Student Loans: Don’t Just Forgive, Restructure

Can we all agree that the government is really bad at lending money to students? The government lends to young people who have no credit. The hope is that every student, through luck or courage, will experience a financial transformation that allows them to repay their debts. But far too many students are entering a world of low salaries that make this dream a pipe dream.

Say what you want about banks, but they know how to lend money. They do this by basing their decisions on who has good credit. But the government program created to help needy students go to college only ended up hurting them.

The monthly bill to pay off student loans is unfeasible for low income students. On average, it amounts to $370 per month. Anyone can tell you that’s way too much. Just do the math.

Many recent graduates in their twenties earn between $30,000 and $40,000. This means that before a student pays for rent, food, daycare, or anything else, they must first spend 10-15% of their take home pay on student loans. What about assets or wealth? For most of these students, that would be zero – no home, no savings account, no retirement. The income they need to build their wealth goes directly to repaying student loans.

And these loans don’t even cover a student’s full college fees. One of the main reasons why tuition and fees increase every year is that university presidents know that any increase in tuition fees will be covered by the government who will lend more to students to cover the increase.

In the real world, loans are canceled every day by bankruptcy courts. A restructuring plan is created to ensure that the individual or business gets back on its feet. But the student loan forgiveness debate has become so ideological and heated that there is no discussion of what happens the day after forgiveness to students and colleges when they need continued funding. In the end, it’s all about arithmetic, but no one seems to be adding and subtracting.

Comprehensive student loan reform should take inspiration from bankruptcy courts and combine forgiveness and restructuring. Much concern surrounds which groups will or will not benefit from forgiveness, but too little attention is paid to student borrowers who will come after. What financial assistance will they receive?

The restructuring should clarify the future of funding as well as the structure that will or will not replace student loans. Sen. Elizabeth Warren (D-Mass.), for example, would like us to forgive the loans and look to the government for future funding. It works, but it would cost billions.

Other plans exist. Here’s one that might work: save students from paying interest. Simply ask them to repay what they borrowed and make up for what is lost in interest by investing the principal. This reform would accomplish several things. Students would see their monthly payments drop significantly. It would also simplify the process, as the amount students pay would never change. And that would allow the government to recoup some of its expenses.

The government is a better regulator than a banker. The reforms suggested here can be introduced at the same time as loan forgiveness. They could convince taxpayers that today’s losses from debt cancellation won’t happen in the future, which could make skeptical voters more forgiving.

Robert Hildreth is the founder of the Hildreth Institute, a non-profit research and policy center dedicated to restoring the promise of higher education as a driver of upward mobility for all. He also founded the non-profit university access Inversant and other organizations with complementary missions to bring low-income students to college.

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