student loans

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The turn of the screw – Sean Wallis

Published by Anonymous (not verified) on Sun, 22/05/2022 - 6:49am in

Huge loan hikes for students — are staff caught in the crossfire?

Across UK Higher Education we are beginning to see a new wave of course closures and redundancies.

  • De Montfort University in Leicester has announced 65 job losses — despite having £120m in the bank. Although in 2021 the university reported a small deficit (£3.7m) due to Covid, this was easily offset by the £15m surplus of the year before.
  • Wolverhampton University has ‘paused’ undergraduate recruitment across 146 courses, and is aggressively pushing a voluntary severance scheme. The university’s financial statements from 2021 reveals £125m in reserves. But according to the Guardian, ‘Wolverhampton’s deputy vice-chancellor blamed the cuts on the university’s £20m budget deficit and a 10% decline in undergraduate applications.’
  • Roehampton University in London sent out 226 letters to about half their academic staff telling them they were going to be ‘at risk’ of redundancy. Cherished courses would be axed and existing students would be taught to completion by casual staff (or existing staff compelled to accept fixed-term contracts).

These cuts dwarf even the Goldsmiths College cuts to History and English & Creative Writing announced earlier this year. The new group are all ‘post-92’ universities, unlike Goldsmiths.

But Goldsmiths reminds us that initial purges are likely to become a cycle of multi-year cuts. Staff who remain are not safe. Colleagues at Roehampton have suffered job culls in 2018, 2020 and 2021, and were just recovering from the last when they received these letters.

In a tuition fee marketplace, any university making significant closures will inevitably find it harder to recruit students. After all, students want to know that their degree programme, and their university, will be recognised by employers ten, twenty, even thirty years in the future. There is a real risk that universities can become locked into a ‘death spiral’.

Roehampton University was one of a group that in 2020 blinked first. On paper it was running a £4m deficit budget and believed that student numbers would fall at the start of the pandemic. Instead, student numbers rose by 2% overall. But Roehampton, already committed to a cuts programme, was in no position to capitalise on the increase. The university’s financial statements for 2021 reveal no real improvement on its financial position despite the cuts, and only £10m in reserves.

Even when departments are excluded from cuts, the damage to the credibility of the university ‘brand’ can affect student recruitment in other courses. London Metropolitan University was the first victim of tuition fee market changes, shrinking by two-thirds within a few years, even before the announcement of the tripling of the undergraduate student fee from £3,000 to £9,000 in 2010.

What is triggering these cuts? Why are they happening now? And what can be done about it?

Was this to do with the recent 2021 Research Excellence Framework (REF)? Universities have a history of hiring and restructuring to ‘game’ the REF. However, it is clear that redundancy plans were developed well in advance of the REF publication date. Indeed, Wolverhampton boasted of excellent REF results in the areas in which they submitted, and Roehampton University also claimed to have excelled in the REF. So an unexpected loss of so-called ‘Quality Related’ income does not appear to be the cause (QR income has not yet been announced).

All these universities — indeed most universities, even the most research intensive — depend primarily on student tuition fee income. And the main reason why business managers identify courses for closure is because they perceive that they will be loss-making, and cannot see how to turn them into profitability.

As the quote from the Wolverhampton deputy vice chancellor indicates, universities are looking anxiously at UCAS student recruitment figures, and attempting to determine whether students will follow through with applications.

Roehampton’s case is a little different, and goes back further, but underlines the same basic point. Faced with problems in domestic undergraduate recruitment, the university chose to ‘diversify’ towards international recruitment and FE. But although the university is less susceptible to student loans changes, the strategy has clearly not worked.

The latest published UCAS data from January 2022 indicates a slight downward variation from 2021 (610,720 applicants across all four nations compared to the 616,360 at the same point in the recruitment cycle last year). This is not the final deadline for applicants, and in fact the application rate is slightly up as a demographic proportion (43.4% of school-leavers compared to 42.6% in 2021). Indeed the 18-year old application rate continues to increase.

Figure. No cause for alarm? UK domiciled January applicants by region (UCAS).Figure. No cause for alarm? UK domiciled January applicants by region year-on-year (UCAS).

So there appears to be nothing in the published application data that should trigger panic.

But this data was sampled before the Government announced its Augar-inspired plans for the student loan scheme, and as inflation was only just beginning its recent stellar rise.

Donelan turns the screw

The Institute of Fiscal Studies (IFS) summarised the Government’s changes introduced by Higher Education Minister Michelle Donelan:

At the end of February, the government announced the most significant reform to the student loans system in England since at least 2012. The central planks of the reform are a lower earnings threshold for student loan repayments (cut to £25,000 and then frozen until 2026–27); a change in the future uprating of the earnings threshold from the rate of average earnings growth to the rate of RPI inflation; an extension of the repayment period from 30 to 40 years; and a cut in the maximum interest rate on student loans to the rate of RPI inflation (from a maximum rate of RPI inflation plus 3%). The new system will apply in full from the 2023 university entry cohort onwards, but the 2012 to 2022 entry cohorts (‘Plan 2 borrowers’) will also see significant changes.

Many may have missed the fact that a single change, concerning the mechanism for uprating the earnings threshold in the future, will also impact on existing undergraduates and the 2022 intake. The IFS calculate that for lower-earning professions, where students are unlikely to pay off their student loan over their lifetime, 2022 students will pay some £20,000 more than they would have expected to pay had these changes not been imposed.

Before Donelan’s changes, the student loan scheme might be best described as a hybrid graduate tax, one where only higher-earning graduates can expect to actually repay a substantial proportion, and the majority were simply taxed at 9% above the threshold for 30 years. The average ‘RAB’ rate was below 50%, meaning that less than half of the loan was expected to be repaid over 30 years.

