Yves here. Reader Bob Hertz sent his proposal for a multi-pronged student debt forgiveness program. One of his motivations was his belief that forgiving all loans isn’t affordable. The Federal government in fact does not need to raise taxes to fund this expenditure, but you’d need to give a harder look to see how much inflation it might generate.
However, there are other reasons to favor a more targeted plan. One is perceived fairness. A surprising number of our readers objected to the Sanders student debt forgiveness proposal because they had dutifully repaid their student loan. A few were offended on general principle.
By contrast, a more tailored program with a smaller price tag should alienate fewer people and thus have greater odds of getting done.
A second issue is that cancelling all student debt plus implementing single payer is a lot of spending and would elicit knee-jerk opposition. Again, even with big ideas and big aims, it behooves officials to look like they are careful stewards of public funds.
However, I am leery of Bob’ enthusiasm for STEM degrees. We’ve posted on why the STEM shortage is a myth. Moreover, for at least the last decade, Slashdot has run a post every so often from a new computer science graduate about the lack of entry-level jobs, and older hands confirm that this is the case.
By Bob Hertz, Editor, New Laws for America
Relieve the worst economic suffering caused by student debt; andReplace student debt as our primary college funding vehicle.
1. Cancelling all loans for persons over age 65…………..$5 billion a year2. Cancelling loans from predatory for-profit colleges…..$3 billion a year3. No income taxes on forgiven debt…………………………$10 billion a year4. No loan payments due from borrowers who earn less than $40,000 a year….$18 billion a year4. Easier standards for discharging student loans in bankruptcy……$5 billion a year5. Expand Pell Grants to $10,000 a year, and for far more Americans…..$55 billion a year6. Additional federal funding for Community Colleges and vocational schools…..$12 billion a year
Forgive all student debt for borrowers and co-signers over age 65.
There are approximately two million persons over age 65 who still carry student debt. Either they owe money on their own loans, or they owe money in support of a child’s loans.
The total amount owed is approximately $90 billion.
Nearly 40 percent of federal student loan borrowers age 65 and older are in default. By contrast, 29 percent of federal student loan borrowers age 50 to 64 are in default, and 17 percent of federal student loan borrowers age 49 and under are in default. These are all horrible statistics, but they are worst for the oldest debtors.)
Over 114,000 seniors have had their Social Security benefits offset because of unpaid student loans. Social Security benefits may be their only source of regular retirement income. This means that benefit offsets may impose serious financial hardship.
The principle behind our forgiveness for seniors is simple: “Enough is enough”.
People deserve a financially untroubled retirement.
Most debtors over age 65 have been paying on these loans for a long time. Their incomes are not going up. Often they cannot even cover the interest on their student loans. They have likely been hit with extra fees, capitalized interest, and unconscionable collection costs.
Many of their debts come from ‘Parent Plus loans’, which are a form of grotesque financial cruelty. These loans have higher interest rates and even a 4% origination fee.
Since students generally have no financial assets, lenders want access to the parents’ money. This certainly does ‘bring families together,’ but in a destructive cycle of intergenerational debt.
The Parent Plus loans must end immediately. If the current limit of $57,000 in undergraduate federal loans (over 4 years) is not enough for a student – then that student is in the wrong college.
Forgiveness for seniors will not be complicated. The over-65 debtor can request forgiveness with proof of age, and their loan can be cancelled.
For any private loans that are forgiven, the government will have to compensate the lenders.
Seniors’ loan forgiveness could be spread out over several years. In the first year, loans could be forgiven for borrowers over 75; then in the next year, for those between 70 and 75, and so on.
Alternatively we can start forgiving any loan to seniors whose current income is less than $20,000 a year, and move up quickly from there.
The federally-originated loans can just be cancelled, and no more payments would be due. The government had no difficulty in purchasing thousands of mortgage loans in 2008.
Skeptics may point out that when loans are written off, the federal government “loses” an asset on its balance sheet.
Student loans are a precarious asset at best due to the large rate of delinquencies. If 40% of loans will ultimately go bad, this asset has limited value.
As Kevin Williamson (no liberal) notes:
If we just gave the universities money, that would show up on the books as an expenditure; whereas lending it to students allows us to pretend that we have created an asset, when all we have actually created is a great deal of debt and horses—t
In fact, government loans are a toxic asset, to the extent they create impoverishment of our own citizens.
