Federal Student Loan Forgiveness Might Be Needed, But How About Solving the Underlying Problem?

We need a comprehensive solution to the $1.5 trillion student debt problem and not a rush to forgiveness that is both unfair and places a huge burden on taxpayers.

A comprehensive solution should address:

• The fact that the cost of a college education has grown substantially faster than salaries have increased
• The need for better information about what options borrowers have today and what more may be needed
• The fact that choices made by the student borrower often drive up their cost of education
• How to make any forgiveness equitable

The high cost to students

There is no doubt the cost of higher education has skyrocketed in the last 30 years. The amount of student debt has swelled to well over $1 trillion and growing. The Consumer Price Index (CPI) for college costs including books, tuition and living expenses have risen significantly faster than the CPI for all items.

From January 2006 to July 2016, the Consumer Price Index for college tuition and fees increased 63 percent, compared with an increase of 21 percent for all items. Over that period, consumer prices for college textbooks increased 88 percent and housing at school (excluding board) increased 51 percent.

For decades, the costs of higher education have increased across all sectors including public, private, and proprietary. Due to the increased cost of tuition, books and living expenses, the federal student loan limits have also increased over time.

In the chart below, added staff represents the top reason for the cost increase. One has to ask, are today’s institutions cost-effective sources of quality education, or have they become bloated with staff or other initiatives that unnecessarily increase costs?

If there is an expectation that the government should pay for higher education, no forgiveness should proceed until the cost of higher education at the college and university level is addressed. Either the fees charged are tied to CPI or perhaps colleges and universities should contribute to financing any write-off. The total burden should not be on the taxpayers. Also, if we forgive today’s debt, what happens to tomorrow’s debt? What prevents the same $trillion+ in debt from amounting all over again?

A few points on current student debt

Let us address the student debt impact on borrowers.  For years students’ payments were based on the amount they borrowed. For instance, the monthly payment on a $50,000 loan would be higher than the payment on a $10,000 loan.  During the Obama administration, the repayment rules changed so borrowers would pay based on their income, not on what they owe.  This meant that if their income were the same, the $50,000 and $10,000 borrowers’ payments would be identical.  Even for low-income borrowers, the payment amounts are adjusted, and, in some cases, payments are extremely low.  Why have earnings-based payments failed to work to facilitate a reasonable or equitable method to determine monthly payments?

All student borrowers are considered adults at age 18 and many make decisions about where they want to live or attend school without sufficient regard to the debt burden, they would accumulate, nor the income potential for the degree program they choose. The current student debt problem is in large part the responsibility of the student and the choices made.  Do we consider absorbing 100% of the burden for $50,000 in student debt when the borrower could have attended a less expensive institution? 

There has been no discussion about how individual circumstances of borrowers and their financial decisions affect debt.  Borrowers who are now in the workforce make financial and personal decisions that affect where they live, how much they earn, and their ability to pay. We also know the cost of living is significantly different across the country. Do we consider any of these factors in the forgiveness calculation?   

Fairness in the forgiveness discussion

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Currently, the focus for forgiveness is limited to those with current federal loans and based on current income levels.  However, in general, income tends to rise over time as an individual progresses in their career.  Should we forgive loans today for a borrower who is only a few years past graduation? What if their rising income could support their ability to pay off the loans in the future, especially if they are 10 years or more from their peak earning potential?

What about borrowers who have paid their loans in whole or in part over the last 5-10 years often living frugally to pay as promised? Shall we give them tax credits or some other means to recognize their positive actions?

Student loan servicers expend significant effort sending mail and making telephone calls attempting to keep borrowers from defaulting on their loans. Many borrowers do not respond, nor do they call for help.   This is compounded by the political comments on forgiving student debt. Why would a borrower repay if they think the debt will be forgiven?

There are borrowers who are having difficulty and need help.  Current regulations are in place to provide assistance.  For the few who truly have exhausted all avenues, by all means, let us help them.  If necessary, legislation can be crafted for these specific circumstances.

Summary

We need a comprehensive solution that addresses the root cause of our current situation. And, in fact, we have an appropriate vehicle for adopting such a solution; The reauthorization of the Higher Education Act of 1965 as amended. The Act is reauthorized approximately every seven years, and legislative proposals for this process started with the last Congress. Some believe it could be completed this year. Here are a handful of suggestions that might be adopted in the reauthorization:

• Hold institutions of higher education responsible for the high cost of education by first requiring a reduction in costs to current students and to share financially in any debt forgiveness.
• Examine what protections are currently in place for borrowers who are working but have low income or financial difficulty.
• Evaluate monthly payments available under current law to determine if they are truly unaffordable.
• Establish an expanded write-off process where the borrower presents a multi-year pattern of low income rather than a blanket write-off based upon current income only.
• Immediately lower the interest rates for all federal student debt, comparable to current mortgage rates.
• Consider an incentive program where borrowers who proactively try to repay are rewarded with a debt reduction. For example, give borrowers credit for two or three dollars of repayment for every dollar the borrower pays voluntarily.
• Consider a forgiveness tax credit for those who have previously paid rather than reward only those with current outstanding debt.