The Case for a Harris Student Debt Plan

The courts have once again blocked the Biden Administration efforts to provide student debt relief.? The 8thDistrict blocked the Biden Administration’s SAVE plan and the Supreme Court refused to immediately reinstate the program.? Based on previous rulings and the makeup of the court, the courts are likely to rule that the Biden Administration does not have the authority to implement the SAVE plan.

?It is generally not a good idea to introduce complex policy proposals late in a campaign.? However, there was no intra-Democrat party discussion of issues in 2024.? The courts, with their recent decisions, have elevated the student debt issue. It appears as though fundamental reform of student borrowing will require Congressional action.? The introduction of a student debt reform package will highlight the need for changes in our courts and for Democrats to win control of Congress.

?A new student debt issue is both good politics, and good economics, a relatively rare combination.? Reasonable people can differ on the merits of different loan discharge plans.? However, the current system of financing student loans is a mess in many respects.

?The current cohort of students has more debt than previous cohorts and the high debt level is a factor reducing family formation and saving for retirement.? The current combination of conventional and Income Driven Replacement (IDR) loan programs is not an economically efficient way to assist the student borrowers who are having a hard time repaying their loans.?

·????? Many people who enroll in income Driven Replacement (IDR) student loan programs immediately after leaving school will repay substantially more over the life of the loan than under a standard loan contract.? First, many IDR borrowers will leave the program once their income and marital status changes.? Second, many IDR borrowers will pay more under the IDR program than under a conventional loan program.? Third, many IDR borrowers will pay more in tax when they change their filing status to retain the loan payment reduction.

·????? Many IDR borrowers have not received timely discharges of student debt either because of loan servicer errors or missed payments.

·????? The existence of IDR loans can incentivize some people to take on more debt because incremental debt often does not result in higher annual or lifetime loan payments.

·????? The proposed SAVE program would penalize some community college students graduates who chose to take on more debt to obtain a four-year degree.?

A new more economically efficient student loan relief program would modify both conventional and IDR loan contracts and changes in the tax code.?

Discussion of modification of conventional loan contracts:?

·????? A zero percent interest rate for the first three years of repayment followed by the market interest rate for the remainder of the loan’s term,

·????? The elimination of the deductibility of student loan interest,

?The initial zero interest rate and initial lower payment on student loans will allow many student borrowