2023: What Needs to Happen When it Comes to Student Debt

A turning point is dependent on more than the Biden relief package.

One of the hottest topics when it comes to personal finance right now is the prospect of student loan forgiveness. The Biden plan that has been put forward would erase as much as $20,000 in federal loans for certain borrowers making less than $125,000 per year or $250,000 for spouses. It could affect more than 40 million people. The package is currently on hold while some legal challenges unfold, but other initiatives have made it clear that student debt is a top priority for the current administration.

All this means is that 2023 is set up to be a year where we will see unprecedented action to address the student debt weighing down Americans. The Biden Administrations new repayment plan is the strongest action this administration has taken and could have the largest impact in the next decade. However, while much emphasis has been put on government activity as a cure-all, it is only a short-term fix leaving structural aspects of the debt problem unchanged. More measures are needed from more actors to have a real impact. Here is what we need to understand about student debt and what needs to happen next for 2023 to be an actual turn-the-corner year. 

First and foremost, it is important to realize that student loan debt is the most unique and complicated form of debt in the United States today, accrued by the youngest borrowers. It has soared to $1.75 trillion, according to the Federal Reserve, exceeding credit card and auto debt and averaging about $38,000 per borrower.

Second, student loan debt is not structured like any other consumer debt or loan. Unlike other loan types, student loans are effectively impossible to discharge during bankruptcy; because they are held by the federal government, student loans are treated differently.

Third, the average student loan borrower has between four to 10 loans—each with their own interest rates, repayment plans and terms, which can be overwhelming and incredibly confusing.

While the Biden Administration’s proposal is good news for some borrowers, one-time cancellation fails to address the underlying and not that often talked about issues linked to these three aspects: difficult-to-manage payments, lack of transparency and financial education.

To handle these issues and move towards real change, we need:

Engagement from employers of all sizes. Businesses should offer loan repayment assistance, signing bonuses that can be applied to student loan payments, loan management tools, and ongoing education for employees.

Likewise, debt paydown programs linked to 401(k) accounts would help support current and future financial health. Clear communication and education around these benefits is essential: There is nothing worse than having a fantastic program for employees if the employees themselves don’t understand or recognize it. Understanding repayment options makes a world of difference for borrowers.

Service provider to enable precision payments. Since borrowers often have multiple financial institutions, banking apps, PFM’s,and more —they need to offer the tools so  their customers understand their student debt, make precision payments, and explore repayment plans that fit their needs. Ensuring that the payment is going to the right loan at the right servicer is critical to successful repayment. Unfortunately, borrowers can’t simply send a check to a loan servicer and expect payment directed to the appropriate loan, ideally the one with the highest impact for repayment. Precision payments will be a game-changer for the industry. 

Solve for Unnecessary Confusion. It goes without saying borrowers deserve to receive information that is accurate, consistent and timely, particularly as they transition out of school or into a different payment plan. While this seems obvious, it is not a given in the industry today.

As we confront trillions of dollars in student loan debt during a time of rising costs, we do not need unnecessary confusion. Student debt does not—and should not—be so complicated. We have the ability to support better, faster and more clear repayments. This would allow Americans to manage student loans, the first and largest liability many of them take on, from a position of strength, setting them up to successfully move ahead with their financial lives.