#CancelStudentDebt is Meaningless without a #PlanforStudentDebt
Not long ago cancellation of student loan debt was considered a wild unattainable progressive dream, broached only by presidential candidates Sen. Bernie Sanders (VT) or Sen. Elizabeth Warren (D-MA). As of February 4, 2021 these calls have become a swelling refrain from the Democratic caucus — the occasional chirp in agreement from a Republican not withstanding.
But most all demands that President Biden eliminate or greatly reduce student debt take the form of a bailout, framed as a massive economic stimulus. With the exception of Sen. Bernie Sanders’, there is still no comprehensive plan for what student debt should look like (let’s be honest, in this Neoliberal Universe there will be student debt).
The moment is right to formulate a real plan, and to give it some traction.
Student Debt is complicated. But here’s a #PlanForStudentDebt that is as simple as they come, has the benefit of utilizing concepts and structures already in place, and addresses head-on the most immoral component of the current system: lending to students at predatory rates.
Any good plan has a premise. The premise behind the #PlanForStudentDebt is that society, not the student borrower, is responsible when that borrower cannot find a well-paying job post-graduation. In these cases — which have now become the norm — society must take responsibility for a stagnant economy, taking up the proportional financial obligation of its own failures in the form of a commitment to aid in the fair payback of student loans.
Here is the Four-Step partnership model of the #PlanForStudentDebt:
1. 1% interest, accruing only from when repayment begins
2. no compounding interest while in school, or for 2 years after graduation
3. the current PSLF-IBR program becomes universal: all student debt is forgiven after ten years of income-adjusted payments
4. all current student loan holders are retroactively adopted into the plan
That’s it.
The #PlanForStudentDebt has the immediate effect of #CancelStudentDebt but it does so under the creation of a fair and understandable repayment program for the present and future. Its language has the necessary public-relations and political discourse benefit of undercutting the rhetoric of those who argue that cancelling student loans is unfair by pointing out the unfairness of expecting student borrowers to conjure up jobs ex nihilo.
The Plan also gives legislators and higher education administrators time to address the fundamental problem of the rising cost of a college education.
Let’s break down the #PlanForStudentDebt.
STEP 1: From this point forward, all current & future student loans will have a a 1% interest rate, compounding annually, with no interest accruing pre-graduation, or for an extended grace period after graduation.
This means that the actual amount borrowed for student loans is the debt throughout the student borrower’s education and for 24 months post-graduation (rather than the actual amount borrowed as well as the addition of accrued interest).
Re-entry into any new, subsequent degree program (i.e., grad school) would freeze the accrual of interest immediately.
The 24-month post-graduation grace period takes into account difficulties of attaining a job post-graduation. It gives a realistic window for identifying where to live and work, and to establish financial stability and independence (even savings) before student debt payments begin.
The most controversial point of this proposal will of course be the idea that the federal government would lend at 0% to students for the duration of their education, and only gain 1% interest back thereafter. But consider the grounds on which this is considered unfair to the federal government and other taxpayers. Current interest rates on student debt are straight extortion of America’s youth. My own current loan interest rate is over 7%. There is nowhere that I or my peers can get anywhere close to that return on an investment of my own. The purpose of student loans cannot be for the government to make a good financial investment through extorting its own future. The federal government should not make better returns lending to its youth than that youth can make by investing in a savings account. 1% is fair.
STEP 2: After ten years, it’s all forgiven.
Once the 24-month grace period has ended, a ten-year plan for payback kicks in. That is: every and all student loans are paid back and/or forgiven after making payments for ten years (120 monthly payments).
How would this be managed? Through a program already in place: the Public Service Loan Forgiveness Program. Currently this program allows any student loan borrower who works for the United States (or a Tribal) government at any level, or for a non-profit organization, to have their debt forgiven after making 120 income-adjusted payments.
There is no good humanitarian, moral, or economic reason that this program should not apply to every student borrower. The #PlanForStudentDebt simply makes that obvious move. The fiscal and psychological benefit of every student borrower knowing that after ten years of making reasonable income-adjusted repayments towards their student loans they would be gone is incalculable.
How does a fair income-based repayment get calculated?
STEP 3: The current income-based repayment model is applied automatically to all borrowers, but the federal government assumes the difference between what the borrower can pay and what the borrower would pay if they had the income to pay off their 1% loan over ten years (120 monthly payments).
First, all repayments would be income-based repayments. Following the current PSLF-IBR model, borrowers would pay 10% of their annual “discretionary income” in twelve monthly payments. Discretionary income is defined as everything the borrower makes beyond 150% of the federal poverty level, as established based on their household size.
See the following charts for those numbers:
Currently income-based repayment is intended to establish fair repayment options, but as it is now applied it actually makes the situation worse. The #PlanForStudentDebt recognizes that the inability of a borrower to make their full, or ideal repayment is not their fault, but society’s.
Under The Plan the difference between the amount that a borrower can pay and what a borrower should pay to eliminate the student debt after ten years is assumed by the federal government. What this would look like in practice is shown below.
