Federal student loan forgiveness might be needed, but how about fixing the underlying problem?
We need a comprehensive solution to the $ 1.5 trillion student debt problem, not a cancellation rush that is both unfair and places a huge burden on taxpayers.
A comprehensive solution must address:
- The fact that the cost of a college education has risen much faster than wages have risen
- The need for better information on what options borrowers have today and what more might be needed
- The fact that the choices made by the student borrower often increase the cost of their studies
- How to make any forgiveness fair
The high cost for students
There is no doubt that the cost of higher education has skyrocketed over the past 30 years. The amount of student debt has swelled to over $ 1 trillion and continues to grow. The Consumer Price Index (CPI) for college costs, including books, tuition, and living expenses, has increased much faster than the CPI for all items.
From January 2006 to July 2016, the consumer price index for tuition and college fees increased 63%, compared to an increase of 21% for all items. During this period, consumer prices for college textbooks increased 88 percent and school accommodation (non-boarding) increased 51 percent.
For decades, the costs of higher education have increased in all sectors, including public, private and proprietary. Due to the increase in tuition, books and living expenses, federal student loan limits have also increased over time.
In the graph below, additional staff is the main reason for the increase in costs. The question is whether today’s institutions are cost-effective sources of quality education, or have they become over-staffed or other initiatives that needlessly increase costs?
If the government is expected to pay for higher education, no pardon should be granted until the cost of higher education at the college and university level has been addressed. Either the fees charged are related to the CPI, or the colleges and universities should help fund any write-offs. The total burden should not be on taxpayers. Also, if we write off today’s debt, what will happen to tomorrow’s debt? What is preventing the same billion dollars and more debt from rising again?
A few points on current student debt
Let’s talk about the impact of student debt on borrowers. For years, student payments were based on how much they borrowed. For example, a monthly loan payment of $ 50,000 would be higher than a loan payment of $ 10,000. During the Obama administration, the repayment rules changed so that borrowers pay based on their income, not what they owe. This meant that if their incomes were the same, borrowers’ payments of $ 50,000 and $ 10,000 would be the same. Even for low-income borrowers, the payment amounts are adjusted and in some cases the payments are extremely low. Why have income-based payments failed to facilitate a reasonable or fair method of determining monthly payments?
All student borrowers are considered adults by the age of 18 and many of them decide where they want to live or attend school without giving sufficient consideration to the debt burden they would accumulate, nor the potential income of the course of study they choose. The current problem of student debt is largely the responsibility of the student and the choices they make. Are we considering absorbing 100% of the burden of a student debt of $ 50,000 when the borrower could have attended a cheaper establishment?
There has been no discussion of how the individual circumstances of borrowers and their financial decisions affect debt. Borrowers who are now in the workforce make financial and personal decisions that affect where they live, their income and their ability to pay. We also know that the cost of living is very different across the country. Do we take any of these factors into account when calculating forgiveness?
Fairness in the forgiveness discussion
Currently, the focus for forgiveness is limited to those with current federal loans and based on current income levels. However, in general, income tends to increase over time as an individual progresses in their career. Should we cancel loans today for a borrower who is only a few years old after graduation? What if their growing income could support their ability to repay loans in the future, especially if they are 10 years or more away from their maximum income potential?
What about borrowers who have paid off their loans in whole or in part over the past 5-10 years often living sparingly to pay off as promised? Should we give them tax credits or other means of recognizing their positive actions?
Student loan administrators go to great lengths to send mail and phone calls to try to prevent borrowers from defaulting on their loans. Many borrowers do not respond and call for help. This situation is made worse by the political commentaries on student debt forgiveness. Why would a borrower repay if they think the debt will be canceled?
There are borrowers who are struggling and need help. Current regulations are in place to provide assistance. For the few who have truly exhausted all avenues, by all means, let’s help them. If necessary, legislation can be developed for these specific circumstances.
We need a comprehensive solution that addresses the root cause of our current situation. And, in fact, we have a suitable vehicle to adopt such a solution; the re-authorization of the higher education law of 1965 as amended. The law is reauthorized approximately every seven years, and legislative proposals for this process began with the last Congress. Some believe it could be completed this year. Here are some suggestions that could be adopted when re-authorizing:
- Hold higher education institutions accountable for the high cost of education by first requiring a reduction in costs for current students and to participate financially in any debt relief.
- Review the protections currently in place for borrowers who are working but have low income or are in financial difficulty.
- Evaluate the monthly payments available under applicable law to determine if they are truly unaffordable.
- Establish an expanded write-off process where the borrower presents a multi-year low income model rather than a blanket write-off based solely on current income.
- Immediately lower the interest rates on all federal student debt, comparable to current mortgage rates.
- Consider an incentive program where borrowers who proactively try to repay are rewarded with debt reduction. For example, give borrowers a loan of two or three dollars in repayment for every dollar the borrower voluntarily pays.
- Consider a remission tax credit for those who have already paid rather than rewarding only those who currently have unpaid debt.