Student loans: U.S. needs to ‘provide clarity’ on debt forgiveness, former FDIC chair says

Former FDIC Chair Sheila Bair joins Yahoo Finance Live to discuss the uncertainty surrounding U.S. student loan forgiveness as well as the possibility of an additional extension to freeze payments.

Video Transcript

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JULIE HYMAN: Well, America's student debtors need clarity, not an endless payment pause. That's according to former FDIC Chair Sheila Bair. She writes that in a new op-ed for Yahoo Finance, and she's joining us now. We should also note, by the way, when it comes to students, she has some experience. She was the former president of Washington College and also author of the "Money Tale," series which teaches money basics to young people. Sheila, it's great to see you. Thanks for being here.

So the payment pause, which certainly came as a relief to many student debtors in the early days of the pandemic-- why do you think it's time to end it?

SHEILA BAIR: Yeah. So, well, this is the two-year anniversary this month. And I strongly supported it when they originally did it and extended it, as the damage from the pandemic continued. But it's really time, I think, to provide some certainty for student borrowers. And there have been five extensions.

And they need some certainty. They need some time to prepare. It's been a long time since they've made these payments. They may need to adjust their budgets, cut back on other debt or expenses to be able to get ready to start repaying again. And so they need some certainty, clarity, and it needs to give them a sufficient, you know, preparation time so they can start making payments on these loans.

And the other issue, which I think the administration has acknowledged, which I welcome and support, which I mentioned, is what is the administration going to do with debt forgiveness or debt cancelations? Because if you're sitting there with $20,000 of debt, but there's a good chance the president might, through executive action, cancel some part or all of it, why do you want to start going ahead and making payments now, when later on, it could be canceled and you will have cost yourself some extra money?

So I do think they need to provide clarity-- what are they going to do on forgiveness, cancelation-- before this repayment starts again. But they need to make decisions on both and move on with it.

BRIAN SOZZI: Sheila, how helpful would it be financially to households if $10,000 in student debt is forgiven?

SHEILA BAIR: Yeah. Well, that would be-- it would wipe out the debt for about a quarter of student borrowers and halve it for another quarter. So it's about half of student borrowers who would be very significantly benefited through a $10,000 debt forgiveness. I think that's the most defensible and justified of all the different options that have been discussed.

The benefits are primarily for lower income borrowers, borrowers of color, students already in financial distress. They're in default. About half of students borrowers who are in default owe less than $10,000. So it's clear progressive benefits targeted to the people who need it the most.

You get into larger amounts-- and there are sympathetic cases, and people I respect are advocating much higher levels of debt forgiveness. But you do get in and start benefiting more and more professional school students, graduate school students, typically upper income households that can afford it-- can afford to repay.

And I do think it's important to remember that the standard option is a 10-year repayment plan for your student loan. But if people have trouble making that, there are alternative-- what are called income-driven repayment plans that are based on an affordable percentage of your income, not just that the standard 10-year plan.

And the administration-- another thing I really applaud-- the administration is working very hard to simplify those IDRs, Income-Driven Repayment plans, consolidate them into one simple option, and make enrollment virtually automatic if the student wants to student borrower wants to opt for that. So there are other areas of relief for those who owe more than 10,000.

But I do think forgiving $10,000 for everybody would, again, wipe out or significantly reduce payments for about half of student borrowers. And that's huge. That's not insignificant. And but I think the rest, if you can-- listen, if you can afford to repay, you should start repaying.

You know, student borrowers, most of them got meaningful degrees that helped their income-producing potential. There was a contract that they agreed to. There are a lot of flaws in the student debt program. I've been talking about that for years. But nonetheless, most students have gotten degrees that have benefited for them. If they have some capacity to repay, they should. And there are different options that the government will provide to help make sure that [AUDIO OUT].

JULIE HYMAN: Yeah. I mean, at the same time, you know, a lot of people are still underwater on a lot of their debts, unfortunately. Sheila, there's always a gap between what government should do and what it will do.

SHEILA BAIR: Will do, that's right.

JULIE HYMAN: And so I'm wondering, is there any bipartisan movement on this issue that makes the prospects of it actually getting done-- some level of forgiveness?

