With Full Toolbox Available to Defuse Student Loan Debt Bomb, Why Use a Hammer?

Summary: An examination of four alternative solutions outside of blanket forgiveness for outstanding student loan debt that solves this very real problem; how each would work and why they collectively offer a better alternative which minimizes potential blowback.
These solutions are:
1. Retroactive interest rate adjustments
2. Helping states establish alternative funding models
3. Fixing underlying issues related to rising cost of education and lack of jobs for graduates
​4. Spreading smaller direct payments to a broader section of students & graduates.

Photo by Alice Pasqual on Unsplash

​Outstanding student loan debt in America currently sits at more than $1.6 TRILLION, with approximately 12% of borrowers currently behind on payments. Both numbers are expected to climb considerably in the near future, costing taxpayers an estimated $30 billion (minimum) over the next ten years. Add in a pandemic-induced recession, and this is a ticking time bomb likely to blow up in our faces much sooner than later.

Some Senate Democrats have publicly suggested that President-Elect Biden forgive $50,000 of student loan debt per borrower, though he has only vocalized support for a lesser amount of $10,000.

Proponents of the $50,000 number argue that the Wall Street rescue in 2009-10 set a precedent for any bailout deemed necessary to preserve the economy as a whole, regardless of fairness to others. This is doubly true when considering that those benefiting would be the very same people whose education has been bookended by two major recessions, causing irreparable harm to their long-term earning potential.

They certainly have a point, and putting that much money in so many pockets would absolutely provide an economic boost at a time when the nation desperately needs one
But are they the right pockets? And even if they are, is this the smartest way to get that money into them?


​Most Americans saw little direct benefit from the Wall Street bailout, and any wider societal benefit isn’t likely to stop a significant portion of the 80% of Americans not currently carrying student loan debt from seething about a second one now.

Many would only see students who took on loans voluntarily, now receiving a free education when others have already paid for theirs, or never received one at all...essentially giving the beneficiaries something for nothing, while they get the shaft.

​How about those who served in the military in order to pay for school? Could anyone really blame a student-veteran who feels some resentment?

Thankfully, blanket loan forgiveness is not the only tool we have at our disposal, and some of the other solutions in the toolbox would achieve the same result without angering anyone beyond those already committed to oppose most everything a Biden administration plans to do.

Meanwhile, Democrats are justifiably concerned about 2022 being a repeat of the midterm drubbing they endured in 2010. So, for them at least, tackling this issue without making that outcome more likely is paramount.

Here are a few better options than blanket debt forgiveness:


Solution 1: Index Student Loan Debt to the Current Fed Rate, Retroactive to 2000

Between 1985 and 2018, the average college tuition effectively doubled, while the ratio of loans to grants has steadily shifted away from providing aid toward offering loans.
Our government used to be committed to making college affordable. Now? They mostly just help students accumulate debt to pay for an increasingly expensive education.

Since 2000, the Fed (Federal Reserve) Borrowing Rate has stayed under 2.5% (mostly due to multiple recessions), with years-long stretches of rates at 0.25%, which is where it currently sits and will stay until 2023 at the earliest.

During this same time-period, the rate on student loans, indexed to treasury bills, has fluctuated between roughly 3% and 7%.

In other words, our wealthiest citizens & biggest corporations have enjoyed virtually interest-free loans, while poor & middle-class students have been paying rates many times higher…all while the cost of attending school has skyrocketed.

Photo by Tbel Abuseridze on Unsplas

​If the government were to reset all student loans to the current Fed rate of 0.25%, making this retroactive to 2000, adjusting balances and issuing refunds to those below zero when applied, it would not be a giveaway, but a redress of past harm.

This should address many of the concerns held by those who have already paid off student loans, or who paid for their schooling out-of-pocket. For those graduating prior to the mid-90's, the cost of attending was much lower and subsidized at a much higher level than it has been over the past twenty-five years, so any objection by this cohort is mostly sour grapes.

Addressing the student debt bomb in this manner also seems less likely to invoke legal challenges than blanket debt-forgiveness might. The optics are certainly better, as changing the interest rate formula offers a more widely palatable justification for bringing student debt down from current unsustainable levels.
​
Going forward, we could continue to index student loans to the Fed Rate, but capped at 1%, to help prevent this issue arising again…but also because it is morally repugnant to finance our government on the backs of people attempting to better themselves.


Solution 2: Help States Establish Financing Alternatives to Traditional Student Loans

There are currently two programs in place to help students finance college at the state level. The federal government could offer states funds to finance the implementation of one (or both) of these programs (and help those who already do).

This would need congressional approval, but Democrats could possibly gain Republican support by including accredited (i.e. legitimate) trade schools in the list of institutions students could attend under a state-run program.

