With Student Loan Forgiveness In Focus Thanks To New Plans To Cancel Up To $20,000, Should Medical Debt Be Next?

Student loan forgiveness has taken center stage with President Biden’s announcement last week that the Department of Education will cancel up to $20,000 in student loan debt for borrowers earning less than $125,000 per year.

Even as the move has been well-received in some political camps and by many borrowers themselves, one Democratic lawmaker quietly argued that the money may have been better spent forgiving medical debt.

An estimated 43 million Americans have outstanding federal student loans, but 100 million U.S. adults (41%) currently have medical debt, according to the Kaiser Family Foundation (KFF). Adding in people who have had medical debt in the past five years, KFF’s data suggest medical debt affects 57% of American adults.

Though the average student loan debt is much higher than the average medical debt, more people feel pessimistic about their ability to pay off their medical debts, even before the latest student loan forgiveness news.

The average balance for undergraduate loans is nearly $30,000 (and more than double that for some graduate degrees), according to NerdWallet. On the other hand, the KFF data show that 44% of people with medical debt owe $2,500 or more.

Despite the imbalance in the average level of debt, more than half (53%) of Americans with $10,000 or more in medical debt say they feel they’ll never pay it off, compared to one in three Americans with student loans.

“Medical debt is often the most depressing and stressful kind, because you or a loved one just endured a health scare—only to face huge bills you can’t afford,” said Howard Dvorkin, CPA, chairman of Debt.com. “You’re already fragile, either physically or emotionally, and often both. Pile medical debt on top of that, and it can crush anyone’s resolve.”

Medical debt holders got some relief earlier this summer when national credit reporting agencies Equifax, Experian, and TransUnion implemented key changes in medical debt reporting. Medical debt that was eventually paid off entirely will now be stripped from consumers’ credit reports and unpaid medical debts will appear on consumers’ credit reports after 12 months instead of the previous six months. Additionally, starting in 2023, medical bills less than $500 will not appear on credit reports.

According to Nathan Foley, director of financial progression at Elevate’s Center for the New Middle Class, these changes will eliminate 70% of medical collection tradelines.

“This is very different than eliminating 70% of medical debt from credit reports,” Foley said.

For example, if one credit report has several entries, each one is a tradeline. Balances below $500 would be removed under the new reporting methods, but anything more would stay.

According to Foley, these changes will impact some credit scores more than others. For example, before the changes, even medical collections you’ve already paid off can drag down your FICO 8 score, which is commonly used in underwriting. But, Foley said, measures such as FICO 9 and 10 already ignore paid collections, so the changes will have minimal impact on those scores.

“This will have the largest impact on older credit scores, namely FICO scores most commonly used in the mortgage industry—great news for home buyers who have a few small or $0 balance medical collections on their credit report,” Foley said.

A WalletHub analysis looked at where in the country people will benefit the most from changes to the reporting of overdue medical debt. The analysis showed clear regional differences based on the share of people with medical debt balances below $500 and debts that are less than a year old. Four of the top 10 cities where people will benefit the most are in Virginia; in all, eight of the top 10 are in the South. The cities where people will benefit the least include four cities in California and three Northeast cities, including New York and Boston.

But where medical debt reporting changes don’t help, the time lag for collections being added to credit reports could make a difference, according to Foley.

“People should use the additional time to ensure that billing is accurate and all payments due from insurance are collected,” Foley said. “They should also double check their bills and make sure they are being charged for the right services.”

If you don’t have insurance, Foley suggests using the added time to negotiate down the total cost of care and to arrange a payment plan for remaining amounts that you can’t afford.

“It’s better for you and the hospital if the bill never goes to collections,” he said.

But if your medical debt does go to collections, should it be forgiven? Debt.com’s Dvorkin isn’t convinced.

“I oppose most debt forgiveness programs,” he said. “They treat a symptom and not the disease. Instead of forgiving that debt, let’s look at a healthcare system that obviously isn’t working.”

Americans may agree with Dvorkin if their attitudes about student loans are any guide. In an NPR/Ipsos poll, 82% of those surveyed about student loan forgiveness said the government should prioritize making college more affordable rather than forgiving some existing student loans.

Dvorkin put debt forgiveness into medical terms: “We need a cure, not a bandage.”