A bank in Oklahoma in 1932 might have owned a lot of farmland, due to foreclosures…..but their community was being ruined. Owning bad loans does not make a nation prosperous.
In the long run, debt forgiveness could make the nation better off. The greater spending of ex-debtors will eventually produce more tax revenue than the loans ever did.
Alexander Hamilton paid off Continental Congress war bonds at one cent on the dollar. Perhaps half of the white people who came to the USA were escaping their debts and indenture in Europe.
n the words of James Galbraith:
Public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets. Private households get more cash. They own that cash free and clear, and they can spend it as they like. If they wish, they can also convert it into interest-earning government bonds or they can repay their debts. This is called an increase in “net financial wealth.” Ordinary people benefit, but there is nothing in it for banks.Bankers don’t like budget deficits because they compete with bank loans as a source of growth. When a bank makes a loan, cash balances in private hands also go up. But now the cash is not owned free and clear. There is a contractual obligation to pay interest and to repay principal. If the enterprise defaults, there may be an asset left over–a house or factory or company–that will then become the property of the bank. It’s easy to see why bankers love private credit but hate public deficits.
Forgive all debts for students who have been defrauded by for-profit colleges
There are approximately 157,000 “Borrower Defense” fraud complaints in process at the Department of Education.
These borrowers have declared — under penalty of perjury — that their schools misled them by using false job placement rates, lies about credit transfer, or other unrealized promises that had a financial impact on the student. However, Under Betty DeVos the Department of Education has been delaying action on these complaints. Even when claims are approved, only a portion of the loans is typically forgiven.
We should move the other way! It is time to approve the complaints rapidly, in full.
The average forgiveness on the approved claims has been $14,100.
Even if this average goes up to $25,000, approving the current claims plus 100,000 more would cost about $6 billion.
The federal government has been deeply complicit in the misery that for- profit schools have caused. The Department of Education has normally chosen to protect predatory businesses, at extraordinary expense to students. Top officials at the Department have been stockholders in Sallie Mae and other profiteers .As Bob Shireman documents, the government has released one study after another – over decades — revealing massive wrongdoing in the industry…..but Washington is very slow in closing down the worst offenders.
Just one example, from Toby Merrill:
The Department of Education litigated for two years to avoid suspending collections and notifying former students of Wilfred Academy that they were eligible for debt relief despite the agency’s findings that, as a result of pervasive fraud throughout the company, all applications for discharge it received should be granted.
David Halperin’s account in Republic Report should be read in full detail…………
Trump Secretary of Education Betsy DeVos owns the ongoing, awful meltdown of the chains of career colleges — the Art Institutes, Argosy University, and South University — formerly operated by for-profit Education Management Corporation. Yet now, as campuses across the country have devolved into chaos, faculty and staff have lost their jobs, and students are left, short-term, lacking money for necessities like rent, and long-term with their futures in doubt, the DeVos Department is doing little to assist students. The Department isn’t even providing students with basic information.
DeVos’s conduct, and that of her subordinates, notably Acting Under Secretary Diane Auer Jones, a former for-profit college lobbyist, constitute dereliction of duty and malfeasance, and a complete disgrace.
Prior to Trump and DeVos coming to power, EDMC, many of whose programs offered quality instruction, Jeffrey Leeds, and Todd Nelson— into a predatory operation that deceived, coerced, overcharged, and under-educated students, while taking billions in taxpayer dollars. Ultimately, federal and state law enforcement went after EDMC, resulting in a settlement that did not come close to making students whole or adequately penalizing the company and its executives, but at least created concreteaccountability mechanisms.
Everything DeVos, Jones, and their team have done have made the situation worse. They have worked to dump the various Obama-era regulations aimed at curbing predatory college operations and protecting students. They re-instated ACICS, the country’s worst college accreditor, which had turned a blind eye to bad behavior at for-profit schools, including some EDMC schools. They approved a wave of bogus conversions of for-profit colleges to non-profit status, and tentatively approved the conversion to non-profit of the EDMC schools after they were acquired by a new non-profit group, Dream Center Education Holdings (DCEH).
