A major student loan refinancing company has joined the chorus of voices calling for broad-based student loan forgiveness as millions of borrowers brace for the end of the pandemic payment pause.
“This is classic leadership by indecision — and it’s exactly not what the country needs,” San Francisco-based student loan refinancing startup SoFi (SOFI) CEO Anthony Noto told Yahoo Finance Live (video above). “We need decisive leadership — we need the administration to take a stand. Kicking the can down the road is not currently going to suit all the needs of the American people.”
Sheila Bair, a former Federal Deposit Insurance Corporation (FDIC) chair and former Assistant Secretary of the U.S. Treasury for Financial Institutions, made a similar argument recently after Biden Chief of Staff Ron Klain suggested that the pandemic payment pause for federally-backed student loans might be extended beyonds the current end of April 30.
“Klain is right that the president needs to decide about student debt cancellation before he decides on when to resume student loan repayments but wrong to keep this cloud of uncertainty over the heads of 40+ million student borrowers,” Bair wrote in an op-ed. “They need to know whether and when their loan obligations will resume. With every delay, it becomes harder for them to prepare.”
The $10,000 student loan forgiveness argument
Student loan payments and interest on federally-held debt have been suspended since March 2020, meaning that nearly 37 million borrowers did not have to pay on their loans.
Without making a decision on forgiveness and by extending the payment pause multiple times, the administration “continues to waffle back and forth,” Noto stated.
President Joe Biden backed the forgiveness of $10,000 in student loan debt on the campaign trail in 2020. During his administration, prominent Democrats have repeatedly urged a seemingly skeptical President Biden to enact broad-based cancellation of up to $50,000 via executive action (as opposed to legislation passed by Congress).
Both Bair and Noto called for $10,000 in forgiveness for federally-backed loans in some from. An erasure of $10,000 for all of those borrowers would cost roughly $371 billion and erase the total debt of roughly 36% of all borrowers with federally-backed loans.
In a blog post on his company’s website, Noto noted that the payment pause extensions have “cost American taxpayers over $150 billion since March 2020,” and determined that cancellation of $10,000 in debt for “distressed and defaulted borrowers” would be a more effective and “permanent” solution.
“The indecision [over student loan forgiveness] is causing people not to be able to make vital financial decisions in their lives,” Noto said, adding that it’s a good opportunity for clarity before interest rates hike up to “seven” or “eight times over the next two years.”
“SoFi is in the business of student loans,” Noto stressed. “So we get impacted by this indecision. But that’s not the motivation. SoFi is going to be fine either way. … We achieved over a billion dollars of revenue in all of 2021 in our first full year of profitability on an EBITDA basis, all while the federal student loan program has been on hold.”
The payment pause worked — now what?
In any case, ending the payment pause will be complicated.
If the payment pause ends in May, 7.8 million borrowers — roughly one in three student debtors — are at “high risk” of struggling to repay their loans, according to a recent analysis from the California Policy Lab and the Student Loan Law Initiative.
For these borrowers, many of whom were in delinquency prior to the pandemic, “the pause on student loan payments worked,” Professor Dalié Jiménez, director of the Student Loan Law Initiative at UC Irvine Law, said in a press release.
The NY Fed recently highlighted the roughly 10 million borrowers who hold private or Family Federal Education Loan (FFEL) loans owned by commercial banks and did not benefit from the payment pause.
“The difficulties faced by these borrowers in managing their student loans and other debts suggest that Direct borrowers will face rising delinquencies once forbearance ends and payments resume,” the analysis found.
SoFi’s Noto argued that cancelling debt en masse, a move many advocates and progressive politicians have called for, isn’t the solution. Instead, he stressed that student loan forgiveness made the most sense for the group of borrowers who would likely default on their payments if the pause ended.
“Those people should be given some type of relief,” Noto said, “otherwise they’re going to default and have to go into bankruptcy.”