I was struck on Wednesday when I saw this quote attributed to Bryce McKibben, of the HOPE Center, referring to possible policy options on student loan forgiveness:
“The land mines on this are everywhere … Their options are an income cap and a political train wreck—or no income cap and broader, automatic-based relief for everyone. There’s not a lot in between.”
I know Bryce a little and consider him a good egg, but I have to disagree on this one. To the extent that he’s outlining the policy options as they’re understood in progressive Democratic circles, I’m concerned that a lack of political imagination may lead them to miss a moment in which something really valuable could be accomplished.
Debating whether to cancel $10,000, $50,000 or something in between is no-win. It’s not enough to help those who need the most help, and it’s a giveaway to some who don’t need it. Trying to fix the latter issue with income caps makes matters worse: it raises the administrative overhead cost of the program while deterring applicants who could use the help. And any forgiveness at scale runs into the basic issue of American political culture in which “handouts” are considered a form of cheating.
But leaving the system intact doesn’t make sense, either. Too many people owe too much. Debt is having an impact on birth rates, marriages and the facts of daily life as it’s lived on the ground.
Instead, I’ll offer a refined version of an earlier proposal that would do some actual good, allow the student loan program to survive, give borrowers breathing room and fit within a prevailing cultural sense of fairness.
Reset the interest rate on undergraduate student loans to zero. And for those for whom even that is too much, make it possible once again to discharge student loans in bankruptcy.
Confining the reset to loans taken out at the undergraduate level neutralizes the objection that we’re subsidizing surgeons. Restoring the option of bankruptcy is just fundamentally fair.
By setting interest at zero, we’d be affirming that borrowers need to pay back every penny they’ve borrowed; nobody gets a free ride. But we stop trying to turn a profit on their debt. Repayment would become easier simply because interest would stop compounding. Every single payment made would reduce the amount owed by just as much. Nobody gets off the hook, but nobody gets trapped in negative amortization, either.
Conceptually, it amounts to refinancing. (Hat tip to Representative Joe Courtney for spelling this out for me.) Many middle-aged and older folks have refinanced a mortgage at least once. It’s common practice. I’ve personally done it. It’s not considered a giveaway or a form of cheating. It’s a rational response to changed market conditions. In this case, as the lender, the government could rationally respond to a debt crisis by holding the debt down to the dollars actually used for education.
I’d advocate including Parent PLUS loans in the great refinancing, too. Those loans have done real damage in some communities, particularly among families who sent students to HBCUs. Resetting the interest to zero wouldn’t let anyone off the hook, but it would allow them to make forward progress with every single payment. That isn’t true now.
In an inflationary economy, one might point out, a 0 percent interest rate is effectively negative. But that’s a feature, not a bug. It offers a chance for borrowers to climb out of debt. And their repaid principal can help keep the program going. There wouldn’t be an issue of discontinuity between past borrowers and future ones: set the rate at zero and leave it there.
I can imagine a compelling objection from someone who knows—correctly—that the highest default rates come from those who owe the least. Those are usually folks who attended college for a semester or two before dropping out, leaving empty-handed. Reducing the interest on a very small debt, by definition, makes a very small difference. That objection is correct, as far as it goes, but I suspect that a substantive response would require a very different Congress. Starting with this proposal allows the prospect of actual passage. Should a more enlightened Congress follow, more proposals could, too.
Higher education policy is complicated, but this particular slice of it doesn’t have to be. And if it’s pitched correctly, it might actually pass.