No Magic Bullet, but Eight Solid Programs
Student loans do not have a single, magic-bullet solution. But there is much we can do – and soon!
According to Betsy DeVos, only one in four borrowers is making payments on both principal and interest with their loans. Some are still in school, of course, but having their loans in deferment or forbearance may not stop interest from growing inexorably. Another seven million borrowers are using income-based repayment. This might keep them free of harassment by debt collectors, but their monthly payments may be so small that their loans are actually growing.
The surest sign of suffering under student loans is to be in default, which can be virtual financial suicide. Default can add 15% or more to your loan balance, trash your credit scores, and screw up apartment rentals, auto loans, and cell phone contracts. It can even scare off potential employers.
Someday we will have to ask: “Why have we let young, financially ignorant people borrow so much?”
But for now, our solutions must be a combination of “Relief and Replace.”
l Clear, quick rescues to those who are in deepest financial trouble right now.
l For future students, replacing loans with grants and scholarships.
Relief Solution #1
Forgive all student debt for borrowers and co-signers who are now over age 65.
There are approximately two million persons over age 65 who still carry student debt. Either they owe money on their own loans, or they owe money in support of a child’s loans.
The total amount owed is approximately $65 to $70 billion. Nearly 40 percent of federal student loan borrowers age 65 and older are in default.
The principle behind forgiveness for seniors is simple: “Enough is enough”. People deserve an untroubled financial retirement.
Most debtors over age 65 have been paying on these loans for a long time. Their incomes are not going up. Often they cannot even cover the interest on their student loans.
Many of their debts come from ‘Parent Plus loans’, which are a form of grotesque financial cruelty. These loans have higher interest rates and even a 4% origination fee.
Parent Plus loans must end. If $31,000 in undergraduate federal loans (over 4 years) is not enough for a student –then that student is in the wrong college.
Forgiveness for seniors will not be complicated. The senior debtor can request forgiveness with proof of age, and their loan is cancelled.
Seniors’ loan forgiveness could be spread out over several years. In the first year, loans could be forgiven for borrowers over 75; then in the next year, for those between 70 and 75, and so on.
Alternatively we can start forgiving any loan to seniors whose current income is less than $30,000 a year, and move up quickly from there .
Relief Solution #2
Forgive all debts for students who have been defrauded by for-profit colleges
There are approximately 127,000 “Borrower Defense” fraud complaints in process at the Department of Education. These borrowers have declared -- under penalty of perjury -- that their schools misled them by using false job placement rates, lies about credit transfer, or other unrealized promises t
Under Betty DeVos, the Department of Education has been delaying action on these complaints. Even when claims are approved, only a portion of the loans is typically forgiven.
We should move the other way! It is time to approve the complaints rapidly, and in full.
The average forgiveness on the few approved claims has been $14,100.
Even if this average goes up to $25,000, approving all 127,000 claims would cost less than $3 billion.
The federal government has been deeply complicit in the misery caused by for- profit schools. There are many instances where the Department of Education chose to protect predatory businesses, at extraordinary expense to students.
When many of these schools close, students must be guaranteed that their credits will be accepted-- so they will not be charged additional tuition and fees to start over again.
Relief Solution #3
All debt forgiveness must be income-tax free.
Our tax code needs to be amended so that borrowers are not taxed when the remaining balance on their loans is forgiven.
James Brooks proposes that loan forgiveness could be classified as scholarships, which are excluded under the tax code.
The long-term impact of this tax forgiveness could easily reach $200 billion, but that would be over a multi-year period. The cost in any one year’s federal budget should be manageable.
Whatever action we take on taxes must be universal for all debtors. The Public Service Loan Forgiveness Act should never have been limited just to public employees! (Especially when government employees already have more secure jobs, more health benefits, and far better pensions than private sector workers.)
Relief Solution #4
No student loan payments will be due -- and no interest will accrue -- until the borrower’s income exceeds $40,000.
Loan balances would not increase while a person was in school.
(This has always been true for Stafford Loans.)
Repayments would not be due when a student drops out, if their income remains relatively low.
(This has been done successfully in Australia.)
The borrower will have to take the initiative here. They can submit their prior year’s tax return, and that could give them a one year grace period from payments or interest accruals.
The government will have to give up its loan interest during these deferrals. I would estimate that about $30 billion in interest would not accrue each year.
We must shed the goal of the government “breaking even” or even making money on student loans. This has constantly led to higher interest rates, aggressive collections, and debtor’s misery all around.
Student loans should indeed have a ‘net cost’ to taxpayers. We should assume that much of the loaned money is just “gone”. Student loans are a toxic asset for the government.
Relief Solution #5
Allow student loans to be discharged in bankruptcy.
Colleges can declare bankruptcy (and some are doing so right now); airlines can declare bankruptcy; Donald Trump has declared it several times – and received huge tax deductions in the process.
Gamblers can declare bankruptcy; credit card abusers can declare bankruptcy; VA mortgage holders can declare bankruptcy; virtually all small business borrowers can declare bankruptcy.
Granted, many student loan borrowers have made huge mistakes. They did not keep track of all their loans; often they kept taking loans in a desperate attempt to get an advanced degree…..which (they prayed) would lead to higher incomes.
