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With student loan forgiveness front and center thanks to new cancellation plans of up to $20,000, should medical debt be next?

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

Although the move was welcomed in some political camps and by many borrowers themselves, one Democratic lawmaker quietly argued that the money might have been better spent writing off the medical debt.

An estimated 43 million Americans have outstanding federal student loans, but 100 million American 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 data suggests that medical debt affects 57% of American adults.

Although average student debt is much higher than average medical debt, more and more people are feeling pessimistic about their ability to pay off medical debt, even before the latest news on student loan forgiveness.

The average undergraduate loan balance is nearly $30,000 (and more than double that for some graduate degrees), according to NerdWallet. On the other hand, KFF data shows 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 medical debt of $10,000 or more say they think they will never pay it off, compared to one in three Americans with student loans.

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

Holders of medical debt got some relief earlier this summer when national credit reporting agencies Equifax, Experian and TransUnion implemented key changes to medical debt reporting. Medical debts that have finally been fully repaid will now be removed from consumer credit reports and unpaid medical debts will appear on consumer credit reports after 12 months instead of the previous six months. Also, starting in 2023, medical bills under $500 will not appear on credit reports.

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

“It’s very different from eliminating 70% of medical debt from credit reports,” Foley said.

For example, if a credit report has multiple entries, each is a business line. Balances below $500 would be removed under the new reporting methods, but anything that remained would remain.

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 for can lower your FICO score 8, which is commonly used in underwriting. But, Foley said, metrics like FICO 9 and 10 already ignore paid collections, so changes will have minimal impact on those scores.

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

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

But where changes to medical debt reports don’t help, the delay in adding collections to credit reports could make a difference, Foley said.

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

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

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

But if your medical debt goes to collection, should it be forgiven? Debt.com’s Dvorkin is not convinced.

“I oppose most debt cancellation programs,” he said. “They treat a symptom and not the disease. Instead of erasing this debt, let’s look at a healthcare system that is clearly not working. »

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

Dvorkin put debt cancellation in medical terms: “We need a cure, not a band-aid.”