The case for a third party in the House of Representatives

Could the problem-solving caucus select a speaker and going forward do we need a third party determining control of the House?

The House of Representatives is dysfunctional for a variety of reasons

The speaker’s chair has been vacated because of a few MAGA Republicans.

Democrats are more interested in positioning themselves for control in 2024 than restoring stability to Congress, a strategy they may soon regret.

The shoe would be on the other foot in a future congress if “progressive” Democrats that literally support Hamas blackmail a future Democratic speaker. 

The shoe would also be on the other foot if a Republican House refused to confirm a vice president the way Ford and Rockefeller were confirmed by a Democrat controlled House.  (This would be a great screenplay, especially if the House did not have a speaker that could schedule a vote.)

At this time moderates of both parties need to put the interests of the nation over the interest of their party and elect a speaker to get the House of Representatives working again. The fact that in the past the speaker was elected entirely by the majority does not relieve the Democrats of their obligation to do what is best for the country now.

Chaos is not the only manifestation of Congressional dysfunction.  Legislation passes through Congress on a party-line or near party-line basis with very little input from individual Congressman.  The desire to spend and not tax has led to an acceleration of the government deficit, even though economic growth remains fairly robust.

This situation must be extremely frustrating for the majority of representatives who are concerned about Ukraine and Israel, support environmental incentives but view newly enacted subsidies as a tad excessive, want to go further with health care reform, and address the Social Security Solvency problem sooner rather than later.

The dysfunction in the House could be fixed two ways.  The first solution involves strengthening the bipartisan problem-solving caucus.  The second involves the creation of a third party focusing on House and Senate elections. 

The problem-solving caucus is a group of over 60 relatively centrist House members from both parties who attempt to reach common ground. 

A decision by a united problem solvers caucus to support a single candidate for the speaker and to persuade members of Congress who are not members of the caucus to support the middle-of the road speaker could resolve the current impasse, prevent similar situations, and facilitate better legislation.

The total number of votes obtained by the candidate with two lines on the ballot (either Democrat and problem solver or Republican and problem solver) is the sum of votes from both lines on the ballot.

The problem-solver party could nominate a Democrat, Republican or a third candidate. 

A person with Republican leanings would never vote for the Democrat but could vote the Democratic candidate on the problem-solving line of the ballot.

Alternatively, a person with Democrat leanings would likely not vote for the Republican but could vote for a moderate Republican on the problem-solving line.

The existence of a third party option for the House or Senate in a deep blue or red area would create a viable option that could win if the dominant party goes too extreme.  A viable moderate option unencumbered by a national party, which appears extreme to local voters, could encourage the dominant party to move towards the center.

In many rural Congressional districts and states the candidacy of the Democrat is the fool’s errand.    Consider Texas.

  • The Democrats have not won a state-wide election in Texas since the 1990s.
  • The Republicans currently control 24 of 38 House seats in Texas.
  • In all but three of the Republican controlled House seats in Texas the victor had more than 60 percent of the vote.

Perhaps in Texas the Democrats should disband and make room for the problem-solvers caucus.

In many districts and states the election outcome is determined by the outcome of the contest for the Republican nomination.  The winner is often a MAGA republican.  The people in the rad area are not pure MAGA as demonstrated by their votes against abortion bans and for Medicaid expansion. But the Democrat candidate loses, in state, Senate and House races, because the left wing of the party is toxic on issues like war and peace and immigration.  

The third party movements could also be viable in deep blue areas with extreme “progressive” Democrats Ilhan Omar just barely won the Democratic nomination in 2022 and could be beaten if Democrats against Omar and Republicans unite under the problem-solvers label.

Most discussion of third parties revolves around the Presidential election.  The creation of a third party for presidential elections is a narcissistic fool’s-errand exercise.  However, a third-party, even if it only gets 10 or 20 seats could hold the balance of power in the House.  

More immediately, a unified problem-solvers caucus could end current chaos.

Authors Note:  Insightful Memos more typically addresses financial and economic issues like Medicare,student debt, and interest rates.   Please subscribe for essays on economics, finance, and politics.  

Authors Note:  David Bernstein is an economist who writes on economics, finance, and politics.  A longer paper on health care reform can be found at Kindle.   A recent empirical paper on student debt and household finances can be found at SSRN.  Recent posts at Finance Memos include questions and answers on Income Driven Replacement loans and an assessment of Medicare Advantage plans.

The Case Against Medicare Advantage

Medicare Advantage plans have significant restrictions on provider choice and a capricious pre-approval process.

It is once again open season for selection of a Medicare plan and the airwaves are insulated with advertisement urging people to select Medicare Advantage over traditional Medicare.  The advertisement campaigns for Medicare Advantage are as ubiquitous and as misleading as the advertisements for a political candidate in the closing days of a campaign.

Some Medicare Advantage plans provide good comprehensive health insurance, but some plans are inadequate and the selection of Medicare advantage over traditional Medicare always creates substantial limitations in health care choices and financial risk.

A recent Wall Street Journal article describes the potential catastrophic impacts of the choice of Medicare Advantage on people who choose Medicare Advantage over traditional fee-for-service Medicare.  One applicant enrolled in a Medicare Advantage plan found he could not obtain adequate treatment after being diagnosed with prostate cancer and was unable to both switch to a combination of traditional Medicare and Medigap because the best time to purchase a Medigap policy is immediately upon turning 65.

Several government studies, academic papers, and news reports show many Medicare Advantage plans provide limited access to doctors and hospitals.

  • This article discusses Vanderbilt Health dropping some Medicare advantage plans in Tennessee. 
  • This article discusses the exclusion of some Medicare Advantage plans by a health system in Oregon.
  • Research summarized here found that Medicare Advantage enrollees in rural areas of California had difficulty obtaining access to specialists. 

Another difference between Medicare Advantage and traditional Medicare is that Medicare Advantage plans often require prior authorization for treatments or even to see a specialist while Medicare does not.

A recent survey conducted by the American Medical Association (AMA) found that 94 percent of doctors found prior authorizations delay care, 80 percent of respondents found that prior authorization could lead to patients abandoning a prescribed course of treatment, and one third of doctors stated that prior authorizations led to an adverse medical outcome.

A report by the office of the inspector general from the Department of Health and Human Services found that 13 percent of denials of denials of prior authorization requests by Medicare Advantage plans would have been automatically approved under standard Medicare guidelines. The auditor found in some cases a claim of inadequate documentation by the Medicare Advantage plan was incorrect.  Medicare Advantage plans appear to be routinely denying requests for services that the provider deems medically necessary.

Many individuals choose Medicare Advantage plans over traditional Medicare plans to lower premiums and obtain extra benefits.  The Biden Administration is finalizing rules  targeting misleading advertisements for Medicare Advantage plans. 

However, misleading advertisements are not the major problem in this industry.  Honest Medicare Advantage advertisement lacks information about the risks inherent to narrow-network health insurance which restricts access to specialists and hospitals and denies requests for medically necessary procedures.  

There is considerable support for Medicare Advantage on both side of the political aisle because these plans lower costs to taxpayers and enrollees.  Donald Trump signed an executive order expanding Medicare Advantage plan.  Medicare Advantage plans were a central feature of the health care reform plan offered by Vice President Harris when she was a candidate for president.

Go here for a better way to balance the need to control costs and provide comprehensive quality health insurance coverage.

Many doctors warn their patients about the risk associated with Medicare Advantage plans but the warnings are drowned out by a barrage of advertisements. 

People are making their choice of Medicare plan based on advice from commercials and salespeople rather than health professionals capable of weighing relative risks.  Perhaps the best advice on the question of whether one should select a Medicare Advantage plan would be the same advice given by Nancy Reagan to teenagers considering drugs — “Just Say No.” 

Authors Note:  The author of this newsletter has examined several financial topics including student debt,  interest rates, the use of 529 plans to fund a Roth IRA, and the need for people near retirement to prioritize elimination of the mortgage.  Please subscribe to Insightful Memos.