SHEILA BAIR: Yeah. Well, that's a good question. I mean, there has been some Republican support for some level of debt forgiveness. You know, I think there's an argument the executive branch has the ability to just do this through executive authority. So they wouldn't really need bipartisan support. I think if you keep it to $10,000 or below, you're probably going to have a stronger case to be able to do it just through executive action versus going through Congress.

But on the other hand, what I worry about is just we're just going to keep extending this pause forever. You know, politicians cite these polls and say, well, there's all this big support for student debt forgiveness or indefinite pauses. And, well, of course, there is. Nobody wants to repay their loans. But I do think that most borrowers that have the capacity to repay are willing to repay. And again, there are different repayment options to make sure their payments are affordable.

But we're sending people-- young people, especially-- all the wrong signals about what debt is. I mean, first of all, it's too easy to get a student loan to begin with. It's just this euphemistically called financial aid. Younger people are not encouraged to think through and understand this is a debt. It's a legal obligation. They're going to have to be repaid later on. You know, it's kind of marketed as financial aid. It's like, nobody kind of de-emphasizes the fact that you've got to repay it later. No emphasis on affordability.

And then we have this endless pause and confusion about, well, will we ever have to pay it back? And that just sends all the wrong signals about personal responsibility, the seriousness of debt, including student debt, in terms of being a claim on your financial future. It's a serious business. It should not be undertaken likely. And then your obligations should not be-- should be fulfilled, as well.

So I do think this whole thing has been handled in a way that sends young people all the wrong messages about what debt is, how serious it is, and that there's an obligation to pay it back.

JULIE HYMAN: And just quickly, then, I mean, debt is also a useful tool as you go through out. Your life.

SHEILA BAIR: It is. It absolutely is. Absolutely.

JULIE HYMAN: So what is the risk here-- the biggest risk, in your mind-- with the student debt system as it stands?

SHEILA BAIR: Right. Well, I think, look, if you do widespread-- so I think $10,000 is very defensible. If you start getting higher than that, without doing more fundamental reforms, you're really just going to be encouraging more profligacy in the student borrowing, because, you know-- and I've seen it. I've heard colleges do it. Shame on them. They shouldn't. But some do. That like, go ahead and borrow. Pay for this expensive graduate degree. They're going to forgive it later.

And this is going to send all the wrong signals. So it actually could encourage student borrowers to even be more cavalier about the kind of obligations they're taking on and letting colleges exploit that. I mean, the student loan proceeds-- let's face it. Those go to higher education institutions. They're the ones that benefit directly financially from it. And they have no incentives, under the current program, to take any personal accountability. The financial incentives are not such that to make sure that student actually gets a degree that's going to enhance their income-producing potential.

So I do think either this goes on forever-- and I think this is unfair to students, too. They need certainty. They need to the ability to plan. This-- still hanging over their head. But if you go through whole-scale, really widespread debt forgiveness without reforming the system-- so that students are better equipped to understand that the debt is an obligation they'll need to repay, the higher education institutions have some accountability to make sure they don't overborrow and they're getting a degree that's worthwhile-- you don't have those reforms, too, we could just double down on what is already a very problematic system.

So I guess that is my biggest worry. And I do have compassion for these student borrowers who are going to have to start repaying again after two years. That's going to be hard for them. And I want, if it takes another extension to make sure they have time to prepare, then so be it. But again, help them understand, debt is a serious obligation. Taxpayers deserve to be repaid. And there are different repayment options that they can utilize if they have trouble repaying.

I have long advocated actually an equity model, income share, where you just get away from debt completely. That unfortunately has not gotten traction. But at least if we're dealing with the current framework, there's some improvements we can make to make it a lot better.

JULIE HYMAN: Yeah. Well, let's hope that at least some of them get done in the next couple of years. Sheila Bair, great to catch up with you. Former chair of the FDIC. You can read Sheila's op-ed on yahoofinance.com. She's also the former president of Washington College. Fun fact, I went to some summer camp at Washington College as a Maryland resident. And it was lovely. It's a lovely campus.

SHEILA BAIR: It is beautiful. It is.

JULIE HYMAN: Thanks so much, Shiela.

SHEILA BAIR: OK.

JULIE HYMAN: Appreciate it. Take care and have a great weekend.