The Future of Student Lending: What Debt Forgiveness Could Mean for the ARM Industry

While the news of low employment, solid consumer spending, and record-breaking stock market gains suggest strong economic conditions for most Americans, many college students and recent graduates struggle with the burden of overwhelming student debt. Experts and policymakers alike are increasingly wary of what they consider to be a crisis in college affordability, and have proposed solutions ranging from expanding current federal relief programs to blanket debt forgiveness and free college. The implementation of these plans, particularly those that are more progressive, may greatly reduce the amount of collection opportunities available to accounts receivable management (ARM) companies in the student loan space.

Student loan debt has skyrocketed in recent years, growing from $252.9 billion in 2003 to nearly $1.5 trillion in 2018. The vast majority of those loans – roughly $1.3 trillion – were originated and serviced by the Department of Education (ED) and its affiliated entities, while the rest fall under the purview of private lenders like Navient and Wells Fargo. Student loan delinquencies grew as well over that span, with the severe delinquency rate – i.e., the percentage of debt at least 90 days past due – climbing to 11.4 percent in 2018 from 6.2 percent in 2003 (the spike from 2011 to 2012 was caused by an alteration in calculation methodology). Bloomberg Global data estimates that, as of October 2018, more than 10.0 percent of student borrowers are severely delinquent on at least one of their loans. Both the explosion in overall debt levels and the rise in delinquencies are in part due to the increasing cost of education along with the relatively stagnant real wages for many workers.

ED currently offers a variety of loan repayment options with monthly payment plans that may be capped at the borrower’s discretionary income, with varying maximum repayment periods. The standard payment plan available to all loan types consists of monthly payments of at least $50 with a maximum repayment period of 10 years. There are also income driven repayment plans that are capped at 10-20% of a borrowers discretionary income, such as the Revise Pay As You Earn (REPAYE) plan, which is capped at monthly payments at 10% of the borrower’s discretionary income available to subsidized, unsubsidized, consolidation, and PLUS loans, with a maximum repayment period to 20 to 25 years for undergraduate and professional study, respectively.

In addition to these repayment plans, ED offers two career-related loan forgiveness programs. The Public Service Loan Forgiveness Program (PSLF) forgives the remaining loan balance on Direct Loans after 120 qualifying monthly payments have been made. Those employed under government organizations, tax-exempt or public service not-for-profit organizations, and AmeriCorps or Peace Corps qualify for this program. The Teacher Loan Forgiveness Program (TLF) forgives up to $17,500 in student loans for those who teach five consecutive years at qualifying schools or agencies that serve low-income families.

Experts analyzing possible solutions to the student loan crisis offer different suggestions and approaches. One such expert, Michael Hansen, the Director of the Brown Center on Education Policy, discussed his proposal regarding student loan forgiveness at a Brookings Institute forum on June 10. Hansen focused on two major issues: college affordability and teacher strikes driven by low wages. Hansen’s solution is to offer generous loan forgiveness (tailored to each individual’s amount of debt accrued) for teachers so that they are unburdened by loan payments while working, thereby allowing most to become debt-free in five to eight years. As roughly 3.7 million people (adjusted for seasonality) are employed full-time in education services as of June 2019, according to the latest Bureau of Labor Statistics estimates, this proposal would drastically reduce the obligations imposed on a great deal of student loan borrowers. Stagnant wages, coupled with increasing healthcare costs and retirement contributions, have led to shrinking paychecks for teachers in many states. Hansen’s plan would counter the aforementioned forces that limit teachers’ real income.

Hansen puts forth the idea of expanding upon federal programs and 26 state loan forgiveness programs, which is more modest than other more progressive proposals such as free college or large increases in teacher salary. He believes that focusing on teachers and those in a public service occupation is more imperative than helping those going into law and medical fields because they will not need as much loan forgiveness. A report by the Center for American Progress found that student loan forgiveness programs helped to increase the proportion of teachers of color, which historically leads to improved test scores, college graduation rates, and behavioral outcomes for students of color.

If Hansen’s proposal was to go into effect, collection agencies may see decreased opportunities from future teacher borrowers as they would be eligible for more loan forgiveness programs. However, student loan debt should continue to grow strongly in the future as a larger ratio of jobs require higher education, showing promising signs for collection opportunities.

Solving the student loan crisis is a hot topic for presidential candidates as well. Elizabeth Warren, a Senator from Massachusetts and candidate for the Democratic presidential nomination, proposed a plan earlier this year to significantly reduce the amount of student loans. The initiative would include eliminating the cost of tuition and fees at public colleges, creating a minimum fund of $50 billion for Historically Black College and Universities (HBCUs), and barring for-profit colleges from receiving federal funding so that they do not take advantage of student financial aid to increase revenues. In an April blog post on Medium, Sen. Warren explained that the first step would be to cancel up to $50,000 in student loan debt for 42 million Americans, which would stimulate economic growth through increased home purchases and growth of small businesses, especially for middle-class families. Funding for this plan would be covered through Sen. Warren’s proposed Ultra-Millionaire Tax, a 2.0 percent annual tax on families with $50.0 million or more in wealth.

The cancellation of the large amount of outstanding student debt and the elimination of the cost of tuition and fees at public colleges would greatly limit collection opportunities for ARM companies, particularly those contracted with ED. As ED’s relationship with private collectors is already fractious, the cancelling of most public school loans would likely be devastating for firms operating in the ED space.

Senator Bernie Sanders, another candidate to become the Democratic nominee for president, introduced the College for All proposal in 2019. This legislation would implement free tuition at public colleges, cancel all $1.5 trillion of outstanding student debt for all 45 million borrowers, and cap the student loan interest rate at 1.88 percent. A Wall Street speculation fee – 50 cents for every $100 of stock, a 0.1% fee on bonds, and a 0.005% fee on derivatives – would fund this plan. If this plan were to go into effect, the ARM industry would have virtually no collection opportunities in the student loan space.

Though these proposals present a daunting prospect for the industry, there still remains many barriers to implementation before any of them come to fruition. Many conservatives, including policymakers like ED Secretary Betsy DeVos, oppose student debt forgiveness on principle. That said, ARM companies should closely monitor the political landscape, particularly in the run-up to the 2020 presidential election, as increased student loan forgiveness may harm future collection opportunities.