An Interest Rate Forecast & Investment Advice

Even if the Fed pauses interest rates, especially the 10-year Treasury rate, will continue to rise. Focus on fixed-income investors should be on ladders with max maturity of two years.

Introduction:

Many analysts quoted in the popular press believe that interest rates have peaked, inflation is receding, the fed has tightened too far, and a recession is likely.

  • A July 7, 2022, a CNBC article suggested there was a high likelihood of a recession because of the inverted yield curve  (The 2-year T-bill rate was 4.9 percent and the 10-year rate was 3.9 percent at the time.)   
  • An October 6, 2023, Reuters article stated that a bear steepening of the U.S yield curve dashes ‘soft landing’ hopes.  (The 2-year interest rate is 5.1 and the 10-year rate is 4.7 at the time of the Reuters article.)
  • Analysts, in this CNBC article  anticipate Fed cutting interest rates and inflation receding in 2024.

The analysis presented here confirms that considerable increases in interest rates off their lows has occurred.  However, interest rates are by no means high compared to to historic figures. Moreover, the 10-year Treasury bond rate remains low relative to other interest rates and will continue to rise under the most realistic economic scenarios.

Some observations about interest rates:

Until recently, interest rates have been abnormally low and additional tightening while not immediately necessary could occur.

  • The median Fed Funds rate between 2011 and 2023 of 0.16 percent was far lower than the median Fed Funds rate of 5.50 between 1976 and 2010.
  • The current Fed Funds rate of 5.33 is close to the median Fed funds rate from the 1976 to 2010 period.
  • The Fed could go further if inflation accelerates.  The Fed funds rate went as high as 19 percent in 1981.

While Fed policy impacts interest rates, market forces also matter.  There is substantial disparity in recent movements of different rates.  In particular, the 10-year Treasury rate appears abnormally low compared to the Federal Funds rates and rates determined by the market.

  • The current two-year Treasury rate slightly above 5.0 percent is pretty close to the average two-year interest rate over the 1976 to 2023 period.
  • The current 30-year fixed rate mortgage of 7.89 percent is 21 basis points higher than the average over the 1976 to 2023 period.
  • The current 10-year Treasury interest rate of 4.71 percent is 118 basis points below the average over the 1976 to 2023 period.
  • The current differential between the 30-year fixed rate mortgage and the 10-year Treasury bond is 318 basis points.  By contrast, the average differential between 1976 and 2023 is 179 basis points.

Discussion:  The recent bear curve steepening is not over.  I expect the 10-year Treasury bond rate will continue to rise until it is in line with Fed policy and rates on other assets in the market.

My most likely economic scenario assumes the Fed will pause but not cut rates and that inflation will remain near its current levels.  The following recommendations are based on this outlook.

  • Continue to eschew the purchase of long-term bonds and bond funds without a fixed maturity date.
  • Focus most fixed-income assets in a bond/CD ladder with a maximum maturity of two years.
  • Allocate a small portion of the fixed-income portion of the portfolio to agency debt with a maturity of five years.
  • Continue purchasing Series I Savings bonds.

This strategy is premised on the view that inflation remains stable near current rates and the 

Fed pauses rate increases.  This scenario is more likely than additional Fed tightening, a soft landing and a hard landing into an immediate recession.

My next macroeconomic post will be on the likely of higher wage-push inflation and its impact on the economic outlook.  

Authors Note:  The author, an economist, is planning to publish and market a quarterly economic outlook.  He is available for economic and financial consulting projects.   His recent paper on the impact of student debt and additional education on household finances can be found here.  Also, please considering the kindle paper, A 2024 Health Care Reform Proposal.

Questions and Answers on IDR loans and the SAVE program

This post addresses some general issues on IDR loan payments and some specific issues raised by the Biden Administrations reform efforts.

What determines the choice between an IDR student loan and a traditional student loan?

An IDR loan is the most viable way to prevent default tor many people leaving college with substantial student debt and a relatively modest starting salary. However, many people who initially enroll in an IDR program because it is the only viable option will end up paying substantially more over the lifetime of the loan than under a standard student loan contract.

  • A student borrower leaving college with $25,000 in student debt at a 5.0 percent interest rate would pay $3,182 per year on their student loan.  Total loan payments on an IDR loan that charges 10 percent of disposable income would come to $1,813.

The payment differential between the conventional and IDR loan will change with changes in income and marital status.

Increases in salary increase IDR loan payments which can cause the borrower to shift to a conventional loan.  The decision to convert the IDR loan to a conventional loan ends the possibility of a partial loan discharge.  (It would usually be very foolish for a person to turn down a nice raise at work to remain eligible for a loan discharge).

Increases in household income after marriage will often increase IDR payments and can induce the borrower to shift from IDR loans to conventional loans.  A married IDR borrower can reduce the increase in the student debt payment by filing a separate return but a decision to file separate returns will often result in a substantial increase in tax obligations which, as discussed below, offsets any savings on student loan payments.

When should married couple with an IDR loan file a separate return instead of a joint return?

A married couple where one or both spouses have an IDR loan could reduce their combined student loan payments by choosing filing status married filing separately, but it is highly likely this choice will substantially increase their tax obligations. 

Articles on whether a married couple should file a joint return, or a separate return generally focus steps a taxpayer must take to insulate themselves from their spouses tax liability and the loss of tax deductions and credits.

A larger impact of the decision to choose the file married separately returns stems from a shift in tax deductions towards the spouse with lower income.

  • A married couple making $120,000 filing a joint return taking the standard deduction of $27,700 will pay federal tax of $10,921.    The additional loss of the tax deduction for student loan interest would reduce the couple’s tax obligation to around to $10,371.
  • The same married couple where one spouse makes $40,000 and the other spouse makes $80,000 where each spouse takes the standard deduction of $13,950 will pay a combined household tax of $12,787.

The decision to file separate returns instead of joint returns will for this couple result in an increased tax obligation of $2.408.  The increase in tax obligations may exceed the reduction in student loan payments from the IDR option.

Many newly married student borrowers will immediately switch from an IDR loan to a conventional because of this tradeoff.

What is the potential income of divorce on successfully paying off a student loan under IDR programs.

IDR relief may not be available for a person who switches from an IDR plan to a conventional plan upon marriage and then gets divorced and wants to reenter an IDR program.  A current Biden Administration effortto update and modify IDR loan records, described below, includes a provision that allows for payment credits on IDR loans for payments made under multiple plans.  But this one-time fix may not be available in the future.

Changes in student loan payment obligations caused by changes in income or marital status make IDR loans a risky way to provide student loan debt relief.  The more effective option outlined here involves selective elimination of interest charges at the beginning of a career and upon the maturity of the loan.

Why are so few people getting IDR loans discharged?

Even after accounting for conversions from IDR to conventional loan programs due to changes in income and marital status relatively few student borrowers are obtaining timely debt discharges from IDR loans.  A GAO report found that as of June 1, 2021, only 157 IDR loans had been approved for forgiveness even though another 7,700 loans were potentially eligible for forgiveness.

Both borrower and loan servicer errors result in inaccurate reporting of student loan payments and annual recertifications as documented in this  CFPB report.  One reason why it is difficult to track payment errors is that in some years or months the required payment on the IDR loan is zero, an amount that is indistinguishable from the amount received if the person failed to make a payment on time. 

A failure to annually recertify income and household size can result in loss of IDR payment status.  This document  indicates that applicants under the SAVE program who fail to recertify will be ineligible for a loan discharge while applicants on the PAYE, IBR or ICR plan can remain in the IDR plans, but their payment will be based on the 10-year standard repayment plan.

What can be done to increase on-time IDR discharges?  What are the limits of efforts to improve the administration of IDR loan programs?

There have been several attempts to facilitate IDR discharges by reviewing, modifying, and updating student loan payment records.  Congress passed legislation in 2019 to help facilitate IDR loan discharges.   The Biden Administration announced an IDR review effort in April 2022. The current Biden Administration effort to update and modify IDR loan records adjusts payment counts for forbearances, deferments and payments made under other payment plans.