The number of Borrower Defense claims will grow rapidly, and it should. Richard Fossey notes that:
Such claims are nothing compared to the fraud committed by the for profit college sector, the exploitation by student loan debt collectors and the venality of college presidents making million dollar salaries while students are forced to borrow more and more money.>
The Obama administration did a decent job in closing down some of the worst for-profit schools…..but that is not enough.
Extra effort must be made to guarantee affected students that at least some of their credits will be accepted, and that students will not be charged additional tuition and fees to start over again. There must be a federal agreement on better transfer opportunities.
Unwinding the venal for-profit industry will not be done overnight and it will not be cheap. By the time these schools get into financial trouble, there is usually no money left for students or taxpayers. The crooks at Argosy University had actually siezed federal aid money that was intended for students. It has been a huge legal struggle just to cancel the high-interest loans made to desperate students by the colleges themselves. All taxpayers truly owe a form of reparations here.
All debt forgiveness must be income-tax free.
When loans to seniors are forgiven, and when predatory loans from non-profits are forgiven, there should be no income taxes due. Also, anyone who completes income-based repayment in the future should not be taxed.
James Brooks proposes that loan forgiveness could be classified as scholarships, which are excluded under the tax code. The purpose of loan forgiveness is similar to the purpose of a need-based scholarship,
Picture a graduate student with a loan balance today of $100,000. If they go on income-based repayment, their loan may still grow because their payments may not even cover the interest. Compound interest is lethal!
Twenty years from now, their loan balance might be $200,000. Can the government really collect $60,000 or more in income taxes when the loan is forgiven? The issues of affordability, bankruptcy and forgiveness will return all over again.
Long-term, this tax forgiveness could reach $200 billion, but that would be over a multi-year period. The cost in any one year’s federal budget should be manageable.
Whatever action we take, it must be universal for all debtors. The ‘Public Service Loan Forgiveness Act’ should never have been limited to just public employees! (Especially when government employees already have more job security, more health benefits, and better pensions than private sector workers.)
For now, all existing applications for the Public Service Forgiveness program must be approved immediately. Debtors of all kinds would not need to navigate all the current barriers — regarding the right kind of loan, the right forms filed with the right servicer, and the shifting rules of the Department of Education for approved forgiveness.
The borrower would just submit 120 cancelled checks – made to any payment plan – and proof of covered employment. The arcane rules about direct loans vs. FFEL loans ,covered repayment plans, et al. would disappear. Servicers would be deservedly left out of the picture.
No student loan payments will be due — and no interest will accrue — until the borrower’s income exceeds $40,000.
This is not a deferred payment; the payment amount is $0.
Loan balances would not increase while a person was in school.
If a lower-income student drops out and never earns $40,000 a year, they owe nothing. Such loans are just mistakes. This has been done successfully in Australia. Julian Castro has proposed a similar reform for the USA.
The borrower will have to take the initiative here. They can submit their prior year’s tax return, and that could give them a grace period from payments or interest accruals.
(This need not be done on a real-time, income adjusted basis, which has been a dubious feature of the Affordable Care Act. If your income goes up or down during the current year, you are still stuck with last year’s assessment status. We can live with a certain imprecision.)
The government will have to give up its loan interest during these deferrals –about $18 billion in interest would not accrue each year.
(Note: Private lenders cannot be forced to go along with this deferral…..which is just one more reason to avoid private loans.)
We must shed the goal of the government “breaking even” or even making money on student loans. This has constantly led to higher interest rates, aggressive collections, and debtor’s misery all around.
It is not wrong if student loans come to have a ‘net cost’ to taxpayers. In fact, we should assume that much of the loaned money is just “gone”.
When it comes to student loans, the Department of Education still acts like a private sector lender: its officials worry about preserving their ‘bottom line.’ They think they performing a valuable service when they crush forgiveness plans and fight every bankruptcy filing.Sadly, this stinginess has had the endorsement of Congress, which wants student loans to stay ‘budget-neutral’ whenever possible. No one seems to notice that borrowers are taxpayers too.
This is wrong and must change! Student loans should not be counted on as a significant source of revenue for the government. Today’s federal government collects over $3.5 trillion a year in all taxes. If the Department of Education shows a large deficit, we can raise taxes on wealthy persons. The goal of reducing the federal debt is not a bad thing in itself – but for heaven’s sakes, let’s not try and meet this goal by beating up on bankrupt ex-students. Right now there is an actual debate on whether loans can be forgiven to disabled veterans….how pathetic and stingy can you get?