But following these ‘reforms’, the loans become more like conventional index-linked Treasury-backed loans, with a much lower repayment threshold. A drop in this threshold means that far more students will have to pay something, and those who pay will have to make a bigger contribution. The IFS calculate that 70% of students will be made to pay back RPI-indexed loans in full over their lifetime.

As the IFS point out, these cuts will bite hardest for student cohorts from 2023. But the effects are beginning to be felt now.

Is the market bubble beginning to burst?

From the university management’s elevated positions above the fray, over the last decade the market system has appeared to have been nothing short of miraculous. Despite rising costs for students, student recruitment has tended to keep on rising.

University managements have scrambled to compete for students, but one fact has remained constant — a very large number of UK students have applied for UK university degrees. Despite Brexit and the pandemic, both shocks to the system unforeseen by David Willets in 2010, student numbers have continued to rise.

However, the university fee system is very sensitive to marginal variation. Since most costs are fixed, a 1% increase in student numbers can translate into a 10% rise in profit (officially: ‘surplus’). The last two years have seen a 2% increase each year. But these increases have been distributed unequally between universities, leading to many commentators to demand a reintroduction on student caps and market regulation.

Although the per-student home undergraduate fee cost is controlled and has not risen with inflation, these increases, garnished with taught postgraduate and overseas student fees, have proved lucrative to Vice Chancellors. Undergraduate teaching, the bread-and-butter of universities, continued to pack in the lecture halls, even if during the pandemic many of these lecture halls became virtual Zoom rooms.

It was almost as if the student fee system could defy the laws of the marketplace.

But gravity can only be defied for so long.

Around the edges, some universities started to plan for Augar changes leaked into Government-supporting press. Last year, London South Bank University closed History and Human Geography undergraduate degree courses, and a range of masters programmes. Aston closed History and language courses. Sheffield closed Archaeology, and Leicester purged staff from Critical Business Studies.

It was not all bad news. In Liverpool, the local UCU branch successfully resisted job losses in the Faculty of Health and Life Sciences by an industrial action campaign. And a campaign in Chester saved many jobs.

Vice Chancellors have continued to seek job losses, and course and department closures as a mechanism for refocusing degree programmes for market competition. But the latest round of redundancies are on a greater scale than before.

A toxic combination?

We should be careful not to speculate about UCAS application figures, although some university managers are clearly worried. At the start of the pandemic, like many at the time, we thought that home undergraduate applications would go down. Instead they rose.

But many lower- to middle-income families considering sending their eighteen-year olds to university will be doing the sums. On the one hand, post-pandemic labour shortages mean more better-paid job openings for school-leavers. This opportunity, which did not exist during the pandemic period, may turn out to be short-lived.

On the other hand are the rising costs of university attendance. Even if the loan scheme changes can appear a long way off, they inevitably prey on the mind of parents, if not students. Facing costs going up, more students may choose to study from home, avoiding increasing rents and hall fees. But this assumes that students live near a university they wish to attend. And it reduces one lucrative source of income from universities, that of student accommodation.

Inflation is also hitting the universities through rising fuel costs.

What can we do about this attack?

The first thing we have to say is that the hike in student loan repayments represents both an increased tax on knowledge for the next generation and a socially regressive restriction in access to knowledge.

The Donelan ‘reforms’ are an attack on social mobility. Universities like Wolverhampton and De Montfort, and indeed Roehampton and Goldsmiths, are what John Holmwood of the Campaign for the Public University memorably termed ‘the heavy lifters of social mobility’: regional universities that served a regional working class and middle class population. These are universities that recruit a higher proportion of non-traditional students, Black and disabled students, single parent returners and others, than the so-called ‘redbrick’ or Russell Group universities.

The ‘reforms’ are also a (negative) price signal to working class students aiming to study STEM subjects, including in the more prestigious universities. Whereas law or medicine may be well-paid, many sciences are rather less so, especially in pure research. The mainstay of university pure science research jobs has long been students from working class families.

We should therefore oppose these ‘reforms’ on principle, whether or not they lead to job losses and course closures. They are an attack on students past, present and future.

But looming large for university staff is the threat that these future changes will impact on them very soon. We may already be beginning to see signs that some students in the 2022 cohort are deciding not to go to university in the face of rising costs and financially more promising alternatives. And if 1% increase means a large upswing in projected surpluses, a 1% decrease can be devastating.

We should rally around and support staff whose jobs are on the line — not simply because we should defend university jobs, but because the staff and their unions are in the frontline for the battle for the future of UK Higher Education.

Some practical suggestions

The Donelan cuts can be reversed. What one Government can do, another can undo. As the IFS point out, they position the UK as an international outlier in relation to the proportion of costs borne by individual students.

This is a sector with record surpluses, but a decade of market competition has undermined collective responsibility for Higher Education.

Vice Chancellors see themselves as CEOs of competing ‘HE providers’, not guardians of their sector. Statements of social responsibility are limited to press releases.

Historically, universities that found themselves in a loss-making position like Roehampton would be candidates for merger with other universities, brokered by HEFCE (or other national funding councils). But HEFCE has been replaced by the Office for Students, whose then-chair Sir Michael Barber infamously said that ‘no university is too big to fail.’ The logic of market acquisitions in the post-2016 marketplace is limited to TUPE-transferring a few prestigious teams, and cherry-picking staff they might wish to recruit.

These changes are being imposed at the same time as the UCU trade union is engaged in serious industrial disputes across the UK including marking boycotts in some universities. These disputes are about the basic terms and conditions of university staff, and the USS pension scheme, which has also been undermined by market pressures.