The Biden Administration has been fairly aggressive about helping IDR loan applicants obtain a loan discharge. Future Administrations may not place a high priority on facilitating student loan discharges, hence IDR loans unlike other loans are impacted by a form of political risk.

Despite these ad-hoc payment count adjustment efforts the number of IDR discharges remains low, and many discharges occur later than stipulated under the contract.  Again, the better solutions outlined here involves selective elimination of interest charges at the beginning of a career and upon the maturity of the loan.

What are the major changes to the IDR program under the Biden Administration’s SAVE program?  

The major changes announced under the SAVE program listed here include:

  • Increase protected income for loan payments from 150 percent of the federal poverty line (FPL) to 225 percent FPL.
  • No interest charge when the IDR payment is lower than interest due.
  • Allows married borrowers to exclude spouse’s income when filing separately.
  • Disallows existence of spouse in household size calculation when filing married separately.
  • Starting in 2024, cuts payment rate on SAVE loans to 10 percent to 5 percent of disposable income.
  • Links number of years needed to obtain a loan discharge to initial size of the loan balance. Students with loan balances below $12,000 are eligible for a loan discharge at 10 years.  Each additional amount borrowed of $1,000 results in one additional year for eligibility of a discharge up to 20 or 25 years.

Does the SAVE program prevent loan balances from increasing overtime?

The SAVE feature prohibiting interest charges when the SAVE payment is less than the interest charge will prevent an increase in the student loan payment when the borrower makes payments on time.  However, student loan balances could increase if the borrower fails to make payments or if the borrower pauses student loan payments to go back to school.  

Does the SAVE program create an incentive for people with less than $12,000 in debt from going back to school and pursing more education.

The SAVE rules appear to create a disincentive for more education by recipients of a two-year degree with less than $12,000 in student debt.  

The person with up to $12,000 in debt who chooses to stop further education will have the remaining balance on the initial $12,000 in debt forgiven after 10 years, as long as the person makes the payment on the SAVE loan.

The person who goes back to school and formally pauses student debt payments will likely have around $30,000 in total debt upon completion of a bachelor’s degree and no chance for a loan discharge for another 20 years.

It may be possible for a student to maintain payments on the original IDR loan while in school and get a partial discharge of debt after 10 years.  The rules appear ambiguous on this point.  This is a question for the Department of Education.

How does the SAVE option impact student debt payments for a typical Bachelor’s degree recipient? 

The typical bachelor’s degree recipient will end school with around $30,000 in student loans and start her career at a relatively low salary.   The initial payment on the loan, currently 10 percent of adjusted gross income over 225 percent of the federal poverty line, is relatively small and is unlikely to initially cover the interest on the loan.  

The SAVE loan borrower essentially has a zero-interest loan with an unchanged $30,000 balance until the borrower’s salary rises to the point that her payment (defined as 10 percent of the difference between AGI and 225 percent of the FPL) falls below interest charges.

A person who maintains a low-salary and low household income will make modest student loan payments for twenty years and have the loan forgiven assuming the loan payments were correctly reported by the loan servicer.

A student borrower who obtains a higher salary or household income would have to make higher loan payments.  The SAVE loan does not limit the monthly payment on the loan when AGI rises.   Other programs like PAYE and IBR cap the monthly payment at the payment for a 10-year standard loan, but these programs would allow the loan balance to increase if the loan payment did not cover interest costs.  

Dave Ramsey has noted that many IDR borrowers could pay more on their student loan than the borrower with a standard 10-year loan both because payments could persist for 20 to 25 years and could rise substantially with income.

Is debt forgiven under IDR programs taxable?

The American Rescue Plan exempted dischargeable student debt from federal tax for debt discharged prior to December 2025.  However, some states treat dischargeable student loans as taxable income.

Authors Note:  A newly published SSRN paper examines the impact of both additional education and additional student debt on the ability of households to make a $400 emergency payment.

Six factors impacting the 2024 election

This post examines six factors impacting the 2024 elections — (1) a rightward tilt in the electoral map, (2) an increase in the number of swing states, (3) candidate quality, (4) abortion, (5) racial issues, and (6) economic discontent. Notably absent from the list are many of the economic, financial, and environmental issues and proposals that I care about.

Below is a list of factors impacting the 2024 election.

Factor One:  A rightward tilt in the electoral map 

Three states that Obama won twice, Iowa Ohio, and Florida are now solid red.  

The Democrats have basically pulled out of Iowa.  Both Biden and Harris are unpopular in the state.    The Democrats went from owning 3 of 4 of the Congressional seats in 2018 to having 0 of 4 in 2022, and are now having trouble finding candidates.  The governorship and both Senate seats are now owned by Republicans.  Their performance in the 2022 governor’s race was especially bad.

Ohio is usually close but has gone from extremely close in 2000 and 2002 to more comfortably Republican in recent years. A Trump-backed Senate candidate won an open seat in 2022. A popular Democratic Senator is up for re-election in 2024 in a tough battleground that leans Republican 

Florida the deciding state in 2000 is now very Red as evidence by the victory of DeSantis, Rubio and House Republicans in 2022.  Democrats need to concentrate on the House in Florida to become relevant. 

Factor Two:  A large number of potential swing states 

There were an incredible number of close statewide races in 2020.  While Democrats look strong in Michigan and Pennsylvania, the Republicans have a lot of paths to victory.

Margins in Wisconsin, Georgia, Nevada, and Arizona were all thin and are the states most likely to flip from blue to red.

Wisconsin is the “blue-wall” sate most likely to fall. the Republican senator and the Democratic governor both won reelection in 2022 and the 2020 Biden/Trump margin was 0.6 percent.

Georgia almost certainly flips if Trump is not the nominee, and its popular Republican governor is on the ticket.

Virginia with its popular Republican governor may also be in play.

Democrats seem to be doing a good job ticking off the electorate in New Hampshire by moving its prestigious first-in-the nation primary back.

No red state is likely to flip blue in 2024.  North Carolina is a long shot.

Factor Three:  Candidate quality 

Both parties have a candidate quality problem at the presidential level and down ballot.

A Trump-Biden rematch would turn off most voters as evidenced by a poll that found 65 percent of voters do not want Biden to run again and 68 percent of voters do not want Trump to run again.

Trump the front number for the nomination is a criminal and may be unelectable in the general election.  Most experts believe Trump will be the nominee.  I believe he will not be the nominee and the nation will move onto other issues quickly.

Biden is gaffe prone.  Fox highlights each gaffe but it is also being picked up by more reputable outlets like USA Today.  

Kamala Harris is unpopular with poll numbers lower than Dan Quayle.  Harris is important because Biden is old and unlikely to finish a second term.   Nikki Haley has done a good job driving up this point.

Republicans tend to have highly contested primaries that often result in the nomination of bad candidates.  This was the case in 2022 Senate races in Arizona and Pennsylvania and in 2022 gubernatorial races in Pennsylvania, Michigan, and Arizona.

Democrats tend to let the establishment pick the candidate. Often the candidate is black because of the huge debt that the party owes black voters.  In 2022, three senate candidates in 

Florida, Wisconsin, and North Carolina won the Democratic nomination with no real competition, which means a lack of practice answering tough questions.

Factor Four:  Abortion is a head wind for Republicans

Abortion is potentially a huge head wind for Republicans because their abortion positions are truly extreme. Democrats need to address several consequences of the Dobbs decision to take full advantage of this issue including

Also, Democrats need to point out that late-term abortions as discussed here are rare and involve very difficult decisions.

The abortion issue did not make the difference in 2002 elections in Florida or Texas and may not turn an overwhelmingly red state blue.  However, a pro-choice Democratic governor was re-elected in Kansas,  a very red state and might prove decisive in the 2024 Kentucky gubernatorial contest.

Abortion could be the deciding issue in the presidential election in several swing states if the Democrats more effectively highlight consequence of Dobbs.

