Australia only charges the inflation rate on student loans and used to charge 0%.
5/ Second, the interest someone *actually* pays might vary a lot from that statutory rate. There are many situations where govt covers or forgives some of the interest. E.g., for Subsidized Direct Loans, govt pays the interest while in school + 6mos, and whenever in deferment.
6/ Where interest really gets complicated though is in the Income-Driven Repayment programs. Here, e.g., is what happens for loans in REPAYE: 1) if income-based payment is too low to cover all interest charged, govt will cover half of the charged but unpaid interest, …
7/ 2) Some of remaining accrued but unpaid interest is capitalized into the loan balance, meaning it increases the loan principal and thus future interest charges. 3) However, capitalized interest is capped at 10% of original loan balance. …
8/ Unpaid interest after that is still owed, but govt won’t charge interest on it in the meantime—essentially, it sits in a separate, interest-free account. 4) BUT if you leave REPAYE, all the interest will be capitalized after all.
9/ Did you get all that? I didn’t, and I just wrote it. Point is, we start with an arbitrary interest charge, and then run it through another set of arbitrary subsidy and capitalization rules (rules, which, btw, are different for the other IDR plans--IBR and PAYE).
10/ This makes it impossible to know what your effective interest actually is, especially at the time you enter the loan. And Congress or ED could change the rules again any time, tweak the IDR subsidies, or whatever.
11/ So big chunk of the outstanding $1.6tr of student debt is really just this artifact of contingent policy choices, which on one hand are used to make money and shore up the program financially, but on the other to provide relief to struggling borrowers.
12/ Third, under some measures, much of the debt actually canceled under IDR programs will end up being essentially interest. Right now ED estimates that it will collect more than it lends from borrowers in IDR, across many different cohorts.
13/ Sometimes the uncollected amounts are framed as a “cost” but that’s only relative to the huge profit ED would make if everyone paid fully. Based on current estimates, govt will still take in more than it lends. https://twitter.com/jakebrooksGULC/status/1331275829775650820?s=20
14/ This gets at a key contradiction in student loans: intended as tool of access, with policies designed to help students and expand higher ed, but running it as a loan portfolio frames those as policies as “forgiveness” to individuals and “losses” to the portfolio.
15/ Fourth, back to interest, it’s telling that there is little objection to the interest subsidies I’ve described—which, to be clear, are a form of debt cancellation—compared to cancelling loan principal, EVEN THOUGH much of the canceled principal will be accrued interest.
16/ This goes to show that treating student loan obligations as a balance-sheet liability really ends up confusing things rather than helping. Imagine if we instead only said (a la UK and AUS), just pay 10% of discretionary income for 20 years.
17/ Finally, since I can’t resist the tax issue, it’s also telling that literally no one is arguing that these many interest subsidies are taxable, even though the same tax law arguments should apply as for cancelling loan principal.
18/ Anyone saying it’s so obvious that student debt cancellation is taxable should ask why they don’t think the same when the government pays or cancels the interest owed.
19/ (I think the answer is in a 1975 ruling by the IRS that student loan interest subsidies are non-taxable “scholarships.” If so, the same should be true for canceled principal.)
20/ My point is that the debate around student debt and cancellation treats outstanding debt as if it’s a clear measure of what a borrower received, when in fact it is largely a function of a bunch of opaque, contingent, and inconsistent policy choices, esp. around interest. /end