  1. UCU branches can be contacted for support and solidarity:
  2. Colleagues should talk to their local UCU or EIS trade union branch and Student Union about organising meetings and protests about the Donelan changes.
  3. We should support protests called by the National Union of Students and local student unions. Representatives of the Council for the Defence of the British Universities (CDBU) and Campaign for the Public University (CPU) can be invited to speak.
  4. The Donelan ‘reforms’ are an assault on the aspirations, the hopes and dreams of the next generation. They impose an austerity of the intellect.
    We can join the demonstration called by the Trades Union Congress (TUC) on June 18.

As the TUC say, it is time to Demand Better from this government!

We should make common cause with all of those protesting against the Government’s austerity programme. Our demand is not to prioritise the university system above every other societal need. But if we don’t speak up for Higher Education, who will?

Why Canceling Student Debt Is a Matter of Racial Justice

Published by Anonymous (not verified) on Sat, 07/05/2022 - 8:52pm in

Student debt disproportionately impacts black and brown Americans. It’s time for Biden to this collective financial burden.

What Might Happen When Student Loan Forbearance Ends?

Published by Anonymous (not verified) on Fri, 22/04/2022 - 10:27pm in

Federal student loan relief was recently extended through August 31, 2022, marking the sixth extension during the pandemic. Such debt relief includes the suspension of student loan payments, a waiver of interest, and the stopping of collections activity on defaulted loans. The suspension of student loan payments was expected to help 41 million borrowers save an estimated $5 billion per month. This post is the first in a two-part series exploring the implications and distributional consequences of policies that aim to address the student debt burden. Here, we focus on the uneven consequences of student debt relief and its withdrawal. With the end-date of the student loan relief drawing near, a key question is whether and how the discontinuation of student debt relief might affect households. Moreover, will these effects vary by demographics?

Student debt forbearance relief during the pandemic has been instrumental in staving off student loan delinquencies and defaults, which previous research has linked to delays in homebuying and other measures of financial stress.  Private student loans are not eligible for this relief while most federal student loans are. Exceptions are certain FFEL, Perkins and HEAL loans. Will delinquency rates climb to pre-pandemic levels as student debt relief ends? Using data collected from student loan borrowers in the New York Fed’s Survey of Consumer Expectations, we seek to understand who obtained student loan forbearance relief, who continues to be in forbearance, and what do they expect to happen if the relief were to end. The second post in this series explores the demographic differences of alternative student debt forgiveness policies.

Insight from the Survey of Consumer Expectations

In this post, we leverage data from the May 2021 Survey of Consumer Expectations (SCE). In May 2021, federal student loan borrowers were also eligible for forbearance relief and it was set to expire on September 30 of that year. Currently, the student loan borrowers face a similar situation, with student loan forbearance expected to end at the end of August 2022. From this perspective, we hypothesize that the survey responses on expectations of future repayment and delinquencies can shed light on current expectations about future repayment and delinquencies. Since June 2013, this monthly survey has collected information on the economic expectations, choices, and behavior of household heads. The SCE covers about 1,300 nationally representative U.S. households and, in addition to monthly core questions, special modules focusing on specific topics are fielded frequently.

Here, we use data collected both as part of the May 2021 core survey as well as from a special module in that month that focused on debt relief during the pandemic. As part of the special module, we asked respondents about debt repayment, receipt of debt relief, the type of relief received, and their expectations that they will miss a debt payment in the next three months. Additionally, we asked respondents to consider a counterfactual scenario under which student debt relief is discontinued forthwith and elicited their expectation that they will miss a payment in the next three months under this scenario.

Student Debt and Likelihood of Any Missed Debt Payment

We begin by investigating households’ expected likelihood of missing any debt payment (that is, any of the minimum required payments on credit and retail cards, auto loans, student loans, mortgages, or any other debt) in the next three months. The average probability of missing a payment is 9.7 percent for the 1,232 households that answered this question. Student debt holders expected a 13.5 percent chance of missing a minimum debt payment in comparison to 8.7 percent for those who did not have student debt. Thus, even with most having an automatic pause on their student debt payments and thereby avoiding delinquency on such loans, student loan borrowers perceived a higher risk of missing a minimum required payment on other outstanding debts. This is consistent with the lower average age, income, and credit score of student loan borrowers—a difference that existed even before the pandemic. These groups are the ones that experienced the greatest financial hardship during the pandemic, with younger workers disproportionally working in the hardest hit sectors of the economy, seeing larger increases in their unemployment rate, and a lower share of younger workers being eligible for unemployment insurance expansions.

Student debt holders who had an income-driven repayment (IDR) plan were less likely to expect that they will be delinquent in the next three months (13.0 percent versus 14.6 percent) on any debt payment. Thus, we find that student debt holding is associated with a higher perceived probability of delinquency while having an IDR plan reduces this risk, likely by restricting payment to a relatively manageable share of their income.

Focusing on borrowers who reported receiving some type of debt relief (other than student debt relief) during the pandemic, we investigate whether such “ever-relief borrowers” had a different perceived risk of being past due on a loan in the near future. We find that debt relief recipients (those receiving fee and interest waivers, debt forgiveness, or a deferral or delay on credit card, auto loan, or mortgage payments) are more likely to expect that they will be delinquent, with an average probability of missing a payment of 23.2 percent compared to 7.8 percent for those who never received debt relief. This suggests that borrowers who received temporary relief are financially worse off and more likely to have needed the financial support. They remain financially more vulnerable and expect a higher level of financial insecurity in the future.