Factor Five:  Racial Issues

Racial politics cuts both ways. 

Republicans seem to either condone racism or claim it is not a major problem.  

Democratic remedies for racism often undermine attempt to reward hard work and make decisions based on merit.

Trump was easily to depict as a racist.  Remember the some very fine people on both sides remark. 

Pence appears to believe that systematic racism does not exist.  

DeSantis is against virtually all efforts to increase diversity. 

Ramaswamy has called white supremacy as realistic as unicorns,  and blamed a recent racist mass-murder on racialized culture instead of white supremacy.

The inability of these candidates to address white extremism and violence and the tendency to deny the existence of systematic racism could sway many moderate voters.

On the other hand, polices favored by Democrats often provide large benefits to less qualified minorities and undermine the notion that decisions should be based on merit. 

Prior to the recent Supreme court decision overturning affirmative action in higher education, Harvard systematically gave Asian applicants a lower personality score to increase representation of other minorities.  Polling data finds that Americans approve of the Scotus decision.   

The end of testing for admission to an elite high school in Virginia and the growth of test-blind admissions for college penalize people who prioritize academics and undermines the process of making decisions on merit. 

Democrats increase turnout among black voters and lose support among other groups, especially Asians, for their support of these preferences.

The question for this campaign is how far each party will go to pander to its extreme.

 Factor Six:  Economic Discontent. 

Biden is presiding over a robust economy stronger than the rest of the world with a low unemployment rate and a still high but declining inflation rate. However, Biden has a low approval rating on the economy.    Here are some of the reasons for the disconnect.

  • High interest rates have increased the cost of consumer loans and mortgages and have reduced affordability for new homes.
  • The inflation rate for food, an essential product, was especially high.
  • 49 percent of adults approaching retirement age have no retirement savings.  Recently enacted policy changes are not likely to have a major impact on retirement savings.
  • Many people do not realize much in additional disposable income from additional work because state-exchange health insurance premiums and Income Driven Replacement Student loan programs are linked to income.  (Work on this topic will be available shortly.)
  • The re-start of student loan payment obligations will have an adverse financial impact for many households as shown here.  

Concluding Thoughts:  There is no doubt that Biden is presiding over a strong economy and has enacted major laws impacting health care, infrastructure, and the environment.  It is notable that many of Biden Administration’s legislative achievements have either phased out or are scheduled to sunset.  Also, Biden has done a better job criticizing Republican health care proposals than putting forward reforms that would resolve the impending reductions to Social Security and Medicare while increasing retirement savings of younger workers.  Unfortunately, the merits of innovative policy proposals will not be central to the 2024 presidential election.

Evaluating Income Driven Repayment (IDR) Reform Measures

Biden Administration initiatives to improve and expand IDR loan programs will have at best a small impact on most student borrowers. It is time to consider alternative proposals.


The Biden Administration responded to the Supreme court ruling disallowing student loan forgiveness by announcing a new Income Driven Repayment Plan (called the SAVE plan) and by facilitating discharges of existing IDR loan applications, through a modification of the count of previous payments.  

This memo summarizes and evaluates these Biden Administration student debt initiatives and discusses alternative relief measures.

Biden Administration Student Debt Initiatives:

The SAVE PLAN described here replaces the REPAYE plan.  Some features of the SAVE plan are implemented in the summer of 2003.  Other features are scheduled to be implemented in July 2024.

These three features of the SAVE plan will be implemented this summer.

  • Increase in the amount protected from payment obligation from income less than 150 percent FPL to income less than 225 percent FPL.
  • Elimination of interest charges when monthly payment does not cover monthly interest charge.
  • The elimination of spouse’s earnings in calculation of SAVE payment.
  • The exclusion of spouse in household size in calculation of protected income threshold.

Additional reductions in monthly and lifetime payments under the SAVE plan are scheduled to be implemented in July 2024.

  • Reduction in monthly payment of undergraduate loan from 10 percent to 5 percent of income. Borrowers with both undergraduate and graduate loans will pay a weighted average of 5.0 percent and 10.0 percent.
  • Reduction in the number of years for loan discharge based on the amount borrowed.  Current requirement for loan discharge for IDR borrowers is 20 or 25 years of repayment.  The SAVE requirements are 10 years for initial loan balance less than $12,000 and a 1- year increase for every additional $1,000 in the initial amount borrowed.

Currently, relatively few IDR borrowers receive a loan discharge as scheduled.  The SAVE rule includes new procedures designed to reduce pitfalls preventing loan discharges.  These new procedures include:

  • Automatic enrollment for people who provide access to federal tax returns even without payment within 75 days.
  • Access to IDR program for some borrowers in default.
  • IDR credit for some borrowers in deferment but additional payments for some other borrowers in deferment.
  • Some credits for borrowers in deferment.

These Biden Administration is also attempting to facilitate more existing IDR loan discharges by fixing the count of past payments on IDR loans as discussed here. The Department of Education announce of the program adjusting IDR payment counts states:

“These fixes are part of the Department’s commitment to address historical failures in the administration of the Federal student loan program in which qualifying payments made under IDR plans that should have moved borrowers closer to forgiveness were not accounted for. Borrowers are eligible for forgiveness if they have accumulated the equivalent of either 20 or 25 years of qualifying months.”

The proposed adjustment to IDR payment counts includes increase credit regardless payments plan, or existence of forbearance or deferment.  The Biden Administration projects that this initiative will provide relief to 804,000 IDR borrowers.

Evaluation of the Student Debt Initiatives:

The Department of Education claims SAVE will provide borrowers with substantial savings including:

  • A reduction in total payments of 40 percent.
  • A savings of $2,000 per year for a typical graduate from a four-year institution.
  • A 2/3 or $17,000 reduction in total payments for a teacher using the public service loan forgiveness program.
  • An 85 percent debt free rate within 10 years for community college borrowers.
  • An average 50 percent reduction in total payments for Black, Hispanic, American Indian, and Native American borrowers.

Some aspects of the SAVE program are useful.  The new SAVE subsidy on interest payments when the borrower’s monthly payment does not cover interest costs will reduce costs for some borrowers.

However, the SAVE modifications do not alter basic inefficiencies with IDR loans.  

The Department of Education vastly overstates likely long-term savings from the replacement of the REPAYE program with the SAVE program.

Even with the SAVE modifications many applicants choosing the IDR loan will either pay substantially more over the lifetime of the loan than under a standard repayment plan, will pay higher taxes because of their use of the IDR option, will not receive an on-time loan discharge, or may be forced to convert to a standard repayment plan.

The SAVE program does not alter the fact that changes in earnings and changes in marital status create substantial uncertainty about the cost of IDR loans.

The decision to enter the IDR program or accept a standard 10-year or 20-year repayment plan is typically made as soon as the student borrower leaves school.  Often the applicant is single and earning a low salary.  Often the IDR program provides the only affordable payment option immediately after leaving school.

The existence of the IDR option prevents many people entering the workforce from quickly defaulting on their student debt.  Unfortunately, many of the people choosing the IDR option, because other options are not feasible will pay much more in student loans or in taxes over the life of their loan.

IDR loan payments increase substantially if income rises and/or if the person marries.  The SAVE program reduces but does not eliminate some problems caused by uncertain household income and changes in marital status.

The SAVE provision eliminating the spouse’s income in the loan payment formula for people filing separate returns will decrease loan payments for married couples filing separate returns.   However, the lower loan payment from the new rule will often be offset and could be smaller than the increased tax obligation from filing separately instead of filing jointly.