When the Corinthian schools went under, a large percentage of their students had household incomes under $10,000. These students should not have been getting any loans of any kind in the first place. The way to help them is not loans, and never has been. The key is to expand Pell Grants, as discussed below.
Allow student loans to be discharged in bankruptcy
We all know that mis-managed bars. restaurants, and casinos can declare bankruptcy. Huge airlines can declare bankruptcy (mainly to destroy their unions and shed their pension plans) ; Donald Trump has declared several times.
Gamblers can declare bankruptcy; credit card abusers can declare bankruptcy; VA mortgage holders can declare bankruptcy; virtually all small businesses can declare bankruptcy. The worst non-profit colleges (c.f. Corinthian) can declare bankruptcy, though only after the owners have cashed out massively. American businesses value the bankruptcy laws for their own purposes. They understand that debt forgiveness does not mean the collapse of economic civilization.
We would not be “coddling” ex-students, if we give them the same bankruptcy standards as all other borrowers.
This is not to deny that some borrowers have made huge mistakes. They did not keep track of all their loans; often they kept taking loans to get an advanced degree in a dormant field…..which (they prayed) would lead to higher incomes.
The question is, how long are we going to make them (and their parents) suffer for bad bets? The rest of their lives? Lenders don’t care; they never have. But public policy should care.
.Bankruptcy is a recognition that both borrowers and lenders have made a mistake.
Bankruptcy gives some satisfaction to both “sides’ in the student loan crisis. Desperate borrowers get relief, but they also may lose assets, and undergo some degree of humiliation. This should keep the general public from feeling dangerously resentful.
The following steps are the beginning of bankruptcy reform:
- Loan holders will not fight a borrower’s requests for discharge, any more than Visa or Master Card sends out an attorney to every single bankruptcy hearing today. In other words, the Department of Education stays out of this. The government should not be squeezing every last dollar out of student borrowers, and certainly not taking bankruptcy cases to appellate courts. (Richard Fossey)
- The court should just accept simple documented proof from borrowers that they cannot repay their loans on a reasonable ten-year schedule, and still have a basic standard of living. In fact if the borrower earns less than 200% of the poverty line, bankruptcy would be granted without challenge.
- The court need no longer require a ‘certainty of hopelessness’ from the borrower. This would no longer be an adversary proceeding. The borrower need not prove permanent illness or disability.
- Student loan bankruptcy would not be permitted for five to ten years after graduation.
- An attorney would only be needed for counseling, and also to file the correct bankruptcy forms. The cost should be no more than $1500-$2000. There would be no lengthy, adversarial hearings.
Here is a how a sample calculation will work in court:
- Assume The debtor has income of $40,000 and two children. (Each state has income limits governing who can file for Chapter 7 bankruptcy.)
- The standard formula might state that this person can devote no more than $300 a month to debt service.
- If $300 a month is not enough to make minimum payments on credit cards and student loans, then bankruptcy is permitted and the student loans can be cancelled. (Note: The bankruptcy judge can alternatively “cram down” the student loans – i.e. by demanding that smaller loans be repaid if the income is there, but still cancelling the unpayable debts.)
- Again, this will not be a lengthy inquisition. The debtor need not prove that their situation will never improve……
It is hard to predict how many student loans can be discharged in this manner. Dr. Robert Lawless estimated that $2.8 billion in loans would be cancelled, but that was using 2012 numbers. For now, if 200,000 debtors went this route in a year, and the average cancelled debt was $50,000, the nominal cost to lenders in that year would be $10 billion. Private lenders will complain, even if the federal government gives them some compensation. (Bankers really want their future flow of interest.)
Of course this will make future loans harder to get – which is on balance a good thing.
Replace Student Debt
Increase Pell Grants to $10,000, and make them available to any family whose household income is under $80,000.
This will benefit at least 9 million students. The federal expense would be $90 billion in total, less the $35 billion we pay out in Pell Grants today…..in other words, $55 billion more spending each year.
As Pell Grant spending goes up, new federal loans must simultaneously go down.
The government has been spending well over $100 billion a year on new federal loans and loan guarantees.