Boosting vocational training is something the GOP has been saying needs to happen for a while now, and they are right. We need more good paying jobs (electricians, welders, machinists, plumbers, roofers, etc.) that don’t require a traditional college education. Not everyone wants, or needs, to go to college. Trade & vocational schools’ inclusion should be an easy price to pay for Democrats to get a deal done.

The Oregon Model:
Oregon’s Pay it Forward, Pay it Back program allows students to, instead of taking out traditional loans, attend university tuition-free with the commitment to pay back a certain percentage of future income over a set period of time. Those who earn more would end up contributing more, but participants know this going in and there is flexibility.

The Oregon formula is 0.75% of 20 years future income for each (up to) 45 units at community colleges and 1% for the same at a 4-year institution. Payments begin six months after completion, and not all units taken have to be included. Students get to choose what to pay out-of-pocket (or through other means) and what to finance, giving them some control over their future obligation.

Based on 180 units to graduate with a bachelor’s degree, a person who financed their entire education this way would top out somewhere between 3.5-5% of future income. Compare that to people currently paying as much as 20% of their monthly income to repay student loans, with no breaks for those not currently employed. Under Pay it Forward, repayment is only made when income is being actively earned.

The biggest issue for states implementing this program is up-front money. Oregon estimates their cost to be approximately $6.5 million per year, peaking in year 4 at about $20 million. After that, it will slowly, but steadily, go down until year 22, when the state will break even, running a surplus of approximately $3 million per year after that.

It’s a good deal for students, even if some end up paying more in the long-run, due to the certainty it provides. Over the long-haul, it's a good deal for the state too. If the federal government provided funding to get through those expensive early years, implementing this program should be a no-brainer for most states.

A ten-year allotment of $500 million per year, divided proportionally among participating states to get the program off the ground, would be a fraction (1/6 to be exact) of the amount we stand to currently lose just from defaults on current student loan debt. Some states might have to chip in some of their own funds, but this should be sufficient to implement similar programs nationwide.

States that resist doing so under ideological grounds would likely face a student exodus, leading to a severe brain drain over time…which is an excellent segue to:

The Maine Model:
Maine currently offers residents with college degrees a tax credit in order to help stave off the sort of brain drain which occurs when people can’t find work in the state comparable to what they might find in a larger metro area.
(Several other states offer similar, though generally smaller, credits for the same purpose)

The credit is dependent on what type of degree a person has: up to $77/month for an associate degree ($924/year), up to $367/month for a bachelor’s degree ($4,404/year), and up to $338/month for a graduate degree ($4,056/year).

Any Maine resident graduating since 2015 (2008 if they attended an in-state school) and still paying off student loans can take advantage. Additionally, as a boon to small businesses, employers can make employee’s student loan payments for them directly, and then claim the associated tax credit themselves.

This is a great program for rural states especially – another carrot to gain Republican support – but less so for the more populous states not facing this brain-drain issue.

Still, most states would benefit from the Oregon model alone, and plenty more could benefit from both programs. Beyond just helping those struggling with debt, this could also help solve some of the issues we face with overcrowded cities and rural abandonment.
 

Solution 3: Address Rising Cost of Higher Education and Lack of Quality Jobs for Those Who Already Have Degrees

Many progressives (and even some Democrats) have argued that college should be free to all Americans. It’s a noble sentiment to be sure, but it ignores the fact that there aren’t enough quality jobs for the people who already have degrees. This was already an issue before the pandemic and has only grown worse since.

It also ignores the skyrocketing cost of higher education over the past twenty years, even as they suggest taxpayers ought to pick up the tab. Both of these issues need to be addressed before such a significant change should even be considered.

The jobs issue is a whole other subject, and one I will be tackling soon. Suffice it to say that the government should absolutely be doing more than it currently is to expand opportunities for all who want a job commiserate with their skills, education and experience.

As for lowering the overall cost of higher education, there is no silver bullet. There are, however, a lot of small fixes which could add up to significant savings taken all together. The following suggestions were drawn directly from a 2010 report by the Center for College Affordability and Productivity, which is so comprehensive (and worth reading) that I am simply listing their suggestions here:

~ Scale back bloated administrative staffs and salaries.
~ Trim bloated athletic programs and associated costs; end the athletic arms’ race.
~ Overhaul the Free Application for Federal Student Aid (FAFSA); reform/streamline/simplify
            entire financial aid process.
~ Reduce or eliminate unnecessary academic research and shift those labor resources to higher
            teaching loads.
~ Cut/consolidate unnecessary/redundant programs within individual institutions.
~ Reduce redundant programs at the state level; have institutions prioritize program offerings.
~ Increase collaborative or centralized purchasing.
~ Improve/streamline facility utilization.
~ Increase number of classes available online.
~ Reduce cost of textbooks; increase utilization of e-books.
~ Digitize academic libraries.
~ Eliminate costly in-house email systems.
~ Expand online course management tools.
~ Ease transfer process between public institutions.
~ Encourage/incentivize timely degree completion.
~ Shift public subsidies from schools to students.

