How to Solve the Student Debt Crisis
Put every penny toward the principal, with retroactive zero-percent refinancing.
I am not an expert on this topic, but I can’t help wondering if this could work. If you are an expert, please let me know what you think!
Many people have paid back the entire amount of money they borrowed on their student loans, yet still owe thousands due to excessive compounding interest and years of program deception and mismanagement. By refinancing all loans at zero percent interest, we give borrowers credit for every penny paid, allowing millions of Americans to retire their loans as Paid-in-Full, without the government paying off one penny of their original loans.
The student loan crisis is real, and fixing it is a political mine field.
Decades of mismanagement have left people in ever-increasing debt with no way out. There is no question that relief is needed and morally right. But we have a huge problem. There are millions of people out there who are in debt, with car loans, medical debt or overdue rent or credit card payments. There is also a perception that those who have attended college are at an advantage in our economy, because we’ve been telling people that very thing for decades.
The Democratic Party has been successfully portrayed by conservatives as being educational elitists, with enormous cost to our support among non-college attending Americans. They were not entirely wrong, which is why this is such a dangerous political vulnerability. We need to fix this problem, not give movement conservatives more ammunition.
How do we address the student loan crisis without igniting a class war?
We start with the questions of morality, and find a policy solution that will sit right with borrowers and with non-college educated voters alike.
Framing Note:
People make political decisions based on what they feel to be morally right.
Human beings across the political spectrum have a very strong need for self-respect: to think of themselves as a good person. That’s why they vote for the Party and the candidate that they feel to be morally or, if you prefer, ethically right, not so much in a religious sense, but in a gut level sense of what is right and what is wrong.
Framing Note:
People think about and judge behavior using cognitive metaphors.
In our society, paying what you owe is a moral imperative. Whether you are talking about financial debts or personal obligations, we all feel like things aren’t right until the “books are balanced” so to speak. We call this cognitive metaphor “moral accounting.”
What is (for some people) the moral issue with student loan forgiveness? Many people, even the borrowers themselves, feel like they have an obligation to pay what they owe. They agreed to the loans. They presumably got the education. For those who didn’t get what they paid for, we are already looking into relief.
Also, the term “forgiveness” is problematic. When do you forgive people? When they have done something wrong. The term is used differently in the context of “forgiving a loan” but the language still carries moral judgment.
It’s not just the loan that’s the problem, it’s the interest. People who are entering college don’t really grasp concepts like annual interest, amortization and capitalization of interest. When weighing their decisions, they are more likely to think about paying back the amount they borrowed, rather than the long term total. Plus, the benefits of their education in the job market are far from guaranteed. I won’t get into the train wreck that has been our student loan system. I will leave it to others to detail the decades of mismanagement, the deliberate deception, the failure of loan forgiveness programs, and so on.
Many people have been faithfully paying what they owe for many years, even decades, and now owe more than they originally borrowed, with future loan forgiveness little more than a mirage.
Rather than forgiving people’s loans, how could we make it possible for people to actually pay their loans off, thus meeting their perceived moral obligations?
We could apply all previous payments toward the principal, the amount they originally borrowed. For many, many borrowers, this would mark their loans paid-in-full.
We could effectively refinance all student loans at zero interest and then apply it retroactively. A retroactive zero-percent refinance would allow people to get credit for every penny they have paid.
If the total payments are less than the original amount borrowed, the remaining balance could be paid on an income-driven-repayment (IDR) plan at zero percent interest, and actually forgiven after some reasonable number of years.
What makes this morally and politically viable?
Borrowers pay back the entirety of the original amount they borrowed. No so-called “hand-outs,” just smart refinancing. This program is a reasonable compromise that respects people’s sense of responsibility and rewards borrowers for the effort involved in paying off the loan principal.
We also need to highlight the fact that many people use student loans for trade and professional training programs. We should expand these loans significantly to show respect for non-college paths to better jobs.
While the problems with the student loan crisis go much deeper than this, including the escalating costs of college and the failure of our society to provide better non-college paths to the middle class, the Paid-in-Full program provides substantial relief with dignity to millions of Americans who only sought to build a better life for themselves and found themselves in a crushing debt spiral, unable to buy homes, raise families or save for retirement, with a bureaucratic nightmare standing between them any chance of relief, and not even bankruptcy as an option.
The Bottom Line: Our message to the public:
The Paid-in-Full Plan
Many people have paid back the entire amount of money they borrowed on their student loans, yet still owe thousands due to excessive compounding interest and years of program deception and mismanagement. By refinancing all loans at zero percent interest, we give borrowers credit for every penny paid, allowing millions of Americans to retire their loans as Paid-in-Full, without the government paying off one penny of their original loans.
We also will be providing loans on the same terms to people who want to finance training or apprenticeships in other trades, because every American has the right to develop the skills that will allow them to succeed in whatever path they choose in life, without being trapped in unreasonable and escalating debt.
The unspoken part of this, though, is the cost to administer these programs -- my daughter has loans which she'll begin having to pay back as of this month. Would the government, essentially, cover those administrative costs? Like my daughter's company that she gets statements from is called Mohela but there are others, too...
I think this is brilliant framing AND good policy, Antonia. Is the RZR plan being considered by Congress? I've not heard it discussed anywhere else.