Updated: Feb 22
The sudden stop of the American economy has exposed a tremendous fragility. We could see thirty million jobs vanish, and many of them may not return.
The $1,200 stimulus checks have been cashed, but this relief hasn’t lasted long. Cell phone bills, car payments, and unpaid rent will deepen the financial hole for lower-income Americans.
As Kristen Kuchar describes: “Consumer debt is like having a giant weight dragging you down. Even as you sink, you still have to pay. Debt collection agencies harass you. Sallie Mae will want money. Chase Bank wants money. Hospitals want money. An entire collections industry feeds off debt repayment.”
Lowering the interest rates on debts does not reduce the principal. In fact, the student loan and credit card collectors are experts at hitting borrowers with late fees and much higher rates than initially advertised.
Finding any job will be hard in future months, and finding a job that earns enough to pay back debt will be nearly impossible. Any solution that doesn’t include forgiving consumer debt will not rescue the economy.
A moratorium on renter evictions is helpful, but insufficient. For the time being, the sheriff doesn’t show up to throw you out onto the streets.
At some point, a moratorium expires. Lenders and landlords become impatient. They have no choice but to come after you. Now you don’t just owe one or two months of back rent, you owe 6 or 10 or 15. If you can’t pay one or two months, how are you going to pay ten?
The effects of an eviction can last a long time. Companies capture evictions in people’s credit scores and digital profiles. This impacts people’s ability to secure new housing and even new jobs.
Many American households will not have the earnings to pay back the money they owe. Will local police and courts assign significant personnel to the task of evicting people from their homes? Will we make renters into lifelong indentured servants? Will we cut back unemployment benefits, make them too stingy to live on, and then demand that people somehow find a job quickly in a nightmare of a job market?
What is to be done? Consider the following:
Government can help pay your rent and utilities
Renters are being hit hard during the Pandemic. They have lower income, have less savings and assets to draw on, and are more likely to be working in the industries that were affected by the virus.
The federal HEROES act --which passed only the House in May -- would have had the government pay for 90% of missed rents for up to seven months, if renters can demonstrate that they had been financially impacted by COVID-19. (Several blue states like Oregon, California and Michgan are considering extended eviction limits – but their bills have very little real money behind them.)
If a landlord accepts payments from the state, they would give up pursuing the remaining 10% of missed rents, and agree not to charge late fees or raise the rent for a year.
Landlords would then have the cash flow to cover their own debts, and evictions would be minimized.
· Landlords need rental income to pay their maintenance bills, taxes and mortgages.
· Municipalities need tax income to pay workers and fund essential services.
This subsidy would be retroactive to April 1.
On a national basis, this would cost about $100 billion if it stayed in force for one year.
Ohio Democratic Senator Sherrod Brown’s bill is called the Emergency Rental Assistance and Rental Market Stabilization Act. Representatives Maxine Waters (D-CA) and Denny Heck (D-WA) are sponsoring a similar bill in the U.S. House. Their bills would offer short- and medium-term rental assistance for up to 24 months or six months of back rent and late fees. The funds would be paid directly to the housing provider on behalf of the tenant.
This would not create a new constitutional powers to eliminate rents. The government would simply be paying the bills during a terrible economy.
As James Galbraith states in New York magazine: “There is a very clear case against evictions, because people have been doing what they were told to do. They’re foot soldiers in the war effort. And so now are we gonna say, ‘You still owe your missed rental payments, even though your income was cut off by a shutdown we were all ordered to observe’? You don’t do that to people. It’s a very basic question of fairness.”
Many households will not have enough money to resume paying their utility bills. But there is an existing federal program, created in 1981, to provide emergency assistance primarily for heating costs.
In general, families must earn less than 60% of the state’s median income to qualify.
However, the program has traditionally been underfunded and regularly runs out of money. The program normally reaches only 20% of the 32 million eligible households across the U.S.
Full funding of utility assistance – including water, electricity, cell phone and internet bills --would cost about $50 billion per year, well worth the federal investment.
Student debt can be cancelled
Prior to the crisis, more than 1 in 7 student loan borrowers were more than 90 days delinquent or in default on their payments. Almost half of all borrowers were simply treading water, meaning that they were technically current on their payments but were not paying down their balances.
The CARES Act provided only temporary relief for student loan borrowers, permitting those with federally held debt to skip payments for 6 months.
A. About eighty-five percent of student loans are owned by the federal government. This debt could be forgiven with a single piece of legislation.
These federally-originated loans can be cancelled, and no more payments would be due.
The total student debt owned by the government is about $1.1 trillion. This produces about $80 billion in annual principal and interest repayments to the Treasury.
The government can find other sources for $80 billion per year.
Student loans are a precarious asset at best due to the large rate of delinquencies. If 40% of loans will ultimately go bad, this asset has limited value.
In fact, government loans are a toxic asset, to the extent they create impoverishment of our own citizens. Much of the debt that would be written off consists of accruals, late charges and penalties on loans gone bad.