New loans must be vastly reduced. Loan limits will be lower –(see Repair No. 3, below) — and loans will virtually disappear in for-profit colleges.
The Pell Grant is a voucher, as was the GI Bill in the 1940’s and 1950’s. When we give vouchers to parents for elementary education, even right-wingers applaud.
The Pell Grants must be available to any student –even those who are in default — plus any students whose earlier loans have been forgiven.
(Note: Some Pell Grants can include child care benefits and housing credits for adult students. This is what the GI bill covered for millions of veterans with new families.)
This is a large change in policy, but one that is overdue. Congress has been shifting public funding away from grants for thirty years, in order to increase student loans and loan industry subsidies.Even the Democrats proposed cutting Pell Grants in 2014. We are so ‘out of it’ – a small grants program called TEACH collapsed when many awards converted to loans becaiuse the correct paperwork was not submitted each year.
Like so many Republican schemes, this is partly from libertarian ideology, but also a desire to reward cronies in the lending and debt-collecting businesses. (No one ever got rich servicing Pell Grants.) Taxes were reduced on well-off Americans, but debts were increased on the non-wealthy young to make up the difference. A public responsibility (i.e. higher education) was converted into private burdens.
Fortunately, we already have a means for financing future Pell Grants. It is called the progressive income tax. Students’ tuitions should be funded with grants. No grants would ever be repaid. People would simply pay their taxes.
We should pay for college education by taxing individuals and corporations now — rather than have students pay all the costs out of future wages. This will be unpopular among anti-tax conservatives, but again it is overdue.
Provide more federal funds to community colleges and vocational schools.
One example would be full funding for the America’s College Promise (ACP) Act:
This law would provide $61 billion over the next decade to make two years of community college free, so students can earn the first half of a bachelor’s degree or an associate degree at no cost.
Giving more money to community colleges will help replace the for-profit colleges.
As for vocational schools – their current federal funding for vocational schools is well-intended, but pathetically small at present. Here is a recent legislative proposal:
- ESSA Title IV-A Student Support and Academic Enrichment Grants– Increase of $70 million, to $1.17 billion. This program can provide funding to CTE programs, particularly in the areas of college and career guidance services, education technology and STEM education.
- Apprenticeship Opportunities– $160 million, an increase of $15 million.
- Adult Education – State grant program increase of $25 million.
Support for vocational schools should be ten or twenty times this amount. These schools have no dormitories, no sports teams, no meal plans, and no professors earning $150,000 to teach one class and do research,
Meanwhile : The graduates of vocational schools reliably find jobs inmachining, auto repair, heating ventilation, computer repair and electrical installation. In fact, due to partnerships between corporations and schools. there are over 500,000 apprentices who have decent jobs while still in school.
Vocational schools have no dormitories, no sports teams, no professors on paid sabbaticals, etc. The message to conventional colleges might be “If it costs you more than $10,000 per year to educate a student, your costs are bloated.”
Establish loan limits
In 2009, the U.S. graduated 38,000 students with bachelor’s degrees in computer and information science, and 2,500 with bachelor’s degrees in microbiology.
However, we also graduated 89,000 students in the visual and performing arts, psychology, and journalism.
Many of the saddest student loan stories involve degrees in counseling or liberal arts. Time after time, one reads of students who borrowed over $100,000, in order to get a social worker job or an art therapy job that pays $28,000 a year.
The workers who clean hotel rooms in Las Vegas make more than $28,000 a year, thanks to a strong union. The workers at McDonald’s in Germany make $36,000 a year, again due to unions.
Americans would not be so desperate for college credits, if they could earn a living wage in all occupations. Instead, Americans look to college as an insurance policy against low wages, unemployment, and downward mobility.
Unfortunately, we have to start denying federal loans for careers that do not reliably produce high earnings. No one would be barred from studying social work – and they could take out non-guaranteed private loans, if a lender is foolish enough to offer one —but they could not borrow federal money to do so.
If an industry actually needs new employees – whether it is plumbing, welding, or computer science – let the industry provide money for grants and apprenticeships. For example, Audi is paying tuition for young mechanics, in order to create a steady pipeline for their workforce. IBM is going directly to high schools in Louisiana to train programmers.