A decision to file married separately instead of filing married jointly will increase tax obligations for the vast majority of married couples, as explained here.   Features of the tax code leading to this result include:

  • A substantially higher tax rate for separate returns than joint returns,
  • 50 percent reduction in exemption for the alternative minimum tax,
  • Loss of credits and benefits for child and dependent care expenses,
  • Loss of the earned income credit,
  • Loss of exclusion and credits for adoption,
  • Loss of education credits and deductions, including the deduction for interest on student debt,
  • Loss of exclusion on interest for savings bonds used for education,
  • Potential loss of elderly tax credit or income exclusion for Social Security,
  • 50 percent reduction in child tax credit, retirement savings contribution, and capital loss deduction,
  • Loss of standard deduction when spouse itemizes,

There is something a bit ironic in the fact that people who decide to file separate returns to take advantage of the lower IDR loan payments could lose other education related tax benefits including the deduction of the interest on their student debt and the exclusion of tax on savings bond interest used for education expenses.

Typically, the IDR option is the only viable option for student borrowers entering the workforce because starting salaries are low.  Typically, the student borrower is single when starting repayment.  The potential problem associated with the choice between married filing jointly and married filing separately does not arise until the wedding.

The married couple that chooses to file married separately instead of married jointly to obtain a lower student debt payment, would be subject to higher marginal and average tax rates,  lose several tax deductions and credits, and pay a higher alternative minimum tax.  Most married students will choose to file joint returns and will lose the lower IDR payment and the opportunity for a loan discharge.

The projected benefits of the SAVE program offered by the Biden administration do not include the projection of a reduction in loan discharges from people who refinance their IDR loan due to increased tax obligations from changes in their marital status. 

The new rules on counting previous IDR payments and the SAVE rules designed to eliminate pitfalls preventing on-time loan discharges will prove ineffective.  

Current IDR programs have failed to provide timely debt discharges.  The existing evidence on the effectiveness of IDR loan comes from the Public Service Loan Forgiveness Loans (PSLF), which are tied to IDR loans.  Go here for some statistics.

  • Around 2.15 percent of Public Service Loan Forgiveness applications processed since November 2020, were accepted.
  • Only around 6.7 percent of eligible student borrowers applied for loan forgiveness.
  • Around 30 percent of denied claims are due to incomplete paperwork.

There is a lot of room for improvement.  Even if the SAVE rule changes and the one-time adjustment previous IDR payment counts to lead to a large improvement in on-time loan discharges, the overwhelming majority of borrowers applying for a loan discharge will be denied.

The recent announcement is not the first announced attempt of a programs to facilitate more accurate counting of IDR loan payments.

Legislation mentioned here was enacted in 2019.

President Biden announced a previous “one-time” PSLF waiver and “one-time” IDR waiver.  The PSLF waiver lasted from October 2021 to October 2022 and the IDR waiver time frame was originally April 2022 to December 2023.   The previously announced IDR waiver described here looks identical to the one announced yesterday.

The Biden Administration claims that their new procedures will benefit over 800,000 borrowers needs to be taken with a bit of salt.  Why weren’t these borrowers already assisted by the previous one-time waiver program.

An announcement of a plan to forgive student debt is different from an announcement that student debt has been forgiven.

It would be useful to have real time information on the percent of on-time IDR loan discharges.

IDR programs require substantial paperwork including initial enrollment and annual income and household certification requirements.  Sloppiness by both borrowers and loan servicers has led to the low loan-discharge success rate. 

Many student borrowers are not highly meticulous about their finances especially when starting their careers.  

A CFPB report found that Borrowers report that servicers delay or deny access to loan forgiveness through wrong information about their loans, flawed payment processing, and bungled job certifications. 

Servicers do not have an incentive to facilitate easy on-line enrollment because they can make more money when the student borrower is slow to repay her loan.

It is difficult to audit IDR loans, since many people with low income have a zero payment, which is identical to the payment they were improperly enrolled.

Neither the “one-time” IDR payment adjustments nor the replacement of REPAYE with SAVE alters the dependence on accurate reporting by households and loan servicers.  

The proponents of SAVE can argue that their reforms will improve loan discharge rates.  

Conveniently, there will be no real evidence on this point for at least 11 years.

The SAVE program fails to reduce the amount of time for possible loan discharge for the typical student borrower completing a four-year degree program.

The loan discharge program will have a miniscule impact on the date of discharge for most four-year students.   A person with the average four-year degree debt level of $28,400 will not be eligible for debt discharge until 20 or 25 years after loan repayment begins.

The SAVE program, like other IDR loans creates unusual incentives impacting the amount borrowed and hours worked.   

In some cases, a person with IDR loans could increase the amount they borrow without increasing the amount they pay back.   This would occur when a student correctly anticipates low future earnings leading to both low loan payments and a loan discharge.  IDR loans could, therefore, encourage increased borrowing by students in fields with low earnings.

The new SAVE discharge formula will likely deter some people who complete a two-year community college program from pursuing a four-year degree.  The person with a two-year degree likely has less than $12,000 in debt and could realize a debt discharge after 10 years.  This relief would be lost if the person returns to school and take on additional debt, since under SAVE it would take the student with an average four-year debt level 20 or 25 years to become eligible for a debt discharge.

All IDR loan programs, by linking student loan payments with income, reduce funds for consumption from additional work.  The ACA premium tax credit and the progressive income tax also reduce gains from additional work.  The SAVE program reduces but does not eliminate this penalty on additional work.  (The SAVE program reduces the increase in loan payments from an increase in income from 10 percent to 5 percent.) 

Conclusion of the IDR and SAVE evaluation:

IDR programs create financial uncertainty and are inefficient.   

IDR programs do a good job in facilitating on-time payments by overextended student early in the repayment period of their loan.  

However, IDR loans have not historically been discharged on time and many IDR borrowers end up paying far more over the life of the loan, in both loan costs and taxes, than borrowers who enroll in standard repayment plans. 

The SAVE reforms do not alter many of the basic problems associated with IDR lending.

Alternative Approaches:

Modifications of the standard student loan contract: 

Three changes to current standard student loan contracts would more efficiently assist overextended student borrowers than IDR loans.  

  • Elimination of interest rate for first three years on all student loans.
  • Elimination of all interest rate on student debt contracts upon the maturity of the student loan.
  • Convert any unpaid student loan balance to a tax obligation collected over 5 years.

Comments on proposed changes to the standard loan contract:

Comment One:  The elimination of interest charges in the first three years after initiation of repayment reduces payments at the start of the repayment process when income is typically low.

  • The elimination of a 5.0 percent interest rate on a 10-year $20,000 student loan reduces monthly payments from $212 to $167.  
  • The elimination of the interest charge on a $20,000 20-year loan reduces monthly interest payments from $133 to $83.

Comment Two:  When interest rates are zero, the entire monthly payment is applied towards reduction of the loan balance.  The quicker reduction in the loan balance allows student borrowers to concentrate on other financial priorities, like saving for retirement or purchasing a home, at an earlier date.  This improvement in saving opportunities for the new generation is essential to offset likely reductions in future Social Security benefits.

Comment Three:  The early interest subsidy and reduction in the loan balance facilitates, or at least does not discourage, additional study at a four-year institution by people who complete a two-year degree.  By contrast, the SAVE applicant with a two-year degree will likely lose all chance of a loan discharge after 10 years by returning to school and taking on more debt.

Comment Four:  The provision ending interest charges upon the maturity of the student loan will assist borrowers who are most likely to enter retirement and have their student loans garnished.

Comment Five:  Under the interest rate concessions proposed here, people who choose to borrow more will repay more than people who choose to borrow less.  This is not always true for IDR loan programs.  The SAVE program could increase the tendency for some student borrowers who anticipate low lifetime earnings to increase the amount they borrow.

Comment Six: The conversion of the loan to a tax obligation when interest charges are eliminated at the maturity of the loan is needed to incentivize continued loan payments in the absence of interest charges.

Modification of IDR loan contracts:

IDR loan contracts could also be modified to reduce reporting problems and increase the likelihood of at least a partial loan discharge.

  • The IDR loan should require a small monthly payment even if the required payment under the IDR formula is zero.
  • The IDR loan contract should provide for partial loan discharges, around 10 percent of the outstanding loan balance, starting with the completion of 24 payments. 
  • An additional loan discharge of this amount would be granted after the completion of each round of 24 on-time payments.  
  • The total amount of the loan discharged due to the repeated partial discharges should not exceed more than 50 percent of the initial loan balance.
  • Require loan servicers create an easy on-line portal for annual updates of income and household size.

