Community Research–Student Loan Relief Programs

March 30, 2017
By Kelly D. Edmiston, Senior Economist and Daniel Perez


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In January 2017, the Federal Reserve Bank of Kansas City released a research working paper titled "Student Loan Relief Programs: Implications for Borrowers and the Federal Government" by Kelly D. Edmiston, senior research economist at the Kansas City Fed and Wenhua Di, a senior research economist at the Dallas Fed. Student loan programs have come under scrutiny for many reasons, but especially because of high rates of default. At the end of the first quarter 2016, the U.S. Department of Education (ED) issued their Federal Student Loan Portfolio. It said 3.7 million Federal Direct Loan borrowers (those who have loans provided directly by the ED) and 4.3 million Federal Family Education Loan borrowers (legacy guaranteed loans) were in default, accounting for 24.7 percent and 39.8 percent of borrowers in repayment, respectively, and a cumulated $124.8 billion of distressed student loan debt. 

Defaults on student loan may have a significant economic effect on debtors. Student loan debt can delay the formation of households and marriages, reduce personal and retirement savings and delay or reduce home purchases (even among mortgage-qualified borrowers). Default on student loan debt mars credit history and disqualifies borrowers from additional access to credit, including additional federal student aid.

In light of these concerns, considerable attention has been focused on providing financial relief to student loan debtors, resulting in programs that extend repayment terms, graduate payments or tie required payments to discretionary income. These programs seek to provide a safety net for distressed borrowers while reducing the likelihood of delinquency and default, and possibly diffuse the fear of debt for reluctant, promising borrowers. However, the costs and outcomes for participating borrowers are far from clear, and the consequences for the federal budget are even less clear.

In their paper, Edmiston and Di analyze how various student loan relief programs work in practice and likely outcomes for borrowers. Their analysis runs simulations on data which is not readily available. Existing programs are complicated and the analysis offers some clarity to the federal repayment system. In the paper’s simulations, lower-income borrowers and borrowers who have significant debt are more likely to benefit from the programs, but their participation can have high fiscal costs. Taxation of cancelled debt, as required in most cases under current law, would reduce the cost of these programs, but an account for delinquency and default may make income-driven repayment more costly.

The paper follows previous student loan research by Edmiston, including “Student Loans: Overviews and Issues” and “State Variation of Student Loan Debt and Performance.