This is in stark contrast to fields that have a tremendous oversupply of candidates already. For-profit colleges are not the only exploiters……what about PhD programs that recruit and retain graduate students, use them as teaching assistants, but leave them virtually unemployable? This is the opposite of a public good.
If an industry has no real demand for new workers, then without loans there will be very few new students, other than wealthy kids who can study anything they want. How bad is that?
(Actually, we need more schools like the new Lambda programming colleges; Instead of tuition, students can pay for their education once they receive a job with a $50,000 annual salary. Once students snag a job that meets the salary minimum, graduates pay back 17 percent of their salary over a period of two years (with the maximum payment capped at $30,000). If you don’t find a job, or meet this income level, you don’t have to pay a cent. And if you lose your job, or your monthly pay dips below $4,166.66, you can pause the repayment for that month.)
We must shed the notion that every student should get huge loans to ‘follow their dreams’ in an over-crowded field, or to attend the over-priced ‘college of their dreams’ on borrowed money.
Is this paternalism? Of course, and not a moment too soon. Letting millions of debtors learn harsh lessons is extremely wasteful. Anyone who can read history knows that debt is dangerous. Look at the wreckage that has been wrought by guaranteed loans for any course of study, and at any age. People in their 50’s should not be getting student loans at all.
(Note: Loans do have to be phased out over a few years. Abruptly ending all federal loans would leave millions of students scrambling for funds, and could quickly ruin too many schools. Anyone in their third or fourth year of study in any field would still be able to get loans – but after that, the spigot stops, especially in liberal arts.)
It is true that the richest colleges already offer enough aid so that loans are unnecessary. Over twenty five major schools do not let their students use loans at all.
Of course not all students can get into Brown, Dartmouth, Harvard, Northwestern, or MIT . In our future, those who still want college and cannot get loans can receive a Pell Grant and go to vocational schools – where they will often get better jobs anyways, and they should have no debt if they live at home.
If workers do need further education, grants are a far better way to help them. When a German or a Danish worker is laid off due to “globalization,’ first of all their union negotiates a respectable severance package. Their health insurance is uninterrupted. They may receive a family allowance, a housing allowance, even a utilities allowance plus free vocational-school tuition as needed. Government aid does not just go to the poor, or to college students. Working people are never left out.
Even with fewer loans, remember, public support for education is not going away. Government already spend over $100 billion a year on merit scholarships, financial aid, community colleges and public universities. No one is proposing that this aid should be reduced.
Let’s add to those numbers through more grants, without the disaster of more student loans.
Five years from now, the government should be making no student loans at all. Students who only go to college for vocational training can take their $10,000 annual Pell Grant anywhere. Medical schools should be funded directly by the taxpayers as a vital industry. Scientific and engineering schools can be funded by their industries. The areas that need new workers will subsidize new students.
For-profit schools will largely disappear. Four year liberal arts schools without endowments may have to shrink, and serve only wealthy students. Some schools will adopt video streaming, free textbooks, and online platforms to lower their tuition to the $10,000 range.
Meanwhile. the next page contains estimates of what loan forgiveness will cost to the taxpayers.
PART ONE: Reduced Federal revenue
- Forgiving all loans over age 65……..$5 billion per year, ongoing
- Forgiving student loans from fraudulent for-profit colleges……….$3 billion per year, ongoing
- Forgiving any income taxes due on cancelled debts……..$10 billion a year, ongoing
- No payments due when borrowers earn less than $40,000 a year…….$18 biliion a year, ongoing
Note: all the above are ‘static costs’ –they do not reflect the new tax revenue that will come in when debtors can now buy houses, etc. after loan forgiveness. I do not have the skill to make this estimate.)
PART TWO – New Federal spending
- Pay off private lenders whohave made Parent Plus Loans…………$10 billion, one time
- Pay off fraud claims against for-profit colleges…….$6 billion, one time
- Pay off private lenders after bankruptcy discharges……..$5 billion a year, ongoing
- Expand Pell Grants…………..$55 billion a year, ongoing
- Expand support for Vocational School and Community Colleges………….$12 billion a year, ongoing
We do not want this spending just added to the deficit. One new source of revenue would be lifting the cap on Social Security contributions (currently there is no tax on any income over $$132,900. Taxing all income at 12.45% would produce approximately $200 billion a year.