At a time when bipartisanship seems quaint, Senators Dean Heller (R-Nev.) and Debbie Stabenow (D-Mich.) appear to have set aside their ideological differences long enough to collaborate on legislation that would extend the Mortgage Forgiveness Debt Relief Act.
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Soon after the housing market collapsed, lenders reluctantly began modifying mortgages by abating interest and forgiving loan principal, and agreeing to short sales, too. In each of these scenarios, the IRS views the financial benefit the mortgagor-homeowner stands to gain at his lenders’ expense as income to be taxed. Left unremedied, those borrowers can look forward to an unhappy surprise from Uncle Sam later on.
There are some who would say, “This is yet another bailout for those who shouldn’t have gotten in over their heads in the first place!” Fair enough. But what about the folks who, for reasons outside of their control yet directly associated with the economic downturn we just endured, deserve to have their loans modified? Given the way the law reads, taxing the value of what amounts to a debt-relief windfall is appropriate. But is it right?
What frustrates me more, frankly, is that here we are talking about extending additional tax exemptions to homeowners when these same benefits have yet to be made available to so many more consumer-borrowers who are equally deserving of them.
According to the latest data from the Federal Reserve Bank of New York, newly serious delinquent mortgages (payments that are more than 90 days past due) totaled 1.78 times as much than for student loans: $52.61 billion versus $29.48 billion, respectively.
No small numbers here, unless you make them comparative.
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Outstanding mortgages totaled $8.17 trillion at the close of 2015 versus $1.16 trillion for student loans. Therefore, as a percentage of the total, newly serious delinquencies represented 2.5% of all student loans versus only 0.6% of all mortgages.
A 4x order of magnitude? Try closer to 8x.
You see, only about half of all those education-related loans are actually in repayment (payments for the balance are deferred until the borrowers leave school). So while there may be a 1.78x order of magnitude between newly serious mortgage and student-loan delinquencies on a whole-dollar basis, there’s a whole lot more trouble with student loans.
What Senators Heller and Stabenow are attempting to accomplish is humane. But let’s not forget to address the plight of those we hope will someday have the means to purchase these very same homes from those whom their legislation is intended to support.
While we’re at it, how about addressing the matter of credit-bureau amnesty?
Say a student completes his studies, finds a job and comes to realize his take-home pay will not stretch far enough to cover his living expenses and student-loan payments. So he applies for one of the government’s income-oriented payment plans, but not before running late on several payments. After his relief plan is approved and put into place, however, he’s able to meet his obligations going forward. Meanwhile, his credit reports and credit scores take a hit.
What about the grad who is one of thousands of struggling borrowers who’ve been given the runaround by loan-servicing and debt-collection companies when all he wants is access to the programs – to which he is entitled – that will enable him to remit his payments on time and, consequently, rehabilitate his credit?
Given the magnitude of problems that exist within the student loan program – for all the reasons you’ve heard before – it seems to me that if we’re willing to do a three-fingered-salute with regard to repayment amounts and durations, we should extend the same consideration for their credit reports.
This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.
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Mitchell D. Weiss is an experienced financial services industry executive and entrepreneur. He is an Executive in Residence at the University of Hartford, a member of its business school’s board and co-founder of the university’s Center for Personal Financial Responsibility. His books include Life Happens: A Practical Course on Personal Finance from College to Career
and Business Happens: A Practical Guide to Entrepreneurial Finance for Small Businesses and Professional Practices—both of which are now undergraduate courses that Mitch teaches at the university and elsewhere. More by Mitchell D. Weiss