Introduction: This post is a quick list of fiscally prudent policies that could alleviate problems associated with increased college cost and student debt.
The proposals presented here involve two approaches to the problem. The first approach (proposals one and two) entail policies ideally designed to decrease student debt totals or at least control the growing use of debt. The second approach entails policies (proposals two through seven) designed to assist overextended student borrowers.
All policies presented here are designed to be fiscally prudent and to balance benefits and costs of taxpayers with student borrowers. The proposals for additional assistance to students are a fraction of the cost of proposals for free or debt-free attendance at public universities offered in the 2016 Presidential campaign. The new proposals to assist overextended student borrowers are more effective and less burdensome to tax payers than current debt-relief policies.
I have also worked on ideas on how to lower college costs by improving on-time graduation rates and lower the number of people who fail to complete college. These ideas will be presented in a separate memo.
People who are interested in learning more about this topic should go to my student debt book at Amazon and Kindle.
Proposal One: Increased Financial Assistance for First-Year Students: The primary goal of this proposal is the elimination or substantial reduction in loans taken out by first-year students. Each state would create and administer a tuition assistance fund. Money in the fund would come from three sources – the federal government, the state government and private donors. The rules governing disbursement of the additional assistance would be determined by each state.
First-year students generally do not have a credit history and do not have a post-secondary academic record. Many first-year students who fail to finish their degree have low incomes and substantial difficulty repaying their loans. As a result, targeting assistance towards first-year students is more progressive than additional assistance spread over all students.
Increased financial assistance to the highly vulnerable first-year student population will result in a larger reduction in default rates than increased assistance to the general population of students.
Debt reduction targeted towards first-year students is an effective way to reduce interest accrued on student debt.
States and schools would be allowed significant latitude in designing benefits for different populations of students; although, the reduction in first-year student loan default and delinquency rates would remain an important objective of the program.
This proposal is substantially less expensive than free-college or debt-free college discussed during the 2016 Presidential campaign. The program is not an entitlement. The cost of the program would not exceed allocated funds.
Proposal Two: Allocate around $100 million to a pilot program that will fund internships at start-up tech incubators.
Advantages: Many people are taking unpaid internships to gain workforce skills. This option either adds to debt or is unaffordable for low-income students.
This program provides funds to startups with relatively little cash who might not otherwise be able to hire talent.
Only actively enrolled students seeking a degree are eligible for these positions. The program does not take away jobs from people who are currently in the workforce.
The size of the program and the number of firms and students served is determined by funds available. First come first served.
Proposal Three: Interest rate reductions for older student debt balances: Set the interest rate on guaranteed student loans to 1.0 percent after 15 years of active payments including negatively amortized payments.
Advantages: Under current law some debt forgiveness can be obtained for people who enroll in the income contingent loan programs. The automatic interest rate reduction after 15 years is easier to administer and fairer than programs offering loan forgiveness.
The interest rate reduction occurs automatically 15 years after loan repayment begins.
Interest rate reduction could not be blocked by loan servicers who currently often block annual re-enrollment in income contingent loan programs.
Loan servicers frequently fail to properly administer debt relief claims under loan forgiveness programs.
Under this program, all borrowers with outstanding student debt after 15 years will receive a lower interest rate.
This program does not provide loan forgiveness. People who take out a 10-year student loan and pay on time will pay less than people who take out a longer maturity loan that leads to the interest rate reduction.
Under income contingent loan programs some people can increase the amount they borrow without increasing their lifetime repayment amount. By contrast, under this proposal even with the interest rate reduction starting at year 15 total loan payments are larger for people who borrow more.
Proposal Four: Reduce the link between interest rates on government guaranteed student debt and market interest rates:
Rules would be changed to create an interest rate floor 4 percent and cap 6 percent regardless of the 10-year interest rate.
Note on current law: Current law links the interest rate on student debt to the 10-year government bond rate.
Advantages: High interest rates on student debt was a pressing problem in the 1980s and 1990s. A return to high interest rates would be much worse today because education costs, the proportion of students taking out debt and the amount of student debt per borrower have all gone up.
Failure to alter the link between market interest rates and student loan rates could reduce access to education or increase costs for an entire cohort of students.
This is a potentially pressing problem now that the Federal Reserve has begun raising interest rates.
Proposal Five: Change rules governing PLUS loans to parents: Limit parent guarantor obligations on Parent Plus Loans and Private Student Debt to Five Years after initial payment. The student borrower would be exclusively responsible for the loan at the end of the five-year period.
Advantages: Currently parents on a PLUS loan are responsible for the loan until they die. Many of the parents who cosign PLUS loans for their children have low income. In 2012, an estimated 6.2 percent of parents of dependent undergraduate students with income in the bottom quartile had taken out a PLUS loan. More alarming, in 2012 over 11 percent of graduate students with parent + student income in the bottom quartile had taken out a PLUS loans.
Many of the parents with PLUS loans are nearing retirement. Limiting their responsibility would reduce the number of older Americans with unpaid student debt.
There appears to be some bipartisan support for changes in laws that would provide some debt relief to parents who sign PLUS loans. Under current law, parents who take out PLUS loans can only have the loan discharged if they become disable or if their child dies. Under current rules, parents with PLUS loans with children borrowers who become disabled and cannot have their loan discharged. A bipartisan bill in Congress seeks to allow discharges of PLUS loans for parents of students who become disabled.
Proposal Six: Reconsider treatment of student debt in bankruptcy including rules governing priority in chapter 13 bankruptcy and discharging of private student loans in both chapter 7 and chapter 13.
The general goal is to assure that student debtors who enter chapter 13 bankruptcy leave bankruptcy after seven years with a substantial reduction in the amount of student debt they owe.
Advantages: Many student borrowers who currently enter chapter 13 bankruptcy will exit bankruptcy without substantially reducing their student debt obligations.
This change will increase student debt payments for people in chapter 13 bankruptcy by allowing for reductions in payments on credit card debt and other consumer loans. Total payments in Chapter 13 bankruptcy would remain unchanged but taxpayers would receive more payment and other unsecured creditors less payment.
This change would reduce the number of occasions where a student borrower dies prior to repaying his or her entire student loan. This represent a direct gain to taxpayers because student debt, like other consumer loans, is forgiven when the borrower dies.
The new rule could be applied to both publicly guaranteed debt and private student loans. The 2005 bankruptcy law made it difficult to discharge student debt in bankruptcy. A return to the pre-2005 bankruptcy rules by allowing for the discharge of private student loans would allow student borrowers to accelerate payments on government guaranteed student debt. This change would also benefit taxpayers.
Proposal Seven: Revise Public Service Loan Programs: New program will provide up to $40,000 in loan forgiveness after four years in a public service job. Current law provides more loan relief after ten year.
The budget offered by the Trump Administration proposes to eliminate the public service loan program starting in 2019. It is not clear how this proposal or any which passes Congress will affect people who are currently applying for assistance through the public service loan program.
The new law by providing limiting loan relief to $40,000 allocates more relief to people with modest debts and modest incomes, rather than relatively high-income professionals.
The shorter period for debt relief allows people to move to a more productive opportunity and reduces job lock.
Concluding Remarks: The progressive wing of the Democratic party want free college and debt forgiveness programs. The Trump Administration is advocating weakened consumer protections, changes to income contingent loan programs, elimination of subsidized student loans and the elimination of the public service loan program.
This centrist approach, presented here, differs sharply from both the policies offered by the progressive wing of the Democratic party and by the Trump Administration.