Smart Borrower Blog

Student Debt Forgiveness Program May Get New Limits


Apr 30th, 2014 @ 7:48 PM by Amber Nelson


Popularity is rising with federal student loan forgiveness programs, but the Obama Administration is suggesting new loan limits in order to keep costs down and make sure the neediest students have access to help.

With college tuition fees surging over the past decade – education costs have already risen 6 percent in 2014 from last year – enrollment in the government’s debt forgiveness plans jumped 40 percent in the last six month of 2013. There are now a total of 1.3 million borrowers enrolled in the various programs that forgive federal student loan debt after 10-25 years of consistently paying a certain percentage of their income. The debt from those students now amounts to $72 billion. Analysts at the Brookings Institution estimate that at that level, these programs could cost the government roughly $14 billion annually.

In part to offset those costs, the Obama Administration has proposed that debt forgiveness be capped at $57,500 per student. This would also take away incentive for colleges to push tuition prices higher too quickly because they would no longer be able to promise their students that the federal government would eventually pick up the tab. Additionally, forgiveness limits would prevent those going into lucrative professions from pushing off the majority of their student debt. Some say without the limits, program funds would be going to doctors and lawyers who will not need as much help after graduation.

The debt forgiveness plans were designed to encourage people interested in working in the public sector or for non-profit organizations. For those individuals, having a big chunk of their loans forgiven after ten years could make taking those lower-paying jobs more worthwhile. And in fact, the programs are not all that cost effective for those working outside the public sector. They have to repay their loans for 20-25 years before the rest can be forgiven. The typical federal student loan is designed to be repaid within 10 years after graduation, so stretching it out could cost a great deal in extra interest charges.

The new loan limits will have to be approved by Congress before becoming law.

About Amber Nelson
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.

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