A 2028 Student Debt Proposal
Moving on from Biden/Harris and Trump.
Vice President Harris, in response to an ABC News question, couldn’t list a single thing she would do differently than the Biden Administration. A 2028 Democrat or third party candidate will be asked a similar question.
The 2028 Democrat and third party candidate will need to acknowledge that in many cases Biden-era achievements were expensive to taxpayers, did not provide large gains and in some cases have already been reversed by the Trump Administration.
The newsletter and blog is preparing a series of memos on issues where a 2028 candidate should differ from the Biden-era policy. This post examines how the 2028 Democrat should differ from Biden on student debt.
The Biden Administration did effectively administer Income Driven Replacement student loans and programs offering debt relief to defrauded students; however, its more ambitious debt loan discharge proposals and expansions of IDR loans have either been blocked by the courts or have been halted by the Trump Administration.
The Trump Administration has halted applications to IDR programs, has cancelled the Biden proposal for expanded IDR programs and may cancel Public Service Loan Forgiveness programs. The Trump Administration is unlikely to forgive student debt to defrauded students and will likely not regulate loan servicers responsible for the discharge of existing IDR loans. (They have already laid off many of the regulators in the Department of Education who were responsible for administering student debt relief efforts.)
The most effective way to protect student borrowers is to reduce the cost of conventional student loans, thereby reducing dependence on IDR loans and student debt discharges. The 2028 student debt policy proposal calls for three modification to the standard student loan contract.
· Zero interest for the first four years of loan repayment,
· Restructuring of the outstanding balance of the loan at maturity to a zero-interest loan administered by the IRS
· The elimination of the deductibility of student loan interest payments.
The modified student loan contract is advantageous to both student borrowers and taxpayers.
The demand for complex hard to administer IDR loans would fall because student borrowers beginning repayment could now afford payments on conventional loans. The initial zero interest rate allows people who eventually choose an IDR loan program to learn more about their lifetime earnings and lifetime loan payments, thereby, reducing the number of people selecting the wrong payment plan.
The reduced reliance on IDR loans reduces denial of discharges due to administrative errors by loan servicers or borrowers.
The restructuring of outstanding student loan balances at maturity will reduce the number of older Americans who have their Social Security benefits garnished because of an unpaid student loan.
The cost of the interest rate concessions to taxpayers is offset in part or whole by decreased student loan discharges and by the elimination of the deductibility of interest on student loans.
An initial zero interest rate is more progressive than the tax deductibility of student debt, which disproportionately benefit high-income student borrowers with high marginal tax rates and high levels of student debt.
The initial zero interest rate allows student borrowers to more quickly deleverage and start savings for other financial priorities including retirement, emergencies, and the purchase of a home.
The 2028 student debt proposal could also include provisions for modifications to IDR loan contracts. Potential modifications to IDR loans include:
· Partial debt relief early in the life of the term of the loan instead of total debt relief after 10 to 20 years of payments,
· A non-zero monthly minimum IDR loan payment,
· Conversion to a zero-interest IRS loan at maturity instead of total loan discharge.
The provision for early partial debt relief will help student borrowers and loan servicers identify and fix payment errors sooner rather than later.
The requirement for a non-zero minimum payment should help loan servicers quickly distinguish between student borrowers who are up to date on their contract and student borrowers who are in delinquency.
The conversion to a zero interest IRS loan at maturity guarantees that people who borrow more have higher repayment obligations and creates an incentive for borrowers to reduce the amount they initially borrow.
Conclusion: The 2028 student debt proposal is better for taxpayers and student borrowers than the Biden-era policies. Moreover, the reforms could not be easily sabotaged by a future Administration that does not support programs helping student borrowers.
Authors Note: Interested in student debt. Read the previous memo Questions and Answers on IDR and SAVE loans.