B. The remaining 15% of student debt is owed to private lenders.
The government could actually purchase this debt, for approximately $220 billion.
The private lenders would therefore be made whole, albeit with no further interest income.
If the U.S. government can finance $4.5 trillion in quantitative easing for the banks and large corporations, it can absorb the cost of paying off these private student loans.
Debt forgiveness should never create a taxable event.
C. If total forgiveness is not feasible -- politically or fiscally -- there is a much less expensive alternative:
We can allow student debt to be discharged in bankruptcy court. Special restrictions would no longer apply, and the Department of Education would not challenge each debtor as they do today. Those who have high repayments and low incomes can file bankruptcy, accept their mistakes, and walk away. The borrowers who actually did get good jobs and can handle their student debts will not receive a windfall.
These bankruptcies could happen fast. There would be no special rules requiring exhaustive proof that the loan can never be repaid. Student loans would be lumped in with medical and credit card debt, and wiped out just as quickly if the borrower simply cannot make the payments.
The bankruptcy filers will include:
· Borrowers in default on their loans or whose monthly payments are more than 90 days overdue;
· People with expiring hardship deferments, or medical treatment deferments;
· Those whose loans are in forbearance and whose debt burden exceeds 20 percent of the borrower's income.
When private loans are wiped out in bankruptcy, the government should still honor any guarantees to the lender. But that should only cost about $20 billion a year.
Some Medical Debts can be cancelled; future medical debt can be prevented
$88 billion in medical debt is already assigned to collection agencies.
Providers now sell these debts for pennies on the dollar to private collectors, who aggressively attempt to force patients to pay the full amount due.
We must cancel these older “zombie debts “, many of which are actually beyond the state statutes of limitation. Debt-collection agencies lobbied hard to be included as “essential businesses” during the pandemic -but this ia a tiny group of workers who should become unemployed.
However, this is only part of the problem. Doctors and hospitals still carry over $900 billion of debt on their own books.
Patients who have huge debts and modest incomes can already take refuge in bankruptcy; this tactic will probably become more common.
Also, some providers have begun to offer payment plans to their patients.
We need new laws to prevent large medical debts from even accruing, including:
1. Balance bills and surprise bills should be cancelled, if there was no prior disclosure of costs.
Providers will not have the right to collect anything more than what insurers pay them.
If the care was done ‘out-of-network’ and no costs were disclosed, then the Medicare fee schedule will apply.
2. Hospital lawsuits against patients must end. Even during the current crisis, some hospitals are still suing patients to recover bloated fees,
That means no accrued interest, late fees, or other penalties for nonpayment of medical debt.
These suits recover negligible amounts of revenue, but are financially crippling to patients.
3. Emergency care must not be subject to insurance deductibles.
In other words, even if you have a plan deductible of $4000 or more, any emergency will be covered at 100%. Co-pays such as $250 for ER care would be acceptable, but nothing more.
4. If a claim is denied, and the patient could not have known this was likely, the patient will not be liable. (This has been true in Medicare for decades.)
Right now, patients are often asked to pay disputed medical bills while insurers and providers attempt to resolve the dispute. If an individual does not pay the bill during this time, it can be turned over to collections.
5. Ambulance service should be a government function, paid for by taxes, no different than fire or police. This applies to air ambulances also.
The taxes required would be about $15 billion a year, which is a rounding error in federal health spending.
Ambulance fees must be capped at the standard Medicare amount of $450, perhaps with an increase of about 30%, all of which should be paid by government.
Credit Card Debt Can be Reduced
Our credit system has abused ordinary Americans. Over the last 40 years, the banks have been very aaactive in lobbying, taking away limits on the interest rates they can charge,
In 2019, credit-card companies raked in nearly $180 billion in revenue from interest and fees.
At the very least, Congress should cap consumer interest rates.
Bernie Sanders has proposed a national limit of 15%, but even that is too high.
Frankly, anyone who makes money on interest should not be protected.
Norman Silber and Jeff Sovern have developed a proposal, called “Credit Card
During the Pandemic Act” or CIRPA, to help consumers and small businesses get past this crisis.
Here are the basic tenets of CIRPA:
· Allow banks to charge the government directly for 70 percent of interest charges on consumer credit cards; with the remaining 30 percent being charged to consumers, who could defer their portion until after the crisis is over;
· Cap the interest rates on credit card charges that are being subsidized by the government;
· Cap the benefit for each consumer at a certain amount - Silber and Sovern suggest $10,000;
· Prohibit lenders who participate in the program from increasing interest rates, reducing consumer borrowing limits, or raising interest rates after the pandemic is over on charges that were incurred during the crisis.
The total cost of this program for one year would be at most about $60 billion.
Criminal justice debt must be cancelled.
“The last thing that we need right now is to have people in unsafe prisons and jails for the crime of ”poverty," said Abby Shafroth, attorney at the National Consumer Law Center. “
Recommendations from the Brennan Center for Justice include:
· States and localities should pass legislation to eliminate court-imposed fees.