Comment One:  A zero IDR payment for a person with a zero IDR bill due to low income or forbearance is indistinguishable from a zero payment from a person who is avoiding all student loan payments.  The requirement that all people in repayment make at least a small non-zero monthly payment creates an audit trail that separates people who are attempting to pay from people avoiding their obligation.  The nominal payment would be applied both to people with a zero-payment obligation and people in forbearance.

Comment Two:  Early partial discharges will force the loan servicers and the borrower to remove pitfalls from discharge earlier rather than later, when a fix may be extremely difficult.

Comment Three:  A partial rather than a full discharge and the limitation of the total amount discharged to no more than 50 percent of the initial loan balances eliminates situations where IDR borrowers could borrow more without repaying more.

Comment Four:  Improvements in technology should facilitate greater on-time payments and fewer reporting errors.   However, these improvements may not be automatically adopted by loan servicers who often gain financially when borrowers fall behind. 

Concluding Thought: Existing IDR loan programs create substantial financial uncertainty for borrowers and are highly inefficient.  

IDR options provide borrowers with a feasible initial payment when they are starting their career at a low salary.  However, often IDR borrowers will fail to receive potential debt discharges and will pay far more both on their loan and on taxes over their lifetimes due to the selection of the IDR option.

IDR loans are in some respects similar to mortgages with teaser rates.  In the case of IDR loans, the initially affordable loan payment is followed by both higher loan payments and higher taxes.

The Biden Administration has exaggerated the potential benefits from the SAVE option, especially the likely reduction in lifetime student debt burdens.

The modifications to standard and IDR loan contracts proposed here will give a better outcome for student borrowers and taxpayers than the SAVE approach.

Student borrowers could also be assisted through changes in the bankruptcy code.

Other aspects of the student debt problem involve both the spiraling increase in tuition, living costs, and the amount of student debt incurred by the typical borrower.  

Additional discussions on proposals to assist overextended student borrowers, proposals to reduce the amount borrowed, and proposals to control college costs can be found here.

The author of this post has also written A 2024 Health Care Reform Proposal found at SellWire and at Kindle.

The politics of abortion

It is likely the abortion issue will have a large impact on control of the House in 2024 and little or no impact of control of the Senate or the presidential race. Donors who want to impact 2024 political outcomes should focus on House races.

The House of Representatives is now ground zero of the abortion debate in the United States.  

Nearly a dozen bills in the House include anti-abortion provisions.  These include bills that:

restrict access to mifepristone, ban paid leave for travel for abortion related services by members of the military and their families, and limit funds to the District of Columbia because of its abortion laws.

Many attempts to restrict abortion involve riders to must-pass appropriation bills. The Senate and President Biden tend to give in to extreme House positions to enact must-pass laws.  A case in point is the decision to schedule the next debt limit vote for early January 2026, when it can be used as pressure in the presidential certification decision.

Pro-choice Democrats running for seats in the House can legitimately make the claim that Democrat control of the House is needed to prevent the implementation of highly regressive policies and political dysfunction.  

There are currently 18 House seats controlled by Republicans in districts won by President Biden and only 5 House seats controlled by Democrats in districts run by former president Trump. There are more than enough House districts that could swing the House back to Democratic control largely because of the abortion issue.   

Prior to Dobbs, abortion was a fringe political issue. Both sides used the specter of overturning Roe to motivate their base during presidential elections. Outcomes of presidential elections and senate contests were determined by the makeup of the states with red states going republican, blue states going to the Democrat and a relatively few purple states swinging depending on the election.  

The Dobbs decision did not change the dynamics governing outcomes of Presidential and Senate election.

The primary determinant of the outcome of the presidential contest in 2024 is candidate quality.  The Republicans have a much better chance of winning the election if they nominate someone not named Trump.  The Republicans could win if Biden has a major health event nearing the election or just makes a ton of mistakes or otherwise appears feeble on the campaign trail. 

The presidential race is also impacted by unanticipated events on the current president’s watch, including renewed inflation, the onset of a recession, some terror event (perhaps one emanating from Afghanistan) or failure in Ukraine due to insufficient American support.  These scenarios could overshadow the abortion issue.  

Abortion is not likely to be a major factor in Senate outcomes, even though the Senate is responsible for confirming judges.

There is a substantial likelihood the Senate will turn from blue to red in 2024.

Only four 2024 contests — Arizona, West Virginia, Ohio, and Montana — are likely to be closely contested. All have vulnerable incumbent Democrats or Independents. 

Arizona is impossible to predict because there may be three viable candidates and even two-way races in Arizona are very close.

The outcome in West Virginia depends on whether the incumbent Democrat runs for reelection.  If Manchin does not run, the republicans will pick up a seat in this state.

Ohio and Montana are red states with popular Senate Democrats.   Montana is more likely to flip than Ohio.

The Democratic establishment will attempt to persuade potential donors to contribute to Senate races in Florida and Texas.  The likelihood of a Democrat prevailing in either state is extremely small.

Democrats have not won a statewide contest in Texas since the 1990s.

Florida now has a Republican governor and two Republican Senators.

Republicans are now winning statewide races in Florida by large margins.

Both Texas and Florida have enacted draconian anti-abortion laws.  Abortion will be a key issue in elections in both states but will more likely be the determining factor in House contests than in statewide contests. 

The die is largely cast for the Senate because of the unfavorable 2024 map for Democrats.  

A contribution to a House race in Texas or Florida will have a larger positive impact on all races in the state than a contribution to the Senate candidate.

The outcome for the presidential race depends largely on the choice of the nominee, the mental and physical health of the nominees, and unanticipated events. None of these factors are under your control or would be impacted by an incremental contribution.

Progressive and centrist Democrats might best impact 2024 outcomes by searching for and donating to high-quality pro-choice House candidates.

Preliminary Discussion of the Cassidy/King Social Security Reform Proposal

The Cassidy/King proposal to increase the full retirement age for Social Security benefits would reduce benefits for most future retirees. A gradual phase in of the higher retirement age would not prevent required automatic benefit cuts under current law.


Introduction:  Two United States senators, Angus King of Maine, and Bill Cassidy of Louisiana, have announced plans to create a Social Security reform package.  The preliminary discussion of their plan stresses two changes to the current system, an increase in the full retirement age from the current age of 67 to age 70, and the creation of a sovereign wealth fund that would invest resources for Social Security in equities. 

A short article on aspects of the Cassidy/King proposal can be found here.  A short press release, mentioning the desire to create a plan that maintains the early retirement age at 62, is found here.  

The primary reason for the Social Security reform proposal is to prevent automatic reductions in Social Security benefits after depletion of Trust Fund assets.  The trustees of the Social Security trust fund believe these automatic benefit cuts could start in 2033.

The purpose of this post is to provide a quick impression of the admittedly preliminary Cassidy/King proposal.

Analysis:

Comment One:   The articles and the press releases pertaining to this preliminary proposal do not contain or refer to an explicit analysis of the impact of the policy change on benefits.  However, the headline of the yahoo new article  “Under latest social security reform proposal millions receive more  and no one receives less” appears misleading. 

An increase in the full retirement age to 70 and the retention of 62 as the early retirement age would lead to a decrease in benefits for everyone with the exception of people who retire at age 62.   The combination of a change in the retirement age and no change to the minimum age for retirement will also reduce the incentive for older people to remain in the workforce and/or delay claiming their Social Security benefit. 

The current full retirement age for people born after 1960 is 67 and under current law people born after 1960 will receive a 30 percent decrease in the retirement benefit and a 35 percent reduction in the spouse’s benefit if they retire at age 62 instead of age 67.  

This publication from the Social Security Administration reveals that under current law a person eligible for a $1,000 benefit at the full retirement age will receive $700 if she retires at age 62 and $1,240 if she retires at age 70.  

