In a recent episode of Madam Secretary, the daughter of the Secretary quits her volunteer position on a Congressional campaign because her candidate did not have a bullet point on forgiving student debt. The candidate explains to her that debt forgiveness is too controversial because it takes money from workers and taxpayers and give money to students. The Secretary lectures the daughter and persuades her to vote despite her problems with this candidate on this one issue.
This episode relives one of the flash points of the 2016 Clinton/Sanders contest. Bernie Sanders supported an expensive and unrealistic free college program. This idea was first scorned and then matched by Clinton. Clinton continued to struggle with the issue by coming up with ideas like let’s forgive debt for employees at start-up firms an idea that was laughed at by virtually everyone who has studied the student debt problem.
Student debt is a growing problem much larger for the current cohort than for previous generations.
- The percent of graduate with student debt went from 50 in 1989/1990 to near 70 today.
- The percent of borrowers leaving school with more than $50,000 in debt went from 2 percent to 17 percent over same period.
- The number of Americans over age 65 with student debt increased by a factor of 4 between 2005 and 2015.
High student debt levels have long term financial consequences. People with high student debt levels often either delay savings for retirement or delay loan repayments. Often student debtors also delay marriage, forego having children and choose to rent rather than purchase a home.
Trump Administration proposals will worsen student debt problems. The Trump Administration is proposing to eliminate subsidized student loans, a change that will increase debt costs and cause many to forego college. The Trump Administration has rejected loan forgiveness applications under the public service loan programs and their actions will weaken the Income Based Replacement loan program. The Trump team does not support of enforce rules protecting students from fraud.
Student debt like health care should be a big wining issue for Democrats. Unfortunately, Democrats are divided between keeping the status quo and giving free college to everyone.
Doing nothing should not be an option. Part of the solution involves increased financial assistance to students, especially for first-year students.
Many students leave college after their first year because of academic performance. Problems associated with first year students who fail to continue their education could be substantially reduced in a cost-effective way by expanding assistance to first-year students.
Part of the solution involves policies and programs which improve on-time and early graduation rates.
Many students either fail to graduate or take more than the allotted time to complete their program. These students tend to take on more debt and are more likely to incur payment problems.
Realistically, improvements in and expansion of debt forgiveness programs must be part of the solution because many borrowers become hopelessly overextended. Some Democrats are currently focused on expanding the Income Based Replacement loan program. Loan servicers regularly ignore the IBR options and debt forgiveness programs centered on the IBR program are likely to fail.
There are other more cost-effective ways to assist overextended borrowers.
Granting priority to student debt over consumer loans in Chapter 13 bankruptcy: Currently, many applicants for Chapter 13 bankruptcy reduce student loan payments to repay credit cards and other consumer loans. Often the student borrower leaves bankruptcy with an increased student debt balance. The quicker repayment of student loans in bankruptcy benefits both taxpayers and student debtors.
The elimination of the link between market interest rates and interest rates on federally guaranteed student loans. Under current rules student debt interest rates are tied to market interest rates. This policy automatically increases costs for an entire cohort should Treasury rates rise. This is a timely problem given recent Fed statements and moves.
Modification of the standard contract on student loans to allow for interest-only payments rather than forbearances and to allow for reduction or even elimination of interest rates after 15 years of payments: The IBR program allows some people to borrow more without increasing the amount they repay. By contrast, under the proposed interest elimination plan, people who borrow more repay more. This program has better incentives and is less expensive to the taxpayer than the IBR program.
Restricting parental guarantee obligations on PLUS loans and cosigned private student loans to 5 years from repayment date: Many of the most severe financial problems associated with student debt involve PLUS loans guaranteed by parents. This change would reduce these problems.
Removal of the prohibition against the discharge of high-interest private student loans in bankruptcy: This proposal returns us to rules that existed prior to the enactment of the 2004 bankruptcy law. The discharge of private student debt in bankruptcy could accelerate payment on government guaranteed debt and assist taxpayers.
Creation of a modified public service loan program, which will allow for partial loan forgiveness after 2 to 5 years rather than 10 years of public service: The current program creates job lock by forcing applicants to wait at least 10 years for loan forgiveness. The shorter period for partial loan relief for the new program reduces job lock. This program will be less expensive and have lower administrative costs than the current program.
Issues like student debt and health insurance are core issues to Democratic voters, which should drive voters to the polls. However, there are huge differences in the way the Sanders wing and the Clinton wing approach the problem. The Sanders proposals would cause either a fiscal crisis or unsustainable tax increases combined with stagnation. The Clinton wing is proposing a band aid for the sake of appearances.
I understand why the screen writers of the show on Madam Secretary are frustrated at the Sander’s supporters who chose to stay home in 2016 rather than vote for an imperfect candidate who is a thousand times better than Trump. However, Democratic candidates must have a comprehensive vision and set of policies on student debt. College costs and debt are an existential problem for current students and recent grads. The cost of college will deter many from getting necessary education. The debt incurred will have long term often crippling impacts on household finances and even happiness.
There are common sense centrist solutions to this problem that increase access to education, reduce costs for overextended students and are fair to workers and taxpayers.
The failure of the Democrats to address student debt issues is sort of like a football team deciding to punt on first down. This is not an effective way to either win the game or excite your fan base.
Authors Note:
David Bernstein is the author of Innovative Solutions to the College Debt Problem. Get his book on Amazon or on Kindle.
https://www.amazon.com/Innovative-Solutions-College-Debt-Problem/dp/1982999446
David has also written on health care and the ACA.
Go here for a Centrist Health Plan:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3263159
I would love to work for a centrist Democrat in 2020. Contact me at Bernstein.book1958@gmail.com or on my cell 202 413 5492.