Although Debt Relief Recipients Perceived a Higher Likelihood of Delinquency; Those with IDR Perceived a Lower Likelihood of Such Distress

Average percent chance of not being able to make a debt payment in the next three months

Overall
9.7

No Student Loan
8.7

Student Loan
13.5

No IDR
14.6

IDR
13

Never Debt Relief (except student loan)
7.8

Ever Debt Relief (except student loan)
23.2

Observations
1232

Source: New York Survey of Consumer Expectations, May 2021.
Note. “Ever Debt Relief” refers to borrowers who have ever obtained debt relief (other than for student loans) during the pandemic. “Never debt relief” refers to borrowers who never obtained such relief.

We next focus our attention on borrowers who received student loan forbearance. The first column in the table below focuses on the 159 borrowers in our sample who have ever received student debt forbearance through the administrative forbearance of federal student loans. On average, these borrowers expect an 11.8 percent likelihood of missing any debt payment in the next three months, slightly smaller than the likelihood faced by an average student loan borrower (13.5 percent). Note that this contrasts with the finding from the above table where borrowers with other kinds of debt relief expected a higher probability of delinquency than those who did not seek and obtained relief. This difference can be explained by two factors. First, borrowers with federal student debt automatically entered forbearance whereas borrowers with other debt sought out relief, likely when they were financially more vulnerable. Second, federal student debt holders who never received forbearance mostly hold FFEL and Perkins loans which were associated with higher delinquencies during this period.

Among borrowers who have ever received student loan forbearance, there is considerable heterogeneity in perceived future delinquency risk by demographics as well as IDR status. We find that less educated, lower-income, female, non-white and middle-aged borrowers expect a higher risk of such delinquency. Consistent with the finding above, we find that borrowers who do not have an IDR plan perceive a higher likelihood of financial distress (as captured by delinquency).

The second column of the table below focuses on the 116 borrowers who in May 2021 remained in student loan forbearance. Borrowers who remained in forbearance have a slightly higher expected delinquency rate than those who ever received forbearance (12.9 percent versus 11.8 percent), although this difference is only marginally statistically significant. Differentiating by demographics, we find the same patterns as above, except that average delinquency probabilities generally are somewhat higher. These results go beyond our earlier findings indicating that student loan borrowers who availed themselves of the option and continue to remain in forbearance perceive a significant risk of missing a debt payment over the next three months, even after pausing their student loan payment and able to continue doing so over the next three months.

Among Forborne Borrowers, Less Educated, Women, and Racial Minority Borrowers Have Higher Expected Delinquency Rates as Do Those Without an IDR

Ever Received Student Loan Forbearance
Currently in Forbearance

Overall
11.8
12.9*

No College
17.2
19.2*

College
8.1
7.8

<60k (US dollars)
13.7
15.1*

>60k (US dollars)
10.9
11.6

Male
10.2
11.4*

Female
12.7
13.8

Non-white
15.3
17.2*

White
10.8
11.4

<40 yrs old
9.9
10.7

41-60 yrs old
15.9
17.7*

>60 yrs old
2.6
2.6

No IDR
13.3
14.5

IDR
9.5
10.5

Observations
159
116

Source: New York Survey of Consumer Expectations, May 2021 Survey.
Stars denote whether column 2 is statistically different from column 1. * p<0.1, ** p<0.05,
*** p<0.01

Finally, we conduct a hypothetical exercise where we ask respondents who continue to avail themselves of student debt forbearance to consider a scenario in which all student debt forbearance is discontinued at the end of the month. Then we asked respondents about their expected likelihood of student loan delinquency in the next three months. We find that, under this scenario the borrowers expect a 16.1 percent risk of delinquency on their student debt. Differentiating by demographics, we find that lower-income, less educated, non-white and female borrowers expect a higher likelihood of delinquency, should the relief be discontinued. Consistent with the above results, discontinuation of student debt forbearance will more adversely affect borrowers without an IDR plan with an almost 50 percent higher expected delinquency rate compared to those who do.

Discontinuation of Student Debt Relief Will Hit the Less Educated, Women, Racial Minorities, and Middle-Aged Borrowers the Hardest.

Currently in Forbearance

Overall
16.1

No College
18.7

College
14.1

<60k (US dollars)
18.7

>60k (US dollars)
14.7

Male
8.3

Female
21.5

Non-white
13.6

White
17

<40 yrs old
13.1

41-60 yrs old
21.5

>60 yrs old
11.9

No IDR
16.5

IDR
15.7

Observations
116

Source: New York Survey of Consumer Expectations, May 2021 Survey.
Note: Sample of student debt borrowers who are in administrative forbearance.

Our analysis suggests that the scheduled discontinuation of student debt forbearance on August 31 will likely increase financial hardship and delinquency rates. Borrowers currently availing themselves of student debt forbearance expect a 16 percent chance of delinquency if relief is discontinued. Assuming a zero-delinquency rate among those not currently receiving student debt relief, this suggests an overall borrower delinquency rate of 10 percent, a return to two-thirds of the pre-pandemic student loan delinquency rate of 15.6 percent of borrowers. Our 10 percent estimate is clearly a lower bound as we have assumed that those that are not currently in forbearance have a zero percent expected delinquency rate, thus implying that we cannot rule out that the delinquency rate at relief withdrawal could reach or even surpass the pre-pandemic rate.

We also find that this hardship in repayments will not affect all borrowers evenly. Rather, we find that lower-income, less educated, non-white, female and middle-aged borrowers will struggle more in making minimum payments and in remaining current. Borrowers who do not have an IDR plan are expected to be relatively worse off, likely because the IDR allows payments to be more manageable amid income fluctuations. Finally, our analysis suggests likely consequences for repayment of debts other than student loans, with student loan borrowers reporting high average risks of delinquency on other debts even while their student loan payments were paused.

Rajashri Chakrabarti is a senior economist in the Bank’s Research and Statistics Group.

