Last month, Adam Looney of the Brookings Institution released a paper that is chock full of ideas for fixing the federal student-loan program. Looney began his paper with a withering condemnation of the program in its present form, which he accurately described as an outrage. I am quoting his critique verbatim, just putting his words into a bullet-style format:
- “It is an outrage that the federal government offers loans to students at low-quality institutions even when we know those schools don’t boost their earnings and that those borrowers won’t be able to repay their loans.”
- It is an outrage that we make parent PLUS loans to the poorest families when we know they almost surely will default and have their wages and social security benefits garnished and their tax refunds confiscated . . .”
- “It is an outrage that we saddled several million students with loans to enroll in untested online programs, that seem to have offered no labor market value.”
- It is an outrage that our lending programs encourage schools like USC to charge $107,484 . . . for a master’s degree in social work (220 percent more than the equivalent course at UCLA) in a field where the median wage is $47,980.”
All these failures, Looney charges, “are entirely the result of federal government policies.”
Third, Looney recommends the REPAYE program as the default student-loan repayment plan for all students. Unless a student opts out, all student-loan borrowers would be automatically enrolled in the REPAYE program when they begin repaying their student loans.
REPAYE, introduced by the Obama administration, allows student debtors to pay 10 percent of the discretionary income (income minus 150 percent of the poverty level) for 20 years rather than attempt to pay off their loans in the standard 10-year repayment plan.
In conjunction with automatic REPAY enrollment, Looney calls for voiding all fees, capitalized interest, and collection costs on current borrowers–costs and fees they wouldn’t have suffered if they had been automatically enrolled in REPAYE. In addition, he proposes to cancel all student-loan debt that is 20 years old or older–without regard to the status of these loans.
Finally, Looney calls for a halt in wage and Social Security garnishment, and an end to the Treasury Offset program–the program that allows the government to capture defaulted borrowers’ tax refunds.
These are all good proposals, but I have reservations. First, is it good public policy to automatically enroll all student-loan debtors in REPAYE–a 20-year income-based repayment plan? If we go that route, we will be creating a massive class of indentured servants who will be paying a percentage of their income to the government for a majority of their working lives.
Moreover, most people in those plans will never pay back the principle on their loans and could wind up with huge amounts of forgiven debt after 20 years, which would be taxable to them as income.
Secondly, Looney’s proposals–all good, as I have said–are complicated, and the Department of Education has a dismal record managing just about every aspect of the student-loan program. For example, individuals enrolled in the Public Service Loan Forgiveness program have been applying for debt relief, and the Department of Education has rejected 99 percent of all claims.
So these are my revisions to Mr. Looney’s proposals:
- Amend the Bankruptcy Code to allow distressed student-loan debtors to discharge their student loans in bankruptcy like any other consumer debt.
- Shut down the Parent PLUS program immediately, and allow parents who took out Parent PLUS loans or cosigned private loans for their children to discharge those loans in bankruptcy.
- Stop funding the venal and corrupt for-profit college industry (as Senator Elizabeth Warren recommends).
- Finally (and this is basically Mr. Looney’s proposal) wipe out all penalties, fees, and capitalized interest for all 45 million student-loan borrowers and stop garnishing wages, tax refunds, and Social Security checks of student debtors in default.
My proposals, Mr. Looney’s proposals, and for that matter, Senator Warren’s debt-forgiveness proposal are shockingly expensive. Any policy that grants student-loan forgiveness to the millions of people who deserve it will cost billions–a quarter of a trillion dollars perhaps or even more.
But let’s face facts. Millions of student borrowers are not paying back their loans under the present system. Indeed, Secretary of education Betsy DeVos acknowledged last November that only one debtor out of four is paying down principle and interest on student loans.
Let’s admit that the student-loan program is a catastrophe, grant relief to its victims, and design a system of higher education that is not so hideously expensive.