How Much of a Relief?

Colleges and universities are increasingly using federal COVID-19 relief funds to pay off unpaid balances owed to them by students. After a year of financial strain and rampant job loss due to the pandemic, the payoffs are a welcome relief for many students and their families. They are also a point of pride for the colleges which have been publicizing their generosity in celebratory press releases about relieving student debt and bold pronouncements during commencement ceremonies and other public events.

While the clearing of student balances has been widely applauded, some higher ed policy experts have been quick to point out that the payoffs don't address the bulk of student debt and also help the institutions clear arrears and balance their books. Some also question how much students benefit from limited, one-time loan forgiveness while longer term external debt loads from federal loans -- students owe a total of $1.7 trillion in federal loans, according to Federal Reserve data -- and personal loans persist.

The American Rescue Plan, the third round of coronavirus stimulus funding passed in March, is the first of the federal relief packages which permitted colleges and universities to use some of the funds to cancel students' outstanding balances. The U.S. Department of Education instructed institutions that they could categorize the debts as lost revenue and reimburse themselves using the federal funds.

Wesley Whistle, former senior advisor for education policy and strategy at New America, a liberal Washington think tank, noted that colleges and universities are reimbursing themselves with payments they otherwise might not get if students can't pay what they owe and are prevented from re-enrolling as a result.

"Not to be pessimistic, but it helps institutions," he said in an interview prior to leaving the organization last week. "It clears off this balance that's on their ledgers."

Megan Coval, vice president of policy and federal relations at the National Association of Student Financial Administrators, said institutions are spending their relief money in this way because higher ed leaders recognize the hefty loan debt burdens students face and that "every little bit" of relief helps, especially in light of the pandemic.

"There's been so much focus at the federal level on the conversation about debt forgiveness, but I think this really shows that the institutions care about this, and at the institutional level, there's concern over their students and how much they borrow," said Coval.

The payoffs, which began as a trickle around commencement time this spring, seem to have turned into a deluge over the last few months.

A number of historically Black institutions including Philander Smith College in Arkansas and Wilberforce University in Ohio surprised graduates in May by announcing they were wiping out thousands of dollars in unpaid balances owed by the graduating classes of 2020 and 2021. More than 20 HBCUs have followed suit, CNN reported.

Colleges and universities across the country, including many serving high numbers of minority and low-income students, have taken similar steps throughout the summer. For example, Trinity Washington University, a predominantly Black and Hispanic-serving institution in Washington D.C., cleared $2.3 million in balances for 535 undergraduates at the end of July.

City University of New York announced that it will pay off the balances of at least 50,000 students, up to $125 million in student debt owed to the system. Lansing Community College in Michigan cancelled four years of unpaid student balances, from fall 2017 through spring 2021. The Board of Trustees for the Compton Community College District in California approved a plan forgiving up to $600,000 in unpaid enrollment fees from spring 2020 to summer 2021.

Fort Valley State University, a historically Black public land grant university in Georgia, wiped away the debts of 200 students, a total of about $250,000 in outstanding balances. Georgia Southwestern University announced last Thursday that it cleared overdue balances totaling more than $110,000 for 82 students enrolled between spring 2020 and spring 2021.

The list of colleges and universities undertaking these initiatives continues to grow, with HBCUs and other minority-serving institutions serving as "real leaders" of the movement, said Whitney Barkley-Denney, senior policy counsel at the Center for Responsible Lending. She noted that Black borrowers also disproportionately bear the burden of federal student loan debt. Black graduates have an average of $52,000 in federal student loan debt, about $25,000 more on average than the debt of their white peers, according to data from the National Center for Education Statistics. Meanwhile, Black parents are disproportionately saddled with federal Parent PLUS loans they use to help pay for their children's education.

Freeing up even small sums of money can be "life changing" for borrowers and can help them "get their finances straight, fix their credit report, and do all the things they need to do to get their financial footing before they go out into the world," Barkley-Denney said.

More substantial debt relief may be in the offing on the federal level. The Biden administration is negotiating with Congressional lawmakers to forgive student loan debt held by certain borrowers but lawmakers are divided on who has the power to cancel federal student loan debt and how much, if any, should be forgiven. Senate Majority Leader Chuck Schumer and Senator Elizabeth Warren are calling on Pres. Biden to forgive $50,000 of loan debt per borrower, a plan which would forgive debt for about 80 percent of borrowers, approximately 36 million people, based on household income, through an executive order, while House Speaker Nancy Pelosi recently argued that debt forgiveness is outside of the president's purview and must be decided by Congress.

While higher education leaders may have limited sway over national policy, the federal relief funds give them a way to act directly on other debts with an "explosion" of canceled balances, said Dominique Baker, assistant professor of education policy at Southern Methodist University.

"I think institutions know that they can't on their own do things about students' federal loans," she said. "They cannot force the federal government to cancel a portion of student loans. So, this is a thing that they can do … that institutions do have control over."

Whistle said the differences between student debt relief debates occurring on the federal level and the actions being taken on the institutional level, are often lost on the students themselves, who don't always understand that the debt cancellations only apply to the balances they owe their institutions, not what they owe in federal loans.

"I think people are actually confused," Whistle said. "They hear, 'Schools are canceling student debt,' but … that's not what we mostly think of as student debt. The majority of student debt is federal student loans." Student loan debt cancellation is "not what is happening here."

Whistle supports the payoffs by colleges, but he's concerned students may change their financial behavior if they believe they owe less money than they actually do.

"If they make other decisions because they think it's going to get canceled, that's also concerning," Whistle said.

He also worried about students being unable to restart payments on federal student loans once the pause on repayments ends. A freeze on payments put in place in response to the pandemic was set to expire in September. The Biden administration on Friday extended the freeze through the end of January 2022. The move was applauded by Congressional lawmakers and debt forgiveness advocates who had been pressing for an extension. A June survey from Student Debt Crisis, a nonprofit focused on student debt policy reform, found that 90 percent of more than 23,000 borrowers reported they would be unprepared to pay back their student loans in October.

Baker, the Southern Methodist University professor, agreed that college administrators need to be "really specific" and "really clear" in their messaging to students to prevent confusion about what they do or do not owe.

She and other scholars also noted that the short-term relief is just a start. She said institutions should examine why so many students wind up with unpaid balances and reconsider policies that bar students from enrolling in classes or accessing their transcripts if they have outstanding college bills. A report from the higher education consulting firm Ithaka S+R in October 2020 estimated that 6.6 million students have had transcripts withheld because of money owed to their institutions.

"I'm really curious about how institutions are going to be working with students for these debts not to accumulate in the first place," she said. Otherwise, "in a year or two years, we'll just have students back in the same place."

Coval believes the large number of colleges paying off student's balances could be a helpful research tool that presents scholars opportunities to study the long-term effects on students. Because some institutions are targeting specific demographics, such as graduates or students who demonstrate financial need, while others are clearing debts for all students. It "presents a real opportunity to kind of watch what happens and learn about the impacts and the outcomes, she said.

Experts hope to see the institution-level debt relief efforts paired with larger, more systemic policy fixes that address college affordability more broadly.

Baker said an effective policy strategy for college affordability requires a "two-pronged attack," both one-off, short-term relief efforts, like institution-level debt cancellation and federal student debt forgiveness, and long-term "system-wide changes" like free college programs and more aid to cover non-tuition costs.

"I think it would be incredibly challenging to fix theses systemic problems focusing on institutions alone," she said. "This has to be something states are involved with. This has to be something that the federal government is involved with."