According to one recent study, 24% of millennials expect their student loans will eventually be forgiven. At first, this might sound like a ridiculously optimistic statistic, but I'm not so sure. Several loan forgiveness programs are already in place, and the numbers suggest this estimate might actually be a little low.
By examining the amount of student loan borrowers who could eventually have their loans forgiven, the "real" amount of student loan debt that will be paid back appears to be much lower than the headlines suggest.
The Consumer Financial Protection Bureau estimates that 25% of the U.S. workforce works in the public sector. Public service workers such as police officers, firefighters, and teachers could qualify for the largest loan forgiveness program.
Basically, after making payments for 10 years under a qualifying repayment plan (usually one of the income-dependent plans), the borrower is eligible to have the remainder of his or her debt forgiven, even if the ending balance is as much or more than the initial principal.
Since this program for public service workers began in 2007, the first borrowers will be eligible for forgiveness in 2017. While it remains to be seen how many student loans will actually be forgiven, the percentage of the population working in public-sector jobs suggests it will be a substantial amount.
Teachers can get some of their loans forgiven
There are two levels of teacher loan forgiveness offered to borrowers who complete five consecutive years of teaching at what the U.S. Department of Education classifies as low-income schools.
Any full-time teacher in a low-income elementary or secondary school who meets the definition of "highly qualified" could be eligible to have up to $5,000 in loans forgiven.
In addition, any teacher in a qualifying school who is a secondary math or science teacher, or who teaches special education at any grade level, could qualify for up to $17,500 in loan forgiveness.
Finally, there is a provision in the income-driven repayment plans that authorizes loans to be forgiven after a certain length of time.
The income-based repayment plan limits a borrower's payments to 15% of discretionary income, and forgives any balance remaining after 25 years of on-time payments.
The pay-as-you-earn plan limits payments to just 10% of discretionary income, and forgives any remaining balance after 20 years. This is the newest repayment plan, and is currently only open to those borrowers who received a student loan disbursement after October 2011, but will be open to all borrowers by the end of 2015.
How much are we talking about?
We've all heard the statistics; they've been all over the news. Total U.S. student loan debt stands at about $1.2 trillion, and is one of the largest forms of consumer debt in the country, second only to mortgages and larger than all credit card debt.
However, when you think of how much of this amount could ultimately be forgiven, maybe it's not all that bad. While there is no way to know for sure exactly how much will be forgiven, let's look at a rough example.
Let's say that the 25% of borrowers who enter public service will have roughly half of their student loans paid off within the 10-year forgiveness window. Well, half of 25% of $1.2 trillion is about $150 billion.
If about 6% of college students go into education, as enrollment data suggests, based on the percentage of schools that receive Title 1 funding and the percentage of teachers who teach in qualifying subject areas (12% in secondary math or science, and about 13% in special education), this could mean another $12 billion forgiven.
Finally, if the student loan borrowers who choose an income-driven repayment plan (let's say it's 25% of borrowers) pay down all but 25% of their loans within the 20-year repayment period -- a conservative estimate -- that would be an additional $75 billion.
This adds up to about $237 billion in potential loan forgiveness. While this is a very rough estimate, bear in mind that some of these assumptions are very conservative, and the actual amount of loan forgiveness is likely to be even higher.
If this much student loan debt is ultimately forgiven, it means that less than $1 trillion will end up actually being repaid. While this is still a significant amount of money, the abundance of loan forgiveness options means most of the repayment will come from those borrowers who can actually afford it.
Now, I'm certainly not saying student loan debt isn't a problem. However, before we go throwing trillion-dollar figures around in headlines, it's good to put things in perspective.
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