In the last blog, we discussed whether the government will just forgive student loans. The skeptic in me sees this as a long shot. So, what can be done, short of forgiving all students loans, that can ease the burden on borrowers? We are talking federal loans because that is the bulk of the $1.5 of outstanding student loan debt. Here are some ideas:
- Eliminate or significantly reduce origination fees. Right now, undergrads are paying a 1.062% origination fee on their Stafford loans. Not onerous. But, let’s look at Parent and Grad Plus loans. The current origination fee is 4.248%. That is highway robbery! Borrow $100K, owe $104,248 right off the bat. Not right. Reduce the origination fee to 1%.
- Decrease the interest rates. Right now, interest rates are 4.53% on Stafford loans. But, the interest rate for Parent and Grad Plus loans is currently 7.08%. There is no reason that the interest on Parent and Grad Plus loans should be any higher than Stafford loans. The interest rate should rate should be fixed at say, 4%. And stay at that rate. Yes, it could be a subsidy to the borrower if interest rates increase, but it is much less a subsidy than forgiving all loans.
- Right now, federal loans can be forgiven in an income based repayment plan after 20 years (depending on the program). However, after the loan is forgiven, you have to pay federal income tax on the amount forgiven. Out of the frying pan and into the fire. Any cancellation after years of payments should not be a taxable event.
- Amend the bankruptcy code on discharge of student loans. Prior to 1978, student loans were dischargeable in bankruptcy. The Bankruptcy Code of 1978 allowed a discharge for undue hardship or after 5 years of payments. In the 1980’s, the law was amended to allow discharge for undue hardship or after 7 years of payments. In the 1990’s, only proving undue hardship translated into a discharge. Undue hardship is extremely difficult and costly to prove. In NJ, you must show that if you paid your loan, you could not maintain a minimal standard of living, that situation will continue for the life of the loan, and you made a good faith effort to repay the loan. The problem for college grads is that the statistics show that their incomes tend to increase the longer that they are out of school. So, it is difficult, absent some disability, to convince a court that your inability to maintain a minimal standard of living will continue for 10-20 years. Go back to the discharge after 5-7 years of payments.
- Give employers tax incentives if they contribute to employees’ student loans. The employer gets a deduction, and the contribution is not taxable income for the employee. A recently introduced bill will allow employers to contribute up to $5250 per year tax free to be used for student loan repayment.
Final thought. We have to look at the source of the problem. That is that college and grad school in the US are way too expensive. Over the last 30 years, those costs have risen at twice the level of inflation. It is beyond my pay grade, but something has to be done to bring these costs down.