Reducing interest loans would probably help. What would you propose they're reduced to?
The 'no bankruptcy' thing happens because there's little disincentive to declaring bankruptcy immediately out of school. The market would not load to students, which means far fewer students would go to university - reducing the average educated population in the US. How do you propose that this would work?
How do you propose that future costs of college are reduced? This is a goal, not a solution.
For interest rates,I'd have to think on it. Off the cuff, we could perhaps reduce them to 2%? I have not thought about the exact number, so I'd be open to ideas.
For bankruptcy, you're combining a future problem with a current problem. Make it allowable to be cleared in bankruptcy now. If people were willing to tank their credit to absolve themselves of the debt, that would be their deal. I think less people would up and declare it than you think. If it became an issue, you could require a certain period of time before they could declare bankruptcy with requirements of some sort for payments made in the mean time before it happened.
I think you are dealing with two sides of the same coin with bankruptcy and interest rates. Remember that aside from any government backing, student loans are essentially unsecured. If you go get a secured loan (mortgage, car, etc), it’s a low interest rate because it is backed by an asset a creditor can seize and sell to recoup some of the loan, and the threat of losing your car/house/etc is generally enough to keep most people paying as long as they can scrape together the cash.
Unsecured loans, on the other hand, like credit cards and personal loans, are much higher interest, because there’s little recourse a bank has aside from trashing your credit and/or suing you if you don’t pay. You can run up $20k on a credit card and then walk away and declare bankruptcy, and the bank will get pennies on the dollar maybe if you don’t have any assets to seize. They compensate for this risk with higher interest rates, just like you would demand a higher interest rate on a riskier investment.
So student loans are similar to unsecured loans, so you would expect to see similar interest rates in the 10-20% range, except they are non-dischargeable which keeps rates somewhat lower. I have no idea why they are currently at 6-7-8% versus the 1% or less (my wife consolidated at 0.5% in 2005) they used to be, that is an argument worth having, but basically if you make loans dischargable, you are inviting much higher interest rates.
What do I think needs to be done to address the issue?
I think a few things. First of all, we need data. We need to understand where the debt is highest, which degree fields are best and worst at paying back, and we also need to understand the percent of student debt that is tuition related versus room and board, what is for-profit college versus not, etc. “Student loans” is a much broader umbrella then we often consider.
Once we understand that, I think there are a few possible solutions that will help:
-Require some sort of “truth in lending” statement to be prepared for borrowers. Make schools give (independently audited) statistics on cost of degree, range and median of career earnings for graduates of that institution at 1, 5, 10, 15, 20 years out, job placement percentages, how likely they will need to go on and get a graduate degree and what that costs, etc etc etc. Give an amortization table, including what the loan will be worth at graduation (I wouldn’t be opposed to freezing interest while the student is in school). Just like your credit card bill, put the little box “if you pay the minimum it will cost X and take this long, pay $200 more and it is $Y” etc. Make this required to be signed before disbursing funds. Make it reqired borrowers receive updated numbers each semester. Make sure numbers are updated if the borrower changes their major. Etc etc etc. “I didn’t know” won’t be an acceptable answer anymore on “how did you get into this mess.”
-Uncap the tax deduction on student loan interest. I think it’s like $2500 now? That’s nothing.
-Require tighter control around how funds are disbursed. I’d like to see payment go directly to the school and not stop in student accounts (maybe that’s how it works now?) I’d also like to see reform around how student loans treat room and board. I’m not sure mechanically how to do it, because I don’t want to lock students into having to use premium-priced on-campus living arrangements, but I also want to avoid kids racking up “student loans” that stemmed from financing spring break trips and nights at the bar and such. Handing an 18-22y/o thousands of dollars a semester that they have to pay back “some day” is an invitation for that. Maybe there needs to be some kind of enforced affordable housing so student loans only cover “reasonable” housing and not luxury apartments. I don’t know how exactly to fix it, but it needs addressing.
-Encourage expanded loan payback programs from private employers. Give them a big tax credit or something, I don’t know. I would like to see it portable across employers, because otherwise it invites abuse. Maybe something like “after your first year of work at MegaCorp we will pay 50% of your student loan each month, scaling up to 100% after 5 years” or something. Or a fixed dollar amount, “up to $500/mo towards a loan, increasing to $1000”. That’s not perfect but something along those lines. I don’t want to see “work here 10 years and we’ll pay 100%” because people will be trapped. Again, give employers big ass incentives to do this, maybe for every 50 people whose loans they are paying you knock $1M off their tax bill, I dunno. Something. Make participation mandatory for every company with over (1000? 5000? I dunno) employees. Make this a “protected class” so employers can’t ask about it during the hiring process.
-Finally, I think schools need some sort of pain too. I wouldn’t be opposed to capping the rate at which they can increase tuition (all in, including “fees”). I wouldn’t be opposed to requiring them to freeze tuition at the price you pay when you entered for the average length of time it takes to get a degree (if a BA/BS takes 4 years on average to get at the school, you have a locked in price for 4 years upon starting, if you screw up and it takes 5 years, too bad for you. If you can’t finish in 4 because the school screwed you with scheduling, there would be an appeals process or something). I would require audited, easy to understand financial statements be delivered to the student or family at the beginning of every semester showing the breakdown of costs, % to administration, teachers, sports programs, building programs, etc etc, cash reserves, all that stuff. I’d also be receptive to hearing a creative way to tie the school getting paid to student success; put the student loans into escrow and instead of the school getting paid as soon as the student signs up for classes, the school doesn’t get paid until the student starts repaying, and if 10% of the students from that school default, the school gets 90% of the payments it was promised or something. And make sure admissions, etc are need blind so the school can’t hold this against students. I dunno, that’s off the top of my head and probably has a lot of holes, but you get the idea, a school is somehow penalized when its former students are ill-equipped to repay the loans they took out.
So those are my thoughts. Overall, I certainly want to help people who are burdened by student loans, but I really don’t think a mass pay-off is the right idea, it incentivizes bad behavior and creates a moral hazard. If you tie repayment to working, you avoid the whole “free ride” problem. And I think this puts the burden on all parties, the borrower who has to know what he/she is getting into, and is more restricted on what they can borrow for, the employer who benefits from an educated workforce and now has to have some skin in that game, and the school who can no longer jerk everyone around with crazy prices and has to be accountable for how the money is spent. I look forward to hearing why all of those ideas are terrible and stupid. I’m sure they need tweaks, but you get the spirit of them.