An increase in the full retirement age to 70 would reduce the benefit at age 70 to $1,000, which is a 24 percent reduction in benefits.

Under current law, a person born after 1960 gets an annual increase in benefits of 7.4 percent for each year of delaying claiming Social Security between age 62 and 67. 

The annual increase in benefits under Cassidy/King is 4.6 percent.

This means a person retiring at age 67 under Cassidy King would get an annual benefit of $875.

The Cassidy/King proposal (or at least my understanding of it) would result in a 12.5 percent in reduction for benefits for the person retiring at age 67.

Comment Two:  The final Cassidy/King plan could also include other modifications to the benefit formula, specifically a change in the number of years worked on final benefits.  This change could offset benefit cuts from the change in the full retirement age for some workers and augment it for other workers.   An analysis of policy change would require information on past lifetime work histories and might require assumptions on how the policy change impacts retirement and workforce participation. 

Comment Three:  Most politicians advocating Social Security reform stress that their plan should not adversely impact benefits of people nearing retirement.  An abrupt change in the full retirement age would abruptly change benefits.  The Cassidy/King proposal would have to be phased in to avoid abrupt benefit changes, however,a gradual phase in would not avoid the projected mandatory 2033 benefit reductions described here.

Comment Four:   Alicia Munnell points out that the Cassidy/king proposal for the creation of a sovereign wealth fund to increase returns and decrease cost of funding Social Security cannot be achieved by diverting funds from the current trust fund, which is nearing its depletion date.   Any diversion of funds from the trust fund would speed up the date of automatic benefit cuts. 

Concluding Thoughts:  Any viable Security reform that deals with the impending automatic benefit cuts without reducing benefits for people nearing retirement will have to include both new revenue and gradual alterations to the benefit formula.  Plans for Social Security reform should also account for the fact that young adults are, for a variety of reasons, not saving enough for retirement.  Go here for an article on the need for linking Social Security reform to policies that would increase savings by young adults.

Modifications to the Biden Student Debt Policy

A one-time discharge of student loan debt will not mitigate long term problems associated with excessive student debt. These proposals will reduce student debt burdens and encourage savings by young adults, a necessary prerequisite to Social Security reform.

Introduction:

A previous post evaluated several of the Biden Administration’s domestic policy agendas, including the Administration’s proposals on health care and insurance, student debt and college costs, retirement savings, and the fiscal condition of Social Security.  

The evaluation of the Biden Administration’s student debt policies reached the following conclusions.

  • The one-time debt discharge proposed by the Biden Administration may not be upheld by the Supreme Court for a variety of reasons.
  • A one-time student debt discharge does not alter the trajectory towards higher student debt levels and higher college costs.
  • The payment shock from the termination of the COVID-era student loan payment freeze will reduce consumer spending and could facilitate a recession.
  • The Biden Administration proposal for expanded Income-Driven loans is complex and less effective than interest rate reductions.
  • Low levels of on-time graduation remain an important factor in high student debt burdens.
  • Many student borrowers leaving school prior to the completion of a degree have a difficult time repaying their student loans.
  • Proposals for increased assistance for students at two-year college are useful but could reduce access to four-year schools by qualified low-income students.

The objective of this post is to provide and explain potential economically efficient solutions to these problems.

Student Debt Proposals:

Proposal One:  Issue an executive order restarting post-covid student loan payments at a 0 percent interest rate for two years and seek legislation permanently establishing a 0 percent interest rate for the first two years after the initiation of repayment of student loans.

Analysis: The recently enacted debt limit deal includes a requirement restarting the covid-era moratorium on student loan payments.   The abrupt restart of student loan payments will reduce spending and saving for retirement by many households and could facilitate a recession.  A permanent 0 percent interest rate for students starting the repayment of student loans would substantially reduce problems associated with excessive student debt.

Proposed response to the restart of student loans:

  • As per the recent debt-limit agreement, student loan payments restart this year.
  • A new executive order sets the interest rate on student debt at 0 percent for two years.
  • Seek legislation making the two-year 0 percent interest rate on student loans permanent.

Advantages of a temporary emergency elimination of interest rates:

  • I expect the Biden Administration’s student debt discharge proposal will be overturned by the Supreme court.  A temporary elimination of interest charges to mitigate adverse impact of payment shock from the end of the covid emergency is more easily depicted as an emergency measure likely to survive legal challenges than the Biden Administration’s proposal.
  • The restart of student loan payments would increase receipts to the Treasury reducing the need to issue debt.  However, the restart of student loan payments will have a substantial adverse impact on young adults with student debt and the overall economy.  These adverse impacts including lower consumption, higher wage demands by some workers and a likely recession could be mitigated by temporarily setting the interest rate at 0 percent on all student loans.
  • Under the proposal the entire minimum payment would be applied to the reduction in principle and the Treasury would receive substantial revenue.

Advantages of a permanent elimination of interest for first two years of student loan repayments:

A permanent 0 percent interest rate for two years after the initiation of repayment would result in several economic benefits.

  • Delinquencies would fall at the beginning of careers when workers tend to have lower salaries.
  • A lower interest rate and quicker repayment of loans would allow young workers to increase household savings, a necessary prerequisite for many Social Security reform proposals under consideration.
  • Quicker repayment of student loans by young adults should eventually reduce the number of older adults with unpaid student loan balances in retirement
  • An initial interest rate of 0 percent would reduce demand for Income Driven Replacement (IDR) Loan programs, which will benefit both student borrowers and the Treasury.

Proposal Two: Modify the standard 10-year and 20-year federal student loan contract to eliminate all interest charges at the maturity of the loan.

Analysis:  The current system requires student borrowers to choose between a standard loan contract and an IDR loan contract as soon as they begin loan repayments.  Some people make the wrong choice.  Features of The IDR loan contract encourage some people to increase the amount they borrow. A simple modification to conventional loans would reduce demand for IDR loans and make taxpayers and many borrowers better off.

Proposed changes to standard loan contract:

  • Set interest rate on outstanding student loan balances to 0 percent when the loan reaches maturity date.
  • Treat unpaid student loan balances after the maturity of the student loan as a tax obligation spread over 3 to 5 years.

Advantages of proposed changes:

  • The interest rate of zero at the maturity of the loan provides some relief for people who have had difficulty repaying their loan. 
  • This change will reduce the number of people who have their Social Security checks garnished because of outstanding student loan obligations.
  • The proposal creates an incentive for borrowers to select a standard student loan contract instead of an income driven loan contract which can benefit the borrower.  IDR loans create financial uncertainty for borrowers and potential lenders and often prevent borrowers from qualifying for a mortgage.  IDR loan discharges are potentially costly to taxpayers.
  • Under the modified student loan contract, the borrower with a larger loan will always repay more than the borrower with the smaller loan over the lifetime of the loan.  By contrast, under the IDR program it is possible an increase in initial student loan debt does not increase the amount repaid over the life of the loan.

Proposal Three:  Modify IDR loan programs to provide for gradual partial discharges of student debt instead of a complete discharge of the remaining balance at the maturity of the loan.

Analysis: Current IDR loans promise a discharge of unpaid debt at the maturity of the loan, but loan discharges frequently do not occur on time because some borrowers fail to make required payments and some loan servicers fail to accurately report payments. IDR loans create an incentive for people to borrow more because in some instances the increase in the amount borrowed will not result in an increase in the amount repaid.  Both of these problems could be addressed by altering the IDR loan discharge provision. 

Proposed changes to IDR contracts:

  • Provide periodic partial discharges of student loans.
  • Discharge formula might involve 10 percent of previous 24 payments after receipt of 24 payments. 
  • Limit discharge at the maturity of the loan to 50 percent of the outstanding balance.
  • Undischarged loan balance will be restructured into a new short-term low interest rate loan.

