This month Hillary Clinton said she will use “executive action” to start a 3-month “moratorium” on student loan payments. The plan is supposed to give borrowers time to talk to the Department of Education to help them “save money on their loans.” But far from saving money, this plan will likely lead to an increase in delinquencies, increased debt for borrowers, and make a lot of very angry people.
Another way to describe this 3-month loan vacation is “automatic forbearance.” Borrowers who are currently paying will have their payments stopped automatically, and during the three months, interest will still accrue. Clinton apparently believes that all borrowers are in such financial distress that they need forbearance, an option that is typically recommended for only the most struggling borrowers.
In fact, the Consumer Financial Protection Bureau has criticized loan servicers for steering too many borrowers into forbearance. Clinton wants to make that automatic for everyone.
Clinton had better be ready for some vitriolic tweets from her younger donors, because this is going to make for some very angry borrowers. Imagine you have a $300 per month student loan bill (the average for those with a bachelor’s degree) and have set up “auto-debit” where the department automatically takes $300 out of your bank account every month.
Perhaps you even pay an extra $100 so as to pay back your loan faster. Under the Clinton plan, your payments would stop for three months, unless you call your servicer to opt out of this vacation. Meanwhile, your interest would continue to accrue. That is, your loan balance would grow. The Clinton campaign confirmed that this policy would indeed be “opt-out”.
But forget about the whining auto-debitors, you might say, we should be worried about struggling borrowers. And that’s true, but Clinton’s plan would be even worse for them. Many defaulters never make a single payment. And while the payment may be burdensome for borrowers, ignoring the issue for three months won’t make things better.
Certainly more of these borrowers ought to be in IBR. But a student can already be delinquent for 9 months without going into default or facing any fees or penalties. That’s already a very long time.
Imagine, after four months of a servicer trying to contact a borrower, he is convinced to start paying back his loans, only to learn two months later that, now, he and everyone else don’t have to pay for three months. What is the likelihood he will resume payments after the vacation?
So, borrowers who are paying back will be annoyed, borrowers and who aren’t paying back will be less likely to start paying back in the future.
But the most perplexing thing about Clinton’s proposal is that, were it not for the fact that this will happen to all borrowers, this option already exists. Borrowers can enroll in forbearance (no payments while interest accrues) for a total of three years without any documentation. So what problem is this policy solving?
The moratorium is just the latest in a series of baffling proposals related to student loans from Clinton that have come as a surprise to the higher education policy community. These proposals are solving problems that have never been defined while probably only doing harm.
The relative silence this proposal has received should be a sign to all. This is harmful policy, and the idea should be abandoned.