· States should institute a sliding scale for assessing fines based on individuals’ ability to pay. The purpose of fines is to punish those who violate the law and deter those who might otherwise do so. A $200 fine that is a minor inconvenience to one person may be an insurmountable debt to another.
· Courts should stop the practice of jailing for failure to pay, which harms rehabilitation efforts and makes little fiscal sense.
· States should eliminate driver’s license suspension for nonpayment of criminal fees and fines. The practice makes it harder for poor people to pay their debts and harms individuals and their families.
· States should pass laws purging old balances that are unlikely to be paid but continue to complicate the lives of millions,.
We will need about $50 billion a year in new federal dollars to replace money that is
now being cruelly collected from prisoners. Courts should be funded primarily by taxpayers.
4. We can make it easier to file for bankruptcy
Bankruptcy works well enough in normal times, particularly in restructuring large public firms.
But the economy will suffer if the system is overloaded –and it will be, when corporations, small businesses, and individuals start to file in huge numbers.
Congress should double the number of bankruptcy judges and support personnel.
The paperwork requirements for individuals can be reduced substantially. Documents can be filed telectronically, and bankruptcy hearings can be done remotely over the phone.
Elizabeth Warren’s reforms would permit people to modify their mortgages in bankruptcy. Her plans also gives more protection for people’s cars. Access to a car is vital for getting a job, and s r starting to rebuild finances.
No matter how you look at it, debt is evil. It is crushing. As Michelle Singletary says, “We must end this love affair with debt, and stop using it to fix our economic problems.”
According to Andrew Ross, “Those who struggle with debt have worse physical health and are more than twice as likely to suffer from depression and anxiety disorders. Debt-stressed people tend to postpone marrying and starting families until they are on more stable financial footing — a state of affairs that may be far in the future and difficult to achieve. And if already living in a family, debt-stressed parents have less time and energy for their children.
When populations are compelled to finance the provision of basic social goods through private debt, we might consider these to be ‘antisocial debts.’
Wages are more and more used for paying back the debts taken on to position themselves as fit in mind and body for the workforce.
Higher education is a perfect example. As low-income families were priced out of public colleges, they were pushed into the for-profit system, fueled by the ready availability of federal loans. First-generation students have been easy prey for the admissions counselors of the for-profit colleges.”
State and federal government can claim they are lowering taxes. But individuals are burdened with higher debts. Privatization means more debt and more suffering
Providing debt relief at this time is not about making excuses for irresponsible individuals,. It may be called for both to reestablish economic prosperity and to make our institutions fairer for everyone. s.
In the words of Paul Craig Roberts, former Treasury official:
“Debts have to be cancelled as they are smothering individuals, businesses, and the economy. Our economic culture is accustomed to thinking that debt must be paid. The belief is that to reward those who did not live frugally and avoid debt subsidizes and encourages bad behavior. But in this case, unless debts are forgiven the frugal and responsible go down with everyone else.”
The alternative to consumer debt is generous social insurance, plus mandatory savings:
· You should not need a credit card to buy expensive drugs or to pay off a hospital bill – you would have single payer benefits instead. Credit cards are a poor subsitute for union cards.
· You should not need a credit card to pay off utility bills when your income is down.
· You would not have large student loans; instead, you would have free college and/or substantial grants. (no different than Germany or Norway.)
You would not need to pay all legal bills yourself. Right now, an individual had to make less than $14,713 per year\ to be eligible for Legal Services Corporation assistance.
· If you are totally out of money, the government can provide low-interest alternatives to payday loans.
(Many of us will still want a credit card to take a trip or buy an appliance. However, these cards should not be completely unsecured as they are today. They should have much higher minimum payments, and if you cannot pay them off in three to six months, you lose the card.
If then you can no longer charge discretionary purchases, how bad is that? Yes, it is bad for the economy in the short term, but it is extremely healthy for individuals. Ask Dave Ramsey.)
The national goal would be for every family and small business to have three to six months of 'absolute end of the world' liquid savings . Maybe we have to do financial stress testing at each tax season, and if needed require a special withholding.
With savings, we could endure these kinds of crises without suffering an economic calamity anywhere near the magnitude of the one we are experiencing now.
When the average person has no savings for college, health care, retirement, or a temporary layoff, then we must turn to the federal government. And we cannot do this endlessly.
Personal savings would at least be a positive outcome from a terrible period. It may be time for paternalism – and it would be popular. Teresa Ghilarducci notes that “Most Americans want the government to force them to save and to force employers to provide a retirement plan. Workers seem to know they are in trouble and want the government to force them to save.”
Bob Hertz lives in Minnesota, and is the author of numerous works on health care reform, student debt forgiveness, and labor law improvements, including:
He is a retired insurance broker, and describes himself as a “Garrison Keillor Democrat.’
If you wish to reprint all or part of this article, contact Bob.Hertz@Frontiernet,net