A better way to forgive student loans? Match at-risk borrowers’ monthly payments

The unprecedented political push to potentially forgive hundreds of billions of dollars in federal student loans is inching towards reality, and probably the only thing keeping it at bay right now is the economic pushback that so much taxpayer money wouldn’t be coming back, even though many of those borrowers would still be able to successfully make their payments without it.

The unspoken assumption behind forgiveness is that it will happen in a single, lump-sum transaction, which raises questions in its own right. Will the one-time tax consequences for struggling families be large enough to require a loan in itself to pay off? Should the recently unemployed be entitled to the same amount of relief that borrowers who have labored for years under impossible-to-manage payments would get?

The fact that the high-profile forgiveness proposals all seem to disproportionately benefit wealthy, rather than poorer, Americans remains an unresolved sticking point on where to go next. There is a way to have one’s cake and eat it here; to apply forgiveness that maximizes relief for those who need it most and minimizes funding to those who need it least.

All it really involves is not giving borrowers lump-sum relief but instead implementing a monthly matching payment approach.

How would it work? Have student borrowers certify their annual income in the same way those in income-driven repayment (IDR) plans already do and then grant them a matching “payment to principal” every month that they make a timely payment. Whether borrowers would need to enroll in an income-driven repayment plan to qualify is unclear, but a case could be made for and against it. The size of the match could vary depending on anything from how much they earn to whether they have completed a degree program to how long they have already been paying.

A program like this could easily be fine-tuned with caps on how long borrowers receive the benefit and income phaseouts to ensure that dollars go to those who need them most, but the benefits are obvious. For those struggling the most, matching payments could cut payment timelines in half and put millions on a path towards greater monthly budget stability while those in a position to more capably cover their payments could still get some relief that is simply better aligned with the burden their student loan payments create.

In a way, both sides gain. Monthly relief benefits the federal government because it limits forgiveness where borrowers’ economic circumstances improve. That means fewer taxpayer dollars going to those who do not necessarily need relief. At the same time, borrowers whose situations worsen would get more relief, and a faster path to paying their loans off, while still building credit off of timely payments. And if targeted relief is the main appeal to a payment match versus flat-out forgiveness, a secondary benefit is it would give borrowers a sense that payments are, in fact, leading to lower balances. Making the government match a direct payment to principal would help those whose payments barely cover the accumulated interest.

The number of Americans paying down federal student loan debt is massive and there are ways that the new administration can continue to provide financial relief that will help millions of borrowers holding tens of thousands of dollars in education debt. Forgiveness is obviously one of those paths, but policy experts and advocates should be exploring ways that strike an appropriate balance between helping individual citizens obtain financial relief and protecting Congress’ intent to taxpayers’ investment through loans.

PhD. Education economist. VP of Research @CampusLogic. Title is theirs, opinions are mine.