Jessica Lu is a senior research analyst in Bank’s Research and Statistics Group.

Wilbert van der Klaauw is a senior vice president in the Bank’s Research and Statistics Group.

Who Are the Federal Student Loan Borrowers and Who Benefits from Forgiveness?

Published by Anonymous (not verified) on Fri, 22/04/2022 - 10:26pm in

Tags 

student loans

The pandemic forbearance for federal student loans was recently extended for a sixth time—marking a historic thirty-month pause on federal student loan payments. The first post in this series uses survey data to help us understand which borrowers are likely to struggle when the pandemic forbearance ends. The results from this survey and the experience of some federal borrowers who did not receive forbearance during the pandemic suggest that delinquencies could surpass pre-pandemic levels after forbearance ends. These concerns have revived debates over the possibility of blanket forgiveness of federal student loans. Calls for student loan forgiveness entered the mainstream during the 2020 election with most proposals centering around blanket federal student loan forgiveness (typically $10,000 or $50,000) or loan forgiveness with certain income limits for eligibility. Several studies (examples here, here, and here) have attempted to quantify the costs and distribution of benefits of some of these policies. However, each of these studies either relies on data that do not fully capture the population that owes student loan debt or does not separate student loans owned by the federal government from those owned by commercial banks and are thus not eligible for forgiveness with most proposals. In this post, we use representative data from anonymized credit reports that allows us to identify federal loans, calculate the total cost of these proposals, explore important heterogeneity in who owes federal student loans, and examine who would likely benefit from federal student loan forgiveness.

This analysis offers a granular look at outcomes under various policy options. We find that smaller forgiveness policies distribute a greater share of benefit to borrowers with low- and mid-range credit scores and residing in low- and middle-income neighborhoods. Increasing the per-borrower maximum forgiveness shifts larger shares of forgiven debt to higher credit score borrowers and higher income neighborhoods. By contrast, limiting forgiveness eligibility by income reduces the total cost of the policy while distributing larger shares of forgiveness to low- and middle-income neighborhoods, low- and mid-credit score borrowers, and majority minority neighborhoods.  

Data and Definitions

We use the New York Fed/Equifax Consumer Credit Panel (CCP) which is a nationally representative 5 percent sample of all U.S. adults with a credit report. We directly observe a borrower’s age, credit score, and student loan balance, but we do not observe an individual’s income or demographic information. Instead, we use Census block group identifiers from the CCP to match an individual to information about their neighborhood, such as median household income and demographics, from the five-year American Community Survey 2014-2018. We identify student loans that are held by the federal government by selecting loans that entered automatic administrative forbearance at the beginning of the COVID-19 pandemic. These include Direct loans that were disbursed by the federal government and loans originally disbursed through the Family Federal Education Loan (FFEL) Program but were subsequently consolidated into the Direct program or sold to the federal government. These also include loans disbursed from either the Direct or FFEL program that are in default.

Costs of Forgiveness Policies

We estimate the total cost of federal loan forgiveness policies by calculating the dollar value of the loans that would be forgiven under each policy. We limit the sample of loans eligible for forgiveness to only those owned by the federal government since this has been the focus of most cancellation proposals. The total outstanding balance for federally-owned (including defaulted) student loans in December 2021 was $1.38 trillion. Limiting forgiveness to a maximum of $50,000 per borrower would cost $904 billion and would forgive the full balance for 29.9 million (79 percent) of the 37.9 million federal borrowers, resulting in an average forgiveness of $23,856 per borrower. This threshold would also forgive 77 percent of all federal student loans that were delinquent or in default prior to the pandemic. Meanwhile, forgiveness of $10,000 per borrower would forgive a total of $321 billion of federal student loans, eliminate the entire balance for 11.8 million borrowers (31.1 percent), and cancel 30.5 percent of loans delinquent or in default prior to the pandemic forbearance. Under this policy, the average borrower would receive $8,478 in student loan forgiveness.

Next, we explore the impact of adding income limits for determining eligibility for forgiveness. Since we do not directly observe a borrower’s income, we simulate eligibility by sampling from the distribution of household income for each borrower’s Census block group and take the average total forgiveness over 100 simulations. Adding a household income limit of $75,000 reduces the total cost of a $50,000 forgiveness policy from $904 billion to $507 billion, a reduction of almost 45 percent. Similarly, the same income limit reduces the cost of a $10,000 forgiveness policy from $321 billion to $182 billion.

One caveat is that the estimate for the cost of potential student loan forgiveness policies is likely the upper bound. Specifically, some of the balances forgiven under these hypothetical blanket policies will eventually be forgiven under the Public Service Loan Forgiveness (PSLF) program or through income-driven repayment plans. For these loans, the net cost of blanket forgiveness now would not be the total outstanding amount of each loan (as we calculate) but instead would be the stream of monthly payments on these loans until they are cancelled under existing forgiveness policies.

Who Benefits from Forgiveness?

BY AGE

We begin by studying who holds federal student loan balances and who would receive forgiveness by age under the various policies. Sixty-seven percent of student loan borrowers are under 40, however only 57 percent of balances are owed by those under 40, showing that those with larger balances are more likely to be older (likely due to borrowing for graduate school). Under each of the considered policies (forgiveness at the $10,000 or the $50,000 level, with and without income caps), over 60 percent of forgiven loan dollars benefit those under 40 years old. While income caps do not significantly change the share of forgiveness going to each age group, increasing the forgiveness amount from $10,000 to $50,000 shifts a larger share of forgiven debt to older borrowers. However, those over 60 years old benefit the least from forgiveness. Despite being 32 percent of the U.S. adult population, those 60 and older only receive around 6 percent of forgiven dollars, roughly in line with the share of this age group that owes federal student loans.

