A Quick Summary (TLDR)
Make the temporary pandemic-driven student loan interest rate of 0% permanent, and then make it retroactive.
Interest makes little sense for loans with near-zero risk in the long-term: the debt is nondischargeable in bankruptcy and subject to wage garnishment upon default. Rates have already been frozen at 0% for nearly a year due to COVID-19. It was done with the stroke of a pen and without a bat of an eye because it comes with a near-zero price tag. It does not involve taxpayers footing a bill because not a cent of the principal borrowed would be forgiven — it merely forgets the profits and forgoes the profiteering going forward.
It is in the public interest to broaden access to higher education. The profit is already in the pudding.
The Full Spiel
We’ve heard the plea to cancel all student debt. We’ve heard the calls for compromise: “forgive some student debt.” Here’s an alternative proposal — make the temporary pandemic-driven emergency rate of 0% permanent, and then make it retroactive.
Don’t get me wrong. I support complete student debt forgiveness because student debt stifles economic growth, perpetuates inequality, and disincentivizes education. That said, I acknowledge the political challenge of achieving this goal. My response is simple: “If we can’t forgive, the least we can do is forego and forget.” This proposal focuses less on student debt and more on the conditions that have transformed student debt into a student debt crisis — namely, interest.
In 2014, a 10-year forecast reported by the CBO estimated that the government could make as much as $135 billion in profits off of federal student loans between 2015 and 2024. Average student debt interest rates are currently ~5.8% with some rates as high as 10%. Undoubtedly, a large portion of the $1.7+ trillion in outstanding student debt was never even borrowed as principal.
There have been strong counterarguments to any form of student debt relief from across the political spectrum. However, these rebuttals are more concerned with past unfairness and influencing future behavior than solving a crisis that is already present.
First, many think this would create a moral hazard — people would feel safer borrowing more recklessly in the future. Meanwhile, the “bailout” approach never seems to raise those same red flags when it comes to institutions that are “too big to fail”. If the underlying assumption of this counterargument were to be said out loud, the true moral principle would come to light: “If some are too big to fail, others are too small to matter.”
Second, others object on principle to any kind of debt relief: “It’s unfair to people who already paid off their debts or saved in advance!” To this, I respond: “Do we not clean up the air because previous generations had to breathe pollution?” We should not allow the failures of the past to hold us back from making improvements in the future — that would betray the entire notion of progress.
And last, there is the tired old refrain leveled against all proposals that attempt to provide direct relief to millions of Americans: “It costs too much!” The seriousness of this argument has eroded over four decades of ceaselessly providing billions in relief to powerful institutions and wealthy individuals via tax cuts in the name of a trickle-down theory that has quite objectively failed to trickle down. Clearly, when we need to find the money to solve a problem, we find it.
While the recently proposed “Warren-Schumer Plan” would certainly cost less than Bernie Sanders’ “Cancel All Student Debt” proposal, both approaches would kick the can down the road since the bubble would quickly reinflate into a renewed crisis. Alternatively, the solution I propose here targets the crisis at its root — the for-profit operation being run by the US Government itself.
First — forego profits and stop the bleeding. Interest makes little sense for loans with nearly zero risk in the long-term: the debt is nondischargeable in bankruptcy and subject to wage garnishment upon default. As noted in the aforementioned CBO report: “the federal government has tools to collect from delinquent borrowers that private lenders do not have, giving federal programs an advantage over private-sector lenders.”
Second — forget accrued interest and penalties. It is this compounding factor, not the principal, that makes student debt so insurmountable. Income-based repayment programs lead to decades of interest-only monthly payments with a large forgiveness tax bill waiting at the end. A common (but fair) sentiment amongst the indebted is that they will be in debt indefinitely.
As a moral issue, do we really believe our government should be in the “business” of profiting off its citizens? As an economic issue, wouldn’t we be more competitive globally to have a well-educated workforce? As a civic issue, wouldn’t it strengthen our democratic institutions to have a more informed body politic? We should be incentivizing these outcomes, not discouraging them.
Interest rates have already been frozen at 0% for nearly a year due to COVID-19. It was done with the stroke of a pen and without the bat of an eye because it comes with a near-zero price tag. It does not involve taxpayers footing a bill because not a cent of the principal borrowed would be forgiven — it merely forgets the profits and forgoes the profiteering going forward. It is in the public interest to broaden access to higher education. The profit is already in the pudding.