For now, the key point is that the current income-based-repayment model is broken. It is based on exorbitant interest rates. Even after refinancing, many borrowers on the current income-based repayment model have and will spend decades simply paying back accumulated interest. In other words, the current model is built to extract proportionally more from lower-income borrowers than higher-income borrowers if their loan amounts were the same. To avoid this additional extortion on low-income student borrowers, income-based repayment must be paired with matching government payments. If the economy can’t sustain providing a graduate with a job that pays enough to pay back the cost of their education, then that is the fault of society and not the student. Society must own the burden of its own economic shortcomings.
STEP 4: #CancelStudentDebt. But don’t do so outright: do so by retro-actively grandfathering everyone with current student debt into the #PlanForStudentDebt. Anyone who has been making payments, at the minimum level of what would be their income-based repayment, for at least 10 years, would automatically be considered to have already fulfilled their obligation to pay back their student loans. Many will have in fact far over-paid that amount. That over-payment would be returned as a tax credit: the #PlanForStudentDebt makes a smarter investment than tax cuts in our present and future national human capital.
Now, for specific examples of what the Four-Part #PlanForStudentDebt would look like for present and future borrowers, and for the government.
EXAMPLE 1:
Borrower A graduates with student loan debt of $50k.
After their two-year post-graduation grace period they have managed to find a job with a $50k salary.
In order to pay off the student loan debt in ten years (120 months), 10% of the loan needs to be repaid in the first year of repayment: $5k, or $417/mo. How do we cover that amount under the #PlanForStudentLoans?
Based on Borrower A (single, childless)’s discretionary income (accounting for household size), they would be required to pay 10% of discretionary income = $3.2k/yr: Borrower A would owe $267/mo.
The Federal Government would then assume the difference between what Borrower A can pay and what they ideally should pay.
Thus, in its matching contribution to student loan, the Fed would contribute the remaining $150/mo to make up the ideal repayment.
In this and all following examples these numbers would then be readjusted annually: after 1% of interest is added every year to the remaining debt, a new repayment amount for each party (the borrower and the government) would be calculated by taking into account changes to income and family size.
EXAMPLE 2:
Borrower B also graduates with student loan debt of $50k.
After their two-year post-graduation grace period they have managed to find a job with a $70k salary.
In order to pay off the student loan debt in ten years, 10% of the loan needs to be repaid in the first year of repayment: $5k, or $417/mo.
Based on Borrower B (married, one child)’s discretionary income (accounting for household size), they would be required to pay 10% of discretionary income = $3.9k/yr: Borrower B would owe $328/mo.
The Federal Government would then assume the difference between what Borrower B can pay and what they ideally should pay.
Thus, in its matching contribution to student loan, the Fed would contribute the remaining $89/mo to make up the ideal repayment.
EXAMPLE 3:
Borrower C also graduates with student loan debt of $50k.
After their two-year post-graduation grace period they have found a job with a $30k salary.
In order to pay off the student loan debt in ten years, 10% of the loan needs to be repaid in the first year of repayment: $5k, or $417/mo.
Based on Borrower C (married, three children)’s discretionary income (accounting for household size), they cannot yet be expected to pay anything towards their student loan debt (150% of federal poverty level for a household of five = $43,170, as above).
Borrower C would owe $0/mo.
The Federal Government would then assume the difference between what Borrower C can pay and what they ideally should pay.
Thus, in its matching contribution to student loan, the Fed would contribute the entire remaining $417/mo to make up the ideal repayment.
EXAMPLE 4:
Borrower D also graduates with student loan debt of $50k.
After their two-year post-graduation grace period they have found a job with a $100k salary.
In order to pay off the student loan debt in ten years (120 months), 10% of the loan is due each of those ten years. Borrower D would need to pay back 10% of the loan in the first year of repayment: $5k, or $417/mo.
Based on Borrower D (married, four children)’s discretionary income (accounting for household size), they would be required to pay up to 10% of their discretionary income = $5k/yr: Borrower D would owe $417/mo.
Though Federal Government assumes the difference between what Borrower D can pay and what they ideally should pay, Borrower D has realized the economic promise of their education and so the Fed would contribute $0/mo as the borrower is able to make the ideal repayment themselves.
In conclusion, the rationale. Students pursue Higher Education to realize the promise of our nation’s economy. Student borrowers who do realize the dream & promise of education, reaping the benefits of a successful economy, do not need that debt forgiven. They can and should pay back accrued student debt.
Fair is fair.
BUT.
Student loan borrowers who do not fully realize education’s promise because of a failed or stagnant economy cannot be held fully responsible for their accrued student loan debt. Society is. The government must back the debt.
Fair is fair.
Americans on both sides of the aisle agree that Higher Education is the gateway to opportunity, to realizing citizens’ economic potential. But it’s not just about being morally responsible. To bind the nation’s productive youth (and their parents) with the ties of never-ending debt is to chain the economy of the entire nation: self-destruction on a collective, national scale.
We must relieve indebted former students quickly & responsibly. At the same time we must have in place a sustainable model for student debt now, next year, and the years and decades after.
#CancelStudentDebt sounds amazing. But the #PlanForStudentDebt rectifies the past, and plans for the present and the future.