Student Loan Forgiveness Predominately Benefits Those Under 40

Sources: New York Fed/Equifax Consumer Credit Panel; authors’ calculations.
Note: Total shares for each policy may not sum to 100 percent due to rounding or missing identifiers.

By Neighborhood Income

Next, we study who benefits from student loan forgiveness by income. Since we do not directly observe income for individuals in the data, we assign individuals to an income category by the median income of their neighborhood through Census block group designations. We split income into quartiles with the lowest quartile defined as low-income (with a median annual income below $46,310), the middle two quartiles as middle-income (between $46,310 and $78,303 per year), and the highest quartile as high-income ($78,303 and above per year). Borrowers living in high-income areas are more likely to owe federal student loans and hold higher balances. Despite being 25 percent of the population, borrowers who live in high-income neighborhoods hold 33 percent of federal balances while borrowers residing in low-income areas hold only 23 percent of balances. Under both forgiveness levels without income caps, low-income neighborhoods receive roughly 25 percent of debt forgiveness while high-income neighborhoods receive around 30 percent of forgiveness. Increasing the threshold from $10,000 to $50,000 results in a marginally larger share of forgiveness to high-income areas. The average federal student loan borrower living in a high-income neighborhood would receive $25,054 while the average borrower living in a low-income neighborhood would receive $22,512. By contrast, adding a $75,000 income cap for forgiveness eligibility significantly shifts the share of benefits. The share of forgiven dollars going to high-income areas falls from around 30 percent to around 18 percent and the share of forgiven debt going to low-income areas increases from around 25 percent to around 34 percent.

Increasing Student Loan Forgiveness Distributes a Larger Share of Benefits to Higher-Income Neighborhoods, but Income Caps Counterbalance this Trend

Sources: New York Fed/Equifax Consumer Credit Panel; American Community Survey 2014-2018; authors’ calculations.
Notes: We assign individuals to an income category by the median income of their neighborhood through Census block group designations. The low-income group represents those with a neighborhood income median below $46,310 per year, the middle-income group between $46,310 and $78,303, and the high-income group $78,303 or more. Total shares for each policy may not sum to 100 percent due to rounding or missing identifiers.

By Credit Score

We also track the share of federal student loan forgiveness that would benefit people with different levels of financial stability by categorizing them into credit score bins. Credit scores serve as a proxy for both income and financial stability so borrowers with lower credit scores are more likely to struggle with payments while borrowers with higher scores are more likely to be of higher income and more financially stable. We use credit scores from February 2020 since previously delinquent federal student loan borrowers experienced large credit score increases when their accounts were marked current due to pandemic forbearance. Compared to the population of U.S. adults with a credit report, student loan borrowers have substantially lower credit scores. Roughly 34 percent of all credit scores are greater than 760, but only 11 percent of student loan borrowers have these super prime scores. When weighted by balance, student loan borrowers have higher scores suggesting that those with high balances also have higher credit scores. Under all four policies, more than half the share of forgiven debt would go to borrowers with a credit score below 660. As with our analysis by income, increasing the threshold from $10,000 to $50,000 increases the share of forgiven balances going to those with credit scores of 720 or higher, suggesting that a higher per borrower forgiveness amount tends to benefit borrowers of higher socioeconomic status more. However, income caps reduce the share of benefits going to those with super prime scores and distributes a larger share of forgiveness to those with lower credit scores.

Most Forgiven Debt Would Go to Student Loan Borrowers with Lower Credit Scores

Sources: New York Fed/Equifax Consumer Credit Panel; authors’ calculations.
Note: Total shares for each policy may not sum to 100 percent due to rounding or missing identifiers.

By Neighborhood Demographics

We next examine who benefits from forgiveness based on demographic characteristics of a borrower’s neighborhood. We separate borrowers into two categories: those who live in a Census block group with more than 50 percent of residents identifying as white non-Hispanic (majority white) and those who live in a Census block group with at most 50 percent white non-Hispanic residents (majority minority). Those living in majority white and majority minority neighborhoods are equally likely to owe student loans; roughly 67 percent of the population and 67 percent of federal student loan borrowers reside in majority white neighborhoods and balance shares are split roughly in the same proportion. Under a $10,000 forgiveness policy, 33 percent of forgiveness would go to majority minority neighborhoods while 67 percent would go to majority white neighborhoods. Further increasing forgiveness from $10,000 to $50,000 does not significantly change these shares. However, introducing an income cap of $75,000 for eligibility significantly increases the share of forgiven loans going to majority minority neighborhoods—from roughly 33 percent of forgiven debt to 37 percent at both forgiveness levels.

Income Caps Shift a Larger Share of Forgiven Student Loans to Majority Minority Neighborhoods

Sources: New York Fed/Equifax Consumer Credit Panel; American Community Survey 2014-2018; authors’ calculations.
Notes: We separate borrowers into two categories: those who live in a Census block group with at most 50 percent white non-Hispanic residents (majority minority) and those who live in a Census block group with more than 50 percent of residents identifying as white non-Hispanic (majority white). Total shares for each policy may not sum to 100 percent due to rounding or missing identifiers.

Conclusion

In this post, we examine who benefits from various federal student loan forgiveness proposals. In general, we find that smaller student loan forgiveness policies distribute a larger share of benefits to lower credit score borrowers and to those that live in less wealthy and majority minority neighborhoods (relative to the share of balances they hold). Increasing the forgiveness amount increases the share of total forgiven debt for higher credit score borrowers and those living in richer neighborhoods with a majority of white residents.

