An easier way for student loans
There were reports on Twitter yesterday that the student loan repayment moratorium would be extended for a few more months. Robert Kelchen responded that the next Republican administration will likely eliminate the federal student loan program; by making reimbursement unlikely, Democrats may have inadvertently condemned the program altogether.
I could see the logic of this position, although I would hate for it to happen.
It reminded me, however, that there is a better way. It’s more in line with American political culture and our general notions of fairness. It would keep people from being buried under compound interest, but wouldn’t let them get away with what they borrowed. It is even mathematically and administratively easy.
Cancel interest. Require people to pay back every penny they borrowed, but no more than that.
Below is the article I wrote in November 2020 outlining the idea. I propose it again as a politically and economically sustainable compromise that would do good. It certainly makes a lot more sense than a series of very short extensions, followed by a programmatic collapse.
It holds up pretty well, if I say so myself…
I thought of Congress. For normal people, that’s not a good sign, but I’ll plead “recovering political scientist” on this one.
The House is still Democratic, but barely, and the coalition includes people from conservative districts who are wary of anything too progressive. The Senate will likely remain Republican, but even if Democrats win both rounds of the ballot in Georgia and Vice President Harris gets deciding votes, the coalition will still have to carry the likes of Senator Manchin of West Virginia, whose voting record is less than solidly blue. And if historical patterns hold, the incumbent president’s party typically loses seats in the first midterm election, so even a very slim majority is likely to be short-lived.
Yes, I would like to see all student loans forgiven. But I just don’t see that happening, and if it does, victory would probably be Pyrrhic. The idea of erasing the obligations of a group of people is so against American political culture that even if adopted, it would likely fuel a backlash that would do far more damage than reform would do good. .
But this is where I part ways with the usual compromise proposals. I don’t think capping the relief at a given dollar amount helps the situation. The layman’s objection to debt relief is not really the cost; that’s the concept. The cost cap is completely wrong; it leaves the concept (and therefore the opposition) intact, and attenuates its positive impact. And the usual playbook of “only for people earning less than x dollars a year” is no better. This leads to all sorts of paperwork nightmares, delays, requests for exceptions, and financial shenanigans. (As a resident of an extremely expensive state, I can also attest that income thresholds that might seem reasonable in, say, Kansas are patently unreasonable here.) The cap on the amount waived and the cap on the income of those whose loans are forgiven, miss the point. They mitigate the positive impact without doing anything to reduce political opposition. In Twitter parlance, they own themselves.
Instead, I propose a measure that would seem fair to most people, have a chance of gaining and retaining political support, reduce administrative costs, and do some good on the ground.
Cancel interest. Eliminate student loan interest. Each dollar repaid is deducted from the principal.
For people who take a decade or more to pay off their loans, interest can become a significant part of what they end up paying. This is especially true for people with older loans, when rates were higher. Students who owe $50,000 or more can easily find themselves paying five figures in interest. Worse still, if they fall behind, interest increases. But the zeros do not accumulate.
Zero interest would be easy to administer. You wouldn’t need income or verification caps, so the usual shenanigans – and the cost of trying to control those shenanigans – would go away. Overheads would go down and the systems would be much easier to manage.
The political call is clear: people must repay what they have borrowed. They are responsible for their decisions. But recognizing that things have gotten out of control over the past two decades – public divestment from public higher education, in particular – we could stop trying to cash in on debt. Repay everything you borrowed, but only what you borrowed. No more no less.
There is a simplicity and fairness to this proposal that could make it politically feasible and sustainable.
Over time, of course, a much better solution involves both sustained and robust operating support for public colleges and universities and basic income support for students. Even free tuition does not take into account the opportunity cost of education; when you struggle to get enough food, the opportunity cost alone can be prohibitive. It’s miles away from anything resembling a panacea. But I think we are miles away from a political environment in which a panacea could pass.
Combine zero interest with free community college tuition and you start to make a real difference. (For a fallback option to completely free community college — one that seems more in line with American political culture — see my “Buy a year, get one free” proposal here.) These measures do not preclude steps more dramatic in the future, but they offer immediate and tangible relief to some people who desperately need it.
Some economists might object that zero nominal interest is equivalent to negative real interest, taking inflation into account. But it’s a feature, not a bug. Young people trying to start a family and a career – or parents already working in the thick of it – could benefit from some relief. If that relief comes in a subtle way that doesn’t hit anyone like a handout, then everyone is a winner.
Let every dollar repaid count against the principal. People have to pay back every penny they borrowed, but no more than that. No one gets a freebie, and no one is buried under compound interest. Fair is fair. This might get enough support to survive the mid runs.