The government could use the accreditation system to craft guidelines which would achieve many of these saving suggestions. This would make publicly subsidized institutions more open and accountable to the taxpaying public, while reorienting the accreditation system to align with its core mission of ensuring that these institutions provide a quality education at a good value.

Universities (and states) would have to adapt, or risk losing critical funding. Further, increasing the amount & type of information being shared with the public could help shift competition between institutions from one that is reputation-based to one that is value-based. This is a much better metric in general, and one which could further drive down costs for both taxpayers and students.
 

Solution 4: Make Direct Payments to ALL Students/Graduates Over Past Twenty-Five Years, Not Just Those Carrying Student Loan Debt

If direct payments are to be made, they should be framed as an adjustment necessitated by rising education costs for all students…all of whom have had to deal with multiple recessions as they entered the labor market.

The rising cost of schools hasn’t only affected those taking out loans, so payments should be made to anyone who has attended a qualifying institution over the past twenty-five years...especially if interest rates are adjusted retroactively as well.

A formula could be crafted based on the number of credits students paid for, whether out-of-pocket or through loans, adjusted on a sliding scale so that more recent attendees earn more than those who attended ten, twenty, or twenty-five years ago.
(Full disclosure: I graduated in 2006 using the G.I. Bill, so would see some benefit from this proposal, though that is not my motivation in suggesting it)

Additional funds could be given to those with student loans, but again framing matters. Make clear that any extra compensation is based on mismanagement (or outright fraud) of the organizations  tasked with servicing student loans (such as Navient, sued in 2017 by the federal government for a variety of offenses), not debt forgiveness.

Direct payments could be administered in the form of a tax credit, with immediate funds being sent to those currently paying student loans. Anyone eligible who doesn’t receive a check immediately could still claim money they are due via their federal tax filing.

Stimulate the economy, yes, but spread the money around to all who have been affected, not just a subset of that group.

Photo by Tim Gouw on Unsplash

Conclusion: Rather than blanket student loan forgiveness, which would risk considerable blowback, while failing to fix any of the underlying conditions which led to the crisis, we should instead begin by adjusting the usurious interest rates being paid on student loans to lower balances and/or issue refunds.

From there, issue direct payments to all former students & graduates over the past twenty-five years, based on a sliding scale. Provide funding for states to implement new financing options for students going forward and/or to reimburse existing loans in ways that benefit local economies.

Finally, use the power of the accreditation system to force schools receiving government subsidies to make changes that would lower the rising cost of education for all students.
 

Some of this could be done via executive order, but other parts will require congressional cooperation, and blanket debt-forgiveness is easily turned into a partisan, ‘Democrats want to give away working people’s money’ narrative that Republicans are so good at using to their advantage. Approaching the problem this way makes that framing far more difficult.

I’ve laid out the carrots Democrats can use to earn Republicans support, but this approach also makes a pretty good stick if it comes to that. In general, Republicans are not interested in helping make the government work better, but if they refuse to adopt a solution that expands vocational training, lowers the cost of college for all, and helps rural states, Democrats should make them wear that choice every opportunity they get.

Messaging isn't Democrats strong suit, but they are going to have to grow a spine and figure out how to hold Republicans accountable for undermining government if this country is ever going to dig itself out of the hole we’ve put ourselves in. If Republicans want to be obstructionist, paint them as anti-job, anti-education zealots who would rather risk another economic calamity than admit that government can actually help the people of this country.

Remaking college debt and increasing people’s access to schooling can either be the solution to the problem or a cudgel to be used against Republican’s attempts to undermine government. The choice would be theirs.


Using the full ‘toolbox’ of options available to us would actually fix a faltering system, not just kick the can down the road. Likewise, focusing aid to all those affected, not just one group in particular, would be far less likely to incite a public backlash that could undo much of the gains achieved.

Will Democrats put down the hammer and use the full toolbox to provide a better outcome for those affected, while also pushing back against the Republican narrative that government can’t solve any of our problems? Probably not willingly, but the electoral threat in 2022 provides a genuine opportunity to force their hand.

Anyone who wants to see student loan debt fixed in a meaningful, long-term manner needs to make clear to Democrats that if they don't act accordingly, we'll start voting them out in favor of politicians who will.

​They hear plenty from lobbyists defending the status quo . Its' high time they heard from those of us bearing the brunt of that broken system as well.