Soaring popularity of student-debt forgiveness plans causes concern

According to the Wall street Journal, government officials have expressed concerns over the rising popularity of two student-debt forgiveness plans. The plans, which forgive any unpaid balance after a set period, have grown in popularity by nearly 40 percent in the past six months, amounting to over $72 billion in unpaid debt, according to U.S Education Department records

The most popular plan, known as "Pay As You Earn," requires borrowers to pay 10 percent of their income, and any remaining balance is forgiven after 10 years for the public or nonprofit sector, or 20 years for private-sector workers.

As of the time of publication, there was no cap to the amount of debt eligible to be forgiven. The Obama administration is currently exploring a $57,500 cap, although this has not yet been put into effect.

Sen. Lamar Alexander of Tennessee, who sits on the Senate Education Committee, stated "Income-based repayment can be a way for students responsibly to manage debt, but it should not be a bailout for students who borrow too much or for schools who charge too much."

Market experts' and officials' concerns are not based solely on the amount of unpaid debt, which is expected to hit $14 billion a year, but the affect those loans will have on the cost of education. It is feared that some institutions will increase tuition and lose fiscal discipline as students become accustomed to borrowing more. Student debt has already doubled since 2007 to $1.1 trillion. 

Congress is unlikely to address this problem in the near future, but has discussed plans to curb eligibility for forgiveness at a later point. Lenders still need to make sure that suitable application processing is performed for all borrowers to make sure there are no problems with repayment later on.

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