Will Student Loan Forgiveness Programs Be Capped?

Sure, there’s no guarantee these massive spreads will persist throughout the repayment durations of these loans. But then again, there’s nothing to prevent the government from hedging its funding costs at any time (as financial institutions routinely do) or, even, to sell all or part of its student-loan portfolio next week or next year in order to lock in the gains. As long as Congress resists revisiting the interest rate legislation it passed last summer that could lead to a huge increase in costs to student borrowers, the mega profits that continue to make headlines could be used to defray the cost of the relief programs. (Programs which, ironically, may be all the more necessary if and when those higher interest rates kick in for borrowers.)

The second consideration—current tax policy—is mentioned in Note 14. As it now stands, the IRS views forgiven debt the same as it does fresh income: eminently taxable. Therefore, should a student borrower remain enrolled in any of these relief programs long enough to realize the aforementioned end benefit (forgiveness), he should also expect a knock on the door from the taxman. More to the point, these prospective revenues weren’t taken into account by the BCEP study either, even though these too could be used to counterbalance costs.

What the report doesn’t take into account, however, are three important considerations: two that are relegated to the End Notes section and one that isn’t even mentioned.

Note 8 acknowledges the rancorous back-and-forth on the matter of federal student-loan profitability. Although a reasonable case can be made for taking into account certain market risks that are attendant to longer-term financings, there are offsets to that which should to be factored into the analysis.

Take, for instance, the fact that the government is, at this time, taking noteworthy advantage of the yield curve by borrowing short and lending long: selling one- to three-month Treasury Notes to fund the student loans it then prices based upon 10-year rates, plus upcharges.

Sure, there’s no guarantee these massive spreads will persist throughout the repayment durations of these loans. But then again, there’s nothing to prevent the government from hedging its funding costs at any time (as financial institutions routinely do) or, even, to sell all or part of its student-loan portfolio next week or next year in order to lock in the gains. As long as Congress resists revisiting the interest rate legislation it passed last summer that could lead to a huge increase in costs to student borrowers, the mega profits that continue to make headlines could be used to defray the cost of the relief programs. (Programs which, ironically, may be all the more necessary if and when those higher interest rates kick in for borrowers.)

The second consideration—current tax policy—is mentioned in Note 14. As it now stands, the IRS views forgiven debt the same as it does fresh income: eminently taxable. Therefore, should a student borrower remain enrolled in any of these relief programs long enough to realize the aforementioned end benefit (forgiveness), he should also expect a knock on the door from the taxman. More to the point, these prospective revenues weren’t taken into account by the BCEP study either, even though these too could be used to counterbalance costs.

Making Underperforming Schools Accountable

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