We find that adding an income cap to forgiveness proposals substantially reduces the cost of student loan forgiveness and increases the share of benefit going to borrowers who are more likely to struggle repaying their debts. A $75,000 income cap drops the cost of forgiveness by almost 45 percent for either a $10,000 or $50,000 policy. Further, it drastically changes the distribution of benefits. Under a $10,000 policy, an income cap raises the share of forgiven loan dollars going to borrowers in low-income neighborhoods from 25 percent to 35 percent and the share going to lower credit score borrowers from 37 percent to 42 percent. Income caps also increase the share of loans forgiven that were delinquent prior to the pandemic. Adding an income cap to a $10,000 policy increases the share of forgiveness canceling loans that were delinquent before the pandemic from 34 percent to 60 percent. Under any policy, means testing would more directly target forgiveness to borrowers facing a greater struggle with repayment, which would result in a significantly less regressive policy.

Jacob Goss is a senior research analyst in the Federal Reserve Bank of New York’s Research and Statistics Group.

Daniel Mangrum is an economist in the Bank’s Research and Statistics Group.

Joelle Scally is a senior data strategist in the Bank’s Research and Statistics Group.

How to cite this post:
Jacob Goss, Daniel Mangrum, and Joelle Scally, “Who Are the Federal Student Loan Borrowers and Who Benefits from Forgiveness?,” Federal Reserve Bank of New York Liberty Street Economics, April 21, 2022, https://libertystreeteconomics.newyorkfed.org/who-are-the-federal-studen....

Disclaimer
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Disclosure
An author owes federal student loans that could be cancelled under some of these policies.

Student Loan Repayment during the Pandemic Forbearance

Published by Anonymous (not verified) on Thu, 24/03/2022 - 12:34am in

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The onset of the COVID-19 pandemic brought substantial financial uncertainty for many Americans. In response, executive and legislative actions in March and April 2020 provided unprecedented debt relief by temporarily lowering interest rates on Direct federal student loans to 0 percent and automatically placing these loans into administrative forbearance. As a result, nearly 37 million borrowers have not been required to make payments on their student loans since March 2020, resulting in an estimated $195 billion worth of waived payments through April 2022. However, 10 million borrowers with private loans or Family Federal Education Loan (FFEL) loans owned by commercial banks were not granted the same relief and continued to make payments during the pandemic. Data show that Direct federal borrowers slowed their paydown, with very few making voluntary payments on their loans. FFEL borrowers, who were not covered by the automatic forbearance, struggled with their debt payments during this time. The difficulties faced by these borrowers in managing their student loans and other debts suggest that Direct borrowers will face rising delinquencies once forbearance ends and payments resume.

Data and Definitions

In this analysis, we use data from the New York Fed Consumer Credit Panel, an anonymized, nationally representative 5 percent sample of credit reports from Equifax. Although we do not directly observe the owner of a loan, we use the administrative forbearance event to sort loans into one of three mutually exclusive categories. The first includes Direct loans disbursed by the federal government and some legacy loans disbursed under the FFEL program and now owned by the federal government. The second and third categories include remaining loans that were not covered by the interest waiver or automatic forbearance: FFEL loans still owned by commercial banks and private loans which were either originated by private entities or were federal loans refinanced into the private market. The table below details these loans, denoted Direct, FFEL, and private loans, on the eve of the pandemic.

Direct loan borrowers have lower credit scores, higher balances, and hold over 85 percent of outstanding balances

DirectFFELPrivateTotal debt outstanding $1.3 trillion$133 billion$95 billionDelinquent but not defaulted rate (in percent)5.35.45.0Median balance per borrower$18,773$10,143$14,087Median age334139Median credit score654687713Source: New York Fed Consumer Credit Panel/Equifax.
Notes: All values are as of February 2020. Direct loans also include loans disbursed through the Family Federal Education Loan (FFEL) program but subsequently sold to the federal government. FFEL loans only include FFEL loans still owned by commercial banks.

Student Loan Forbearance and Delinquency during the Pandemic

The chart below shows the share of borrowers in either deferment or forbearance (left) and the share of borrowers with a student loan at least ninety days delinquent but not in default (right) since the first quarter of 2019. Our calculation of the delinquency rate differs from the typical calculation in the New York Fed’s Quarterly Report on Household Debt and Credit because we focus on borrowers instead of balances and we exclude defaulted loans. Prior to the pandemic, the share of borrowers in forbearance remained stable across all three student loan types with FFEL loans and private loans at around 26 percent and Direct loans at roughly double the rate largely due to the higher share of borrowers in in-school deferment. After the onset of the pandemic, forbearance rose across all loan types with Direct loans rising to almost 100 percent due to administrative forbearance. Consequently, all previously delinquent but not defaulted loans were marked current, driving this rate to zero during the pandemic. Meanwhile, student loan borrowers with either private or FFEL loans needed to request voluntary forbearance from their loan servicer. The rate of forbearance for private loans increased from 26 percent in February 2020 to 33 percent in May 2020 before steadily declining. The forbearance rate for FFEL borrowers increased from 26 percent in February 2020 to a peak of 36 percent in June 2020 before falling to levels on par with private loans.

Forbearance brought Direct borrowers current throughout the pandemic, but struggling FFEL borrowers only got a brief reprieve


Source: New York Fed Consumer Credit Panel/Equifax.
Note: FFEL is Family Federal Education Loan.

Like Direct loans, many previously delinquent FFEL loans were marked current during forbearance driving the delinquency rate from 5.4 percent just before the pandemic to a low of 3.1 percent in July 2020. Since voluntary forbearance for FFEL loans typically lasted only a few months, delinquency began to increase again late in 2020 before another round of stimulus payments at the beginning of 2021 drove another small decline. From March 2021, delinquency for FFEL borrowers continued to rise, returning to pre-pandemic levels by the end of 2021. By contrast, private loan borrowers weathered the pandemic remarkably well with delinquency rates declining throughout the pandemic to a low of 3.6 percent at the end of 2021.

