Federal Student Loan Repayment Freeze is Putting Some Well-Off Borrowers on a Fast Track to Forgiveness

The student loan repayment moratorium, which has allowed all borrowers with federal student loans to take a break from making payments without penalty, saw its fourth and final extension last month and is set to end early next year. Giving borrowers a break during a time of national economic crisis might seem reasonable, but the break has gone on for far too long. And thanks to the intricacies of the loan repayment system, some high-earning borrowers are reaping a windfall. 

Borrowers who are repaying their student debt on an income-driven repayment (IDR) plan are generally expected to make 20 years of payments (240 monthly payments) on their loan before the balance is forgiven. Borrowers who are enrolled in Public Service Loan Forgiveness only need to make payments for ten years. The loan moratorium was set up to allow the months of non-payment during the repayment freeze to count toward those required payments, meaning some borrowers will have 22 months of zero-dollar payments counted toward the total number required for them to achieve forgiveness. 

It might not seem like this extra hand out to borrowers already relying on the safety net would be a big deal. After all, aren’t these the most disadvantaged of all borrowers?

Not necessarily.

Many borrowers experience periods of depressed earnings that make it advantageous for them to enroll in IDR but then go on to achieve high earnings later in their career. Because IDR ties the payment amount due to the amount a borrower is earning, these borrowers are on the hook to make sizable monthly payments. This means that the payment pause has given many high-income borrowers, many who didn’t see any hit to their earnings during the pandemic, a break on huge monthly payments and has put them on a fast track to having their balance forgiven. 

With this newfound freedom from making good on their loans, some borrowers have reportedly used their funds to throw wedding parties. Others, including a two-income couple, a medical doctor and a local government administrator, reported that their savings allowed them to save for their retirement “more than ever before.” That is a luxury that the 42 percent of Americans with less than $10,000 in retirement savings, or the 14 percent who have saved nothing at all would surely like to have. 

The problem, however, is that these benefits are not free. These 22 months of zero payments will cost the federal government nearly $100 billion, according to the Committee for a Responsible Federal Budget (CRFB). CFRB rightly states that “with most of these benefits accruing to high-income Americans...it is not clear that these costs are justified at this point in the economic recovery.”

Right now, over two-thirds of borrowers enrolled in IDR plans are repaying balances from graduate and professional schools. That does not mean they are all rich, but on average this group is amongst the most well-off in our society. This group also experienced less of a hit during the economic downturn than their less-educated neighbors. The freeze on loan repayment has delivered a windfall to some in this decidedly privileged group.

It is important to provide relief for borrowers who are truly struggling. But this moratorium, like so many other popular progressive proposals, fails to target those who are truly in need and is providing a payday, at taxpayer expense, to many high earners. 

Although it was a sound policy in March 2020, the continuation of the student loan moratorium has been strikingly inequitable and even regressive. Experts on both sides of the aisle have been arguing for years, long before the repayment crisis was initiated by the pandemic-induced economic downturn, that our system of safety nets designed to protect borrowers in periods of distress is desperately in need of reform. Policymakers should take a lesson from this poorly executed bailout and streamline the program terms and enrollment process of IDR so it can better protect struggling borrowers from unaffordable payments.

Elizabeth “Beth” Akers is a senior fellow at the American Enterprise Institute (AEI), where she focuses on the economics of higher education. Olivia K. Shaw is a research associate at AEI.