Here is what bankruptcy reform would look like:
1. The Department of Education will not fight a borrower’s requests for discharge, any more than Visa or Master Card sends out an attorney to every single bankruptcy hearing today.
2. The court should just accept basic proof from borrowers that they cannot repay their loans and meet a basic standard of living….i.e. tax returns, pay stubs, etc.
3. Student loan bankruptcy cannot be permitted for five to ten years after graduation.
Here is a sample the calculation in court:
· The debtor has income of $40,000 and two children. (Each state has income limits governing who can file for Chapter 7 bankruptcy.)
· The standard formula might state that this person can devote no more than $300 a month to debt service.
· If $300 a month is not enough to make minimum payments on credit cards and student loans, then bankruptcy is permitted and the student loans can be cancelled.
· This will not be a lengthy inquisition. The debtor need not prove that their situation will never improve.
If 100,000 debtors went this route in a year, and the average cancelled student debt was $50,000, the cost to lenders in that year would be $5 billion. The government will have to offer compensation to private lenders, because the risk of bankruptcy was not present when the loans were made.
Replace Solution #1:
Increase Pell Grants to $10,000, and make them available to any family whose household income is under $80,000.
This will benefit about 9 million students. The federal expense would be $90 billion in total, less the $35 billion we pay out in Pell Grants today…..in other words, $55 billion more spending.
As Pell Grant spending goes up, new federal loans must simultaneously go down.
The government has been spending well over $100 billion a year on new federal loans and loan guarantees.
That amount must be vastly reduced.
The Pell Grant is essentially a voucher, as was the GI Bill in the 1940’s and 1950’s. When we give vouchers to parents for elementary education, even right-wingers applaud. No one has to pay interest on a voucher.
The Pell Grants must be available to any student --even those who are in default…plus those whose earlier loans have been forgiven.
We already have a financing system for Pell Grants – it is called the progressive income tax. Student tuitions should be funded via grants: no grants would ever be repaid. Government will once again be a spender, not a lender.
Replace Solution #2:
Provide more federal funds to community colleges and vocational schools.
Giving more money to community colleges will help replace the for-profit colleges.
Current federal funding for vocational schools is well-intended, but pathetically small at present. Here is a recent legislative proposal:
· ESSA Title IV-A Student Support and Academic Enrichment Grants – Increase of $70 million, to $1.17 billion. This program can provide funding to CTE programs, particularly in the areas of college and career guidance services, education technology and STEM education.
· Apprenticeship Opportunities – $160 million, an increase of $15 million.
· Adult Education – State grant program increase of $25 million.
Support for vocational schools should be ten or twenty times this amount.
The loan monies that have been going to dishonest and overpriced for-profit colleges could have funded every vocational school and community college at 100%, with ease.
Replace Solution #3
Introduce Loan Limits
In 2009, the U.S. graduated 38,000 students with bachelor’s degrees in computer and information science, and 2,500 with bachelor’s degrees in microbiology.
However, we graduated 89,000 students in the visual and performing arts, psychology, and journalism.
Many of the saddest student loan stories involve degrees in counseling or liberal arts. Time after time, one encounters students who borrowed over $100,000 to get a social worker job or a counseling job that pays only $28,000 a year.
Unfortunately, we have to start denying federal loans for careers that do not reliably produce high earnings. No one would be barred from studying social work or art history, but they could not borrow federal money to do so.
If an industry actually needs new employees – whether it is plumbing, welding, or computer science – let the industry provide money for grants and apprenticeships. (For example, Audi is paying tuition right now for young mechanics, in order to create a steady pipeline for their workforce. )
If an industry has no real demand for new workers, then without loans there will be very few new students, other than wealthy kids who can study anything they want. How awful is that?
Prospective students who cannot get loans can receive a Pell Grant and go to vocational schools – where they will get better jobs, and should have little or no debt if they live at home.
Many fields today have a tremendous oversupply of candidates already. For-profit colleges are not the only exploiters……what about PhD programs that recruit and retain graduate students, use them as teaching assistants, but leave them virtually unemployable?
We must shed the notion that every student should get huge loans to ‘follow their dreams’ in an over-crowded field, or to attend the over-priced ‘college of their dreams’ on borrowed money.
Is this paternalism? Of course, and not a moment too soon.
Tressie McMillan Cottom describes loans as “a negative social insurance program. Unlike actual social insurance programs, negative social insurance doesn’t actually make us more secure. It only makes our collective insecurity profitable.”
Public support for higher education is not going away. Federal and state governments currently spend over $100 billion a year on merit scholarships, financial aid, community colleges and land-grant universities. Let’s add to those numbers without the disaster of more student loans.
THE COST OF STUDENT LOAN SOLUTIONS
Description of Reform Direct Federal Spending
Forgive loans over age 65 $5 billion/year for 4 years (estimated)
Honor fraud claims $2 billion/year for 2 years
No income taxes on forgiven debt $20 billion/year in uncollected taxes
No loan payments due if a $30 billion interest not accrued/yr
graduate’s income is less
Discharges due to bankruptcy $3-5 billion/yr in federal loans cancelled
Increase Pell Grants to $10,000 $55 billion/year, ongoing
Support for community colleges $12 billion/yr, ongoing
and vocational schools