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What If We Just Fixed the Income-Based Student Loan Repayment System

By on August 2, 2018

Sandy Baum published a short essay yesterday in the Chronicle of Higher Education titled “Don’t Get Rid of the Income-Based Loan Repayment System. Fix It.” As she said in her essay, the federal student-loan repayment system as it now stands is “broken and at risk of collapsing.”

I have a few reservations about Ms. Baum’s recommendations (which I will address later), but on the whole her suggestions for reform are excellent.

“Create one income-driven repayment plan with clear requirements and provisions.”

As Ms. Baum attests, the Department of Education currently administers a “hodgepodge of repayment programs”: PAYE, REPAYE, Public Service Loan Forgiveness (PSLF), etc. She recommends one plan for everyone: a 20-year plan with borrowers paying 15 percent of their income that exceeds 150 percent of the poverty level for their family size.

This is a good idea. Currently, the most generous plan is the Public Service Loan Forgiveness Plan, but that plan was very poorly designed. As Jason Delisle pointed out in his analysis for the Brookings Institution, anyone who is employed by a nonprofit organization or a federal, state, or local government agency is eligible; and that includes 25 percent of the American workforce. Moreover, since PSLF payments are based on income and not the amount borrowed, the plan has a built-in incentive for students to borrow as much money as possible.

Baum also recommends that student borrowers be automatically enrolled in an income-based repayment plan just as soon as their repayment obligations begin. In addition, she endorses having student-loan payments added as a payroll deduction to student borrowers’ paychecks.

This is a terrific idea. As Baum pointed out, “[p]ayroll deductions for student-loan payments would make it easier for required payments to adjust quickly when financial circumstances change, and also make it easier for students to meet their payment responsibilities.”

More than that, automatic payroll deductions would make it impossible to default on student loans and eliminate the need for student borrowers to obtain economic hardship deferments. If the payroll deduction reform were implemented, it would be put the student-loan servicers out of business. No more 25 percent penalties slapped on loan defaulters; no more interest accruing on loans that are in deferment, no more robocalls from the debt collectors.

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“As the total amount borrowed increases, extend the number of payments required to reach loan forgiveness.”

Baum argues for longer repayment periods for people who acquired a lot of student debt. And this too makes sense. People who borrowed $20,000 or $30,000 to attend college should have a repayment plan that allows them to be debt free after 10 or 15 years. But a person who borrows $100,000 or more should expect to make payments for a longer period of time.

“Place reasonable limits on graduate students’ federal borrowing.”

Student-loan debt is spinning out of control, partly fueled by the GRAD PLUS program that allows people to borrow the entire cost of going to graduate school regardless of the amount. In response to that incentive, universities raised the cost of their graduate programs exponentially–and I mean exponentially. As I have said before, I paid $1,000 a year to attend University of Texas School of Law. The current cost is $35,000 a year–35 times as much as I paid.

Not long ago, I wrote about Mike Meru, who borrowed $600,000 to go to dentistry school. With accrued interest, he now owes $1 million! A cap on the amount a student can borrow to go to graduate school would stop the insane escalation in professional-school tuition.

“Eliminate taxes on all forgiven loan balances.”

The IRS considers a forgiven loan to be taxable income. Thus, with the exception of borrowers in PSLF plans, borrowers whose loan balances are forgiven under income-based repayment plans receive a tax bill for the amount of forgiven debt .

This is crazy. I doubt anyone in Congress supports the status quo on this issue. After all, what is the point of people enrolling in income-based repayment plans if they get hit with a big tax bill after faithfully making monthly loan payments for 20 or 25 years.?

Conclusion: I may have been wrong about Sandy Baum.

I confess I was skeptical of Sandy Baum’s stance on the federal student loan program because I believed her policy positions favored the higher education industry over distressed student borrowers. But maybe I was wrong, or maybe Ms. Baum’s views have evolved.

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In addition to the recommendations she made this week in Chronicle of Higher Education, Baum wrote a book on the student loan program in which she endorsed easier accessibility to the bankruptcy courts for distressed student borrowers. She also supports an end to garnishing Social Security checks of elderly student loan defaulters.

I once opposed all income-based repayment plans on the grounds that they basically turn student debtors into indentured servants–forced to pay a portion of their wages to the federal government for the majority of their working lives simply for the privilege of going to college. I still believe that.

Nevertheless, Baum’s proposals address reality–which is that 45 million student debtors now carry $1.5 trillion in student-loan debt. The proposals Baum put forward this week in Chronicle of Higher Education won’t fix this train wreck of the federal student-loan program, but they will make the system more humane.

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About Richard Fossey

Richard Fossey is a professor at the University of Louisiana in Lafayette, Louisiana. He received his law degree from the University of Texas and his doctorate from Harvard Graduate School of Education. He is editor of Catholic Southwest, A Journal of History and Culture.

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