Advantages of proposed changes to IDR contracts:

  • The quicker partial discharge gives borrowers an incentive to make payments on time to maximize debt relief.
  • The quicker partial discharge reveals potential problems with the recording of loan payments earlier.  Currently, payment problems are not revealed until maturity when the borrower apples for the complete loan discharge.
  • The limitation of the final discharge to 50 percent of the outstanding loan balance will cause borrowers with larger loans to have a higher debt at maturity than borrowers with lower debt.  This clause reduces the incentive for people to borrow more because monthly payments are determined by income rather than loan size and they anticipate the entire loan will eventually be discharged.
  • The incentive to reduce borrowing could also be achieved by taxing loan discharges.

Proposal Four:  Provide greater financial assistance to all first-year students with the goal of eliminating all student debt incurred during the first year of post-secondary school education.

Analysis:  Increasingly, some education after high school is necessary for career advancement.  Many student borrowers who leave school prior to the completion of the degree have great difficulty in repaying their loans.  Increased financial assistance for first-year students will increase access to higher educations for underserved groups and will assist people likely to have the most difficult repaying loans.

Proposed changes to first-year financial assistance programs:

  • Provide federal grants to institutions that agree to eliminate student debt incurred by first-year students.
  • All state and private institutions that agree to match the new federal/private funds are eligible for the new grants.
  • Participating institution are not allowed to provide federal student loans to first-year students.
  • Tax credits and/or deductions would be offered to taxpayers that contribute to funds providing matching resources for first-year students.
  • Benefit is available at both two-year and four-year institutions.
  • Additional benefits available for first year after transfer from a two-year to four-year college.


Advantages:

  • Program reduces payment problems and default rates by student borrowers that leave college early prior to the completion of their degree.  (Students leaving college without a degree after only one or two years of study tend to have an especially hard time repaying their student loan.)
  • Program will reduce typical college debt levels.
  • Absence of debt could allow a person to reenter school later in life when she is more prepared for higher education.
  • Proposed goal of a debt-free first year of post-secondary education is far less expensive than previous free college or debt-free colleges proposals. 
  • Program allows more highly qualified people to consider a four-year college. 
  • Prospect of additional assistance for transfer students could further reduce costs for students who start their post-secondary career at a two-year college and mitigate impact of credits lost through the transfer process.

Proposal Five:  Modify the bankruptcy code to allow for the discharge of private student debt in bankruptcy and to provide priority to federal student debt payments over all consumer loans in chapter 13 bankruptcy plans.

Analysis:  Student debt has always been difficult to discharge in bankruptcy.  The2005 Bankruptcy reform law discouraged Chapter 7 bankruptcy in favor of Chapter 13 and made it more difficult to discharge private student loans in bankruptcy.  Moreover, in most instances current law results in higher priority for consumer debt over all student loan debt in Chapter 13 bankruptcy plans.  Some student borrowers now leave chapter 13 bankruptcy plans with more student debt than when they entered.  More favorable treatment of student debt in bankruptcy could benefit both student borrowers and taxpayers.

 Proposed Changes:

  • Retain current rules governing access to Chapter 7 and Chapter 13 bankruptcy adopted in the 2004 Bankruptcy reform act.
  • Change bankruptcy code to make private student loan debt dischargeable in bankruptcy.
  • Provide priority to payments on federal student loan payments under chapter 13 bankruptcy plans.

Advantages

  • Retention of means test for use of chapter 7 bankruptcy discourages bankruptcy filings for many people who might be able to pay off their debts without bankruptcy relief.
  • Private student loans with high interest rates is similar to credit card debt and other consumer loans and should be treated accordingly.
  • Helps people leaving chapter 13 bankruptcy obtain a fresh start.
  • Helps taxpayers by increasing and speeding up student debt payments.  
  • Helps the most vulnerable student borrowers.  Should reduce the number of older taxpayers having Social Security garnished because of unpaid student debt.
  • Creates an incentive for lender to better evaluate the ability of borrowers to repay private consumer loans and private student debt.

An evaluation of the debt-limit deal

The debt limit deal is a big economic and political win for Republicans. It solidifies the Republican fiscal agenda and gives Republicans clout in future fiscal disputes including disputes involving Social Security. Moreover, the decision to schedule the next debt limit dispute at the same time as the presidential certification decision could help decide the next presidential election.


Introduction:  The Biden Administration is attempting to sell the debt limit deal as a valid compromise that maintains major achievements enacted in the first two years of the Administration.  The reality is that many of the most important Biden-era achievements have been or will be phased out and the continued existence of the debt limit will facilitate GOP domination of future fiscal debates including the response to automatic Social Security and Medicare benefit reductions under current law.

Moreover, the decision to schedule the next debt limit decision with the next presidential certification decision gives an additional lever to senators and congressmen who want to challenge the next presidential election result.

Major Aspects of the Debt Limit Deal:

The President of the United States and the Speaker of the House of Representatives have an agreement in principle on a deal that averts a default on the national debt.  The major features of the deal are as follows.

  • Suspends debt limit until January 1, 2025.
  • Flat non-defense discretionary spending in 2024 and 1.0 percent growth in 2025.
  • Protects spending on veterans health care and defense.
  • Expands work requirements for food stamps.
  • Claws back some Covid 19 funds
  • Cut funding for Internal Revenue Service contained in the Inflation Reduction Act.
  • Restarts student loan payments.
  • Maintains climate and clean energy.
  • Expedites an energy project in West Virginia and streamlines future energy project approval project.

Comments:

Comment One:  The Biden Administration has argued that the suspension of the debt limit until after the election is a win. Wrong!  The Republicans would have been foolish to threaten a debt default or government closure prior to the election.  The January 1, 2025, deadline in the middle of the certification requirement for the results of the election could provide the Republican an additional tool to overturn an election result.  It is difficult to understand why the Biden Administration would agree to time the next debt limit fight with the next presidential election certification decision.   

Comment Two:  Second-term honeymoons are brief, if they exist. The binding debt limit early in the first term of a second Biden Administration (should the President win reelection) would make it very difficult to achieve any of the President’s priorities.  This provision makes President Biden a lame duck in his second term even before his inauguration.

Comment Two:  The freeze in non-defense spending and the one-year 1.0 percent increase in non-defense spending is a significant real reduction in the current 5.0 percent annual inflation environment.

Comment Three:  An evaluation of the debt limit deal must account for the fact that it is occurring when many of the most important progressive priorities – the expanded earn income tax credit and additional health care subsidies have already been phased out or are in danger of being phased out. The lack of permanent progress on expanding and improving the ACA is especially startling.  The American Rescue Plan included a provision for short-term COBRA assistance instead of a major expansion of ACA insurance.  The expanded ACA premium tax credit will expire in 2025, when Republicans could demand its elimination in exchange for an increase in the debt limit.  The Covid-era Medicaid expansion has already been eliminated.   This deal does not include work-requirements for Medicaid and the Biden Administration has eliminated some Trump-era Medicaid work requirement.  However, the number of uninsured will likely increase in the next few years and will not return to pre-Trump levels. 

Comment Four:  The deal does not cut environmental tax credits, many of which benefit affluent households and could be prohibitively expensive.  The deal facilitates additional energy projects.  The deal also does not eliminate ethanol tax credits, which have, at best, a small positive environmental impact.  My view, expressed here, is that government subsidies, like tax credits for EVs, will not have a major environmental impact because these subsidies only impact a small fraction of household spending on energy and products that cause carbon emissions or pollution.  A comprehensive environmental policy requires a carbon tax and/or cap and trade regimes, policies that are currently not under consideration.

Comment Five:  The continued existence of a debt limit will give the Republicans the upper hand in future fiscal debates including the debates over the future of Social Security and Medicare.    The Republicans will be able to extract major concessions on Social Security and Medicare when the debt limit is binding and current law mandates automatic benefit reductions.  Go here for a discussion of projected automatic cuts to entitlement programs.

Comment Six:  The deal requires the restart of student loan payments but does not overturn the Biden Administration’s student loan discharge proposal.  This is a good deal for the Republicans if as expected the Supreme court rules the president rules the student discharge program is unconstitutional.  My preferred solution discussed here; the elimination of all interest payments for two years was never considered.