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Student Loan Fixes

posted by Alan White

While presidential candidates propose sweeping new policy initiatives, a few simple legislative fixes could go a long way to alleviate the student loan crisis. Three numbers set by Congress have a huge impact on the burden borne by millions of borrowers: the Stafford loan interest rate, the income-driven repayment plan income share, and the number of years to balance forgiveness. These three numbers (currently 5%/6.6%, 10%/15% and 20/25 years, respectively) essentially allocate the burden of funding postsecondary education between students and taxpayers. The interest rate, for example, has produced a net profit for the Treasury for many years, meaning that former students pay more than the cost of loan administration and loss recoveries, essentially paying a surtax. Some income-driven repayment plans require borrowers to pay 10% of disposable income, while others call for 15%, and of course several numbers go into defining disposable income. Finally, income-driven repayment plans call for debt balance cancellation at the end of 20 or 25 years. Reducing the interest rate, the income percentage and the repayment period are all means to shift the funding of an educated workforce from graduates (and noncompleters) to the broader taxpaying public. Student loan costs can be reduced incrementally; the choices are not limited to the status quo or free college for all.

While some Democrats propose to "refinance" student loans, Congress can reduce interest rates on existing loans at any time, saving borrowers and federal contractors lots of transaction costs. Loan defaults could be virtually eliminated by making income-driven repayment the default, automatically enrolling borrowers, and authorizing IRS income reporting. In lieu of creating new national service programs, the existing public service loan forgiveness program could be fixed to allow enrollment on graduation and automatic employer certification and payment progress reporting. The current 10-year PSLF repayment period could also be shortened. Finally, the Pell grant amount could be set to cover the full cost of attendance for low-income students at public 2-year or 4-year colleges in each state.

Comments

And for bankruptcy?

At the very least, separate classification of student loans in Chapter 13 to allow maintenance of IDR payments should be allowed. And that's the very least.

A small step further, waiver of student loan default, although possible allowable already, should be explicitly allowed as a third option to rehabilitation or consolidation. This is especially needed for debtors that have defaulted once in an IDR, as they otherwise have to start over. It would also avoid the pointless, but draconian and dispiriting 18.5% collection penalty that is imposed for other means of resolving a default.

Any payments under a Chapter 13 plan could be considered as sufficient for an IDR. The Secretary of Education already has the authority to authorize non-conforming IDR payments, but to the best of my knowledge never has under either the Obama or Trump administrations. Choosing between saving your house or car and continuing to make an IDR (which under the strict mechanical calculation ignores emergency expenses) is something of a Hobson's choice.

The filing of a Chapter 7 should not automatically put a borrower into an administrative forbearance, where their IDR payments are accepted but not applied to the 10/20/25 year forgiveness terms.

Seriously, you've suggested nothing for private loans. The answer: DISCHARGE.

And for senior citizens? A nice 20 year IDR of $0 from their Social Security check. DISCHARGE.

And, more generally, DISCHARGE.

Do I recall correctly that student loans in default may be turned over for collection to private independent contractors, and that they are entitled to add 15% to the amount due as a collection fee? If so, Congress should change that practice, as well.

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