Terry’s Columns Solving the Student Loan Problem

Solving the Student Loan Problem

By Terry Savage on February 01, 2021

One of the very first acts of President Biden was an executive order extending the “pause” on required student loan payments through September. But it is likely to be only a first step in the new administration’s approach to the current $1.7 trillion in student loans.

The word “forgiveness” looms large, but the details of any proposal are still unclear. And in any discussion of student loan forgiveness, the next key word is “fairness.” Is it fair to those who paid off their debt to forgive some or all of the balances for others?

Fairness is a concept that has intrigued policy makers ever since King Solomon offered to “split the baby in half” to resolve a custody dispute!

There is no way that any plan will be considered fair to all. So the real question is whether any proposed solution benefits enough people — beyond even the actual debtors — that it is beneficial to our country as a whole.

That requires looking at three considerations: the goals of the program, the blame for the problem and the potential benefits of any solution.

Goals of Student Loans

Student loans started under the National Defense Education Act of 1958. Then, in 1965, the federal government began guaranteeing student loans provided by banks and non-profit lenders under the Federal Family Education Loan Program (FFEL). But in 2010, a new law ended costly subsidies to private lenders. Since then, all federal student loans have become Direct loans, made by the government and distributed through colleges and universities.

Despite all the changes, the ultimate goal of the federal student loan program has always been to create an educated workforce and citizenry. But since the changes made in 2010, Federal student loan debt has soared, and defaults have risen. According to EducationData.org:

–10.8% of student borrowers default on their educational loans within their first year of repayment.

–25% of borrowers default within their first five years of repayment.

–10%-20% of student loans are currently in default.

Who is to Blame?

There is plenty of blame to go around, so briefly consider this. Since 2010 most Federal student loans were made regardless of ability to repay. And there was no performance requirement. So the schools (including many for-profit trade schools) were not held to any standard of practical results. The money simply flowed out to the schools, allowing them to raise prices without much cost discipline.

And, any discussion of the problem, must include the fact that when a student loan is made, it carries that fixed rate forever — until the loan is repaid. So, for student loans older than 10 years, many adults are now paying interest rates above 8 percent!

The sad result is that “35-year-olds have the highest average outstanding student loan debt at $42,600 per borrower, with an end balance 287% higher than the value of their original loan,” according to EducationData.org. That burden keeps them from buying homes and starting families.

Especially notable: Unlike mortgages, which can be refinanced, the student loan debtors are stuck as the interest builds into a mountain. Even the government is currently refinancing its existing debt at rates around 1% when it sells 10-year Treasury bonds.

Now Consider the Solutions

It is in this context that we must debate changes in federal student loans.

–Total balance forgiveness seems unfair, but it has been proposed.

–A fixed amount of forgiveness has been discussed — but the terms and conditions are open for debate. Should some public service be required in exchange for forgiveness?

–Another proposal would pause future interest accrual, and offer ultimate forgiveness after five years of on-time payments.

–Or perhaps the account balances could be recalculated backwards, removing excess interest charged over the prevailing 10-year Treasury rate in previous years. That would likely wipe out some remaining balances.

–Requiring colleges to meet performance standards might be part of a new student loan deal.

But blindly declaring it’s not fair to give federal student loan borrowers a break is definitely not the answer. If our common goal is to see our country move forward in an educated, productive society, then it’s time to resolve our student loan debt problem. And that’s The Savage Truth.



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