Biden’s student loan forgiveness will make matters worse
Ten years ago, I graduated from Regis University in Denver, Colorado. Going to a small private university was an expensive decision made possible by a scholarship from Regis, support from my parents, tens of thousands of student loans, and the decision to graduate in three years.
Like others, paying off student loans has been a challenge for me. Faced with financial hardship in the midst of the pandemic, millions of us have benefited from the moratorium on student loan interest and the postponement of loan repayments.
While former President Trump’s executive order helped many through the coronavirus crisis, it is actually proof of one important thing: the role of incentives in our decision-making. It also highlights why President Biden’s student loan forgiveness ideas would be so bad, and why we desperately need a better approach.
To be clear, the student loan burden in the United States has reached crisis levels. Student loan debt held by 43 million Americans now stands at $ 1.7 trillion, a staggering 493% since 2004, when it stood at $ 345 billion. According to the former US secretary of education Betsy DeVos, federal student loans represent a third of the government’s total balance sheet.
The typical borrower graduates with approximately $ 40,000 in debt. As a result, home ownership and small business start-up rate took hits. Student loan the defects have increased. Something must be done.
Many believe that student debt has skyrocketed because of high tuition fees, but it’s actually the other way around; tuition fees are high because grants and loans are plentiful. In 2015 Federal Reserve Bank of New York report concluded: “Higher tuition fees increase the demand for loans, but the supply of loans …[relaxes] student funding constraints ”, generating a“ pass-through effect on tuition fees. For every dollar a college or university receives in federal subsidized loans, the report concludes, tuition fees increase by 65 cents. and Pell Grants (55 cents).
Just like a moratorium on interest discouraged payments on a loan, proliferation of loans and grants urges More spending on colleges and higher education institutions is in turn incentivized to increase tuition fees.
In 2007, student debt reached $ 500 billion. Presidents Bush and Obama signed bills that effectively nationalized and significantly expanded student loan programs. As might be expected, loan balances have more than tripled since then.
In addition, student loans were previously more difficult to obtain because they could be discharged in the event of bankruptcy and would carry high interest rates. Beginning in 1978 and culminating in 2005—Ironically thanks to then-Senator Biden — Congress has made it virtually impossible to release student loans in bankruptcy. This has greatly reduced the risks for lenders and thus prompted both more loan requests and more loan disbursements.
Biden is now exploring three possibilities: one is for Congress provide $ 10,000 in student loan cancellation for each borrower “due to COVID”. Another would improve income-driven repayment plans, cap monthly payments at 5% discretionary income (up from 10-20% currently), automatically write off debt after 20 years, and make canceled debt tax-free –in addition forgiveness from the outset. The third would eliminate all tuition-related student loans for public colleges and universities only for those earning $ 125,000 or less per year.
There are plenty of reasons to oppose the three proposals, but the most crucial is that Biden’s ideas will make matters worse, not better. Again, this is about incentives. If current borrowers have their debt canceled, new students will expect theirs to be canceled as well. There will be every reason to take out more loans and for colleges to keep raising tuition fees endlessly.
Instead, there are two superior alternatives to pursue. First, Congress should relax bankruptcy laws to make student loan repayment more achievable. Senator Elizabeth warren (D-MA) proposed such legislation, and although its latest version is too broad when it comes to bankruptcy in general, she has the right idea. Bankruptcy offers a way out for heavily indebted borrowers, but it also has consequences that encourage thoughtful decision-making. Borrowers should also be required to repay part of the loans for at least five years before being eligible.
Congress should make it easier and faster for borrowers to pay off their student loans. For example, the Act respecting employer participation in reimbursement gained broad bipartisan support in Congress and would allow employers to help workers tax-free.
Of course, the above does not deal with the costs for future students. For them, colleges and universities should get in on the game and share some risk for losses on future defaulted or canceled loans. Warren co-sponsored a risk-sharing proposal in this direction, but Congress can do more. This should revise college student loan and accreditation systems; and revamping Pell Grants into a good Pell.
Biden has ushered us into this hell of student loans, but his new debt forgiveness concoction feels more like gasoline than a suppressor. Only a sensible solution will tame the flames.
Jimmy Sengenberger is the host of Jimmy at the crossroads, a webshow and a podcast in partnership with The Washington Examiner, and The Jimmy Sengenberger show on Denver News / Discussion 710 KNUS. His Twitter is @SengCenter.
The opinions expressed in this article are those of the author.