Student Loan Forgiveness

What is Student Loan Forgiveness?

Student Loan Forgiveness

The most lucrative option for you to repay the student loan you receive is, of course, in the form of forgiveness or deletion of the debt. But as you can imagine, this possibility is rarely possible. So, what is “Student Loan Forgiveness”, and what is not? We recommend that you read the following information carefully.

— Factors That Predict Student Loan Defaults

The most important predictor of default is probably the student borrower’s employment prospects and whether post-graduation income is adequate to service educational debts. Studies have also found that students are less likely to default if they are employed in a field that is related to their major. Some studies report that defaults are lower for STEM majors. Students who drop out are much more likely to default, and attrition can be predicted from poor academic performance both before college and during college.

Other individual characteristics that have been shown to predict default include race, age, parental education levels, family income levels, family structure, debt burdens, and (for law students) credit scores.

Characteristics of educational institutions may not provide much additional predictive accuracy. Although two-year community colleges have higher default rates than traditional nonprofit four-year institutions—and wealthier institutions tend to have lower default rates—studies suggest that higher default institutions’ loan performance may be due to these institutions disproportionately serving students whose individual characteristics make them more likely to default—for example, students who are from lower income or less wealthy families.

— Preserving Equal Opportunity, Social Mobility, and Individual Choice

Although risk-based pricing involves technical analysis of data, it also implicates important ethical considerations. As discussed above, risk-based pricing reduces the transfer of value from low-risk borrowers to high-risk borrowers by forcing all borrowers to internalize their own risks.

In some situations, differences in relative risk levels may be driven by choices and behaviors that can be changed, and that we might affirmatively wish to encourage borrowers to change. In such situations uniform pricing creates moral hazard—that is, uniform pricing encourages high-risk behavior. Risk-based pricing could improve efficiency by forcing borrowers to internalize risk and thereby cause them to make more responsible choices. The most obvious example would be choice of courses and major, which is almost entirely under the student’s control. Indeed, students from disadvantaged backgrounds already disproportionately choose fields of study linked to higher post-graduation wages. Risk-based pricing would benefit these students by reducing the total cost of their educations.

In other situations, relative risk levels may be driven by factors that are beyond the borrower’s control. In such cases, we might question the propriety of compounding misfortune by charging the unfortunate a higher interest rate than the fortunate. In such situations, risk-based pricing is unlikely to improve efficiency because borrowers cannot reduce their risk levels by making different decisions.

The most obvious examples of factors that are outside the realm of choice and may predict default risk include race and parents’ socio-economic status. Parental financial resources are strong predictors of the likelihood of default, but students do not get to choose their parents. Even credit scores of students will sometimes reflect the credit histories of their parents rather than choices made by the individual student.

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Src: Academia

For Updated Info

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