The Evolution of Student Loan Balances during the Pandemic

To better understand the evolution of borrowers’ loan balances during the pandemic, we compare changes in balances during the pandemic (between April 2020 and December 2021 – blue bars) to changes in balances prior to the pandemic (between June 2018 and February 2020 – red bars). We include only those student loan borrowers who took out their last loan prior to October 2017 to focus on those who are no longer initiating new loans.  

Prior to the pandemic, Direct loan borrowers were nearly split between those making progress on their loans (40 percent) and those with increasing balances (43 percent). While increasing balances are typical for the small subset of delinquent borrowers, this is more commonly because of the availability of Income-Drive Repayment (IDR) plans, where borrowers pay a share of their disposable income as a monthly payment, which is often too small to cover accruing interest. IDR borrowers in negative amortization can have increasing balances despite making on-time payments, and this has become more common in recent years. However, the share of borrowers with increasing balances dropped to nearly zero during the pandemic due to administrative forbearance and the temporary 0 percent interest rate. Of the borrowers who had increasing balances prior to the pandemic, 83 percent had no change in their balance during the pandemic forbearance while 9 percent made some progress. Meanwhile, Direct loan borrowers with declining balances pre-pandemic were more likely to have declining balances during the pandemic with 34 percent continuing to reduce balances on their loans and 66 percent not reducing them.

Most Direct borrowers made no payments during the pandemic forbearance


Source: New York Fed Consumer Credit Panel/Equifax.
Notes: The pre-pandemic period denotes the change in student loan balances between June 2018 and February 2020. The pandemic period denotes the change in student loan balances between April 2020 and December 2021.

The next chart details the evolution of balances for borrowers with FFEL loans, which did not receive automatic forbearance. Prior to the pandemic, a higher share of these borrowers had declining balances (59 percent) than Direct loan borrowers (40 percent). Since the last FFEL loans were distributed in 2010, FFEL borrowers are, on average, older, have higher credit scores, and have less generous IDR plans than Direct borrowers, factors leading them to have growing balances less frequently. During the pandemic, the majority of FFEL borrowers did not change their paydown habits. However, at least some FFEL borrowers were able to accelerate the rate of paydown, resulting in an increase of one percentage point for those paying down most aggressively. Meanwhile, the share of FFEL borrowers with increasing balances grew by 2 percentage points. The growth in increasing balances was in part due to the increase in elective forbearance for FFEL borrowers since interest was still accruing, but a small percentage of them struggled, missing payments when they had previously been making them.

Some FFEL borrowers struggled with payments during the pandemic while others accelerated paydown


Source: New York Fed Consumer Credit Panel/Equifax.
Notes: The pre-pandemic period denotes the change in student loan balances between June 2018 and February 2020. The pandemic period denotes the change in student loan balances between April 2020 and December 2021.

The last chart below shows how borrowers with private loans changed their paydown patterns during the pandemic. These borrowers were more likely to increase their rate of paydown during the pandemic. Compared to the previous twenty months, private loan borrowers were less likely to have increasing balances, make no progress, or make small progress on their loans and were more likely to make larger balance reductions than in the previous year. The share of private loan borrowers paying down at least $2,000 increased by 9 percentage points, from 40 percent to 49 percent. This acceleration in paydown by private student loan borrowers and some FFEL borrowers was likely aided by several rounds of stimulus payments, which we showed in a previous post drove large reductions in credit card debt during the first year of the pandemic, however we do not find a similar stimulus-fueled paydown for Direct borrowers.

Private student loan borrowers accelerated paydown during the pandemic

Source: New York Fed Consumer Credit Panel/Equifax.
Notes: The pre-pandemic period denotes the change in student loan balances between June 2018 and February 2020. The pandemic period denotes the change in student loan balances between April 2020 and December 2021.

Lessons from FFEL Borrowers

We believe that the experience of the FFEL borrowers exiting forbearance in late 2020 foreshadows future repayment difficulties for Direct borrowers once required payments resume. Borrowers with bank-held FFEL loans, who did not receive automatic forbearance, were more likely to struggle with payments during the pandemic. Some FFEL borrowers were able to avoid delinquency through forbearance, but delinquency rates increased shortly after the forbearance period ended. Further, delinquency among previously forborne FFEL borrowers was not limited to their student loans. We find that these borrowers experienced 33 percent higher delinquency on their non-student, non-mortgage debt after exiting forbearance than the Direct borrowers who remained in forbearance. Although borrowers will likely face a healthier economy going forward, Direct loan holders have higher debt balances, lower credit scores, and were making less progress on repayment than FFEL borrowers prior to the pandemic. As such, we believe that Direct borrowers are likely to experience a meaningful rise in delinquencies, both for student loans and for other debt, once forbearance ends.

Policymakers have considered several proposals to soften the end of the forbearance program that has helped to smooth cashflow for most student borrowers during the pandemic recession. These proposals range from temporarily not reporting missed payments to credit bureaus to outright cancellation of federal student loans. Suspending the reporting of delinquencies will certainly prevent payment difficulties from appearing on a borrower’s credit report and allow borrowers to better ease into repayment, but these repayment issues will still exist under the surface. These concerns have motivated a debate on student loan cancellation which will be the topic of an upcoming post.

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Jacob Goss is a senior research analyst in the Federal Reserve Bank of New York’s Research and Statistics Group.

Daniel Mangrum is an economist in the Bank’s Research and Statistics Group.

Joelle Scally is a senior data strategist in the Bank’s Research and Statistics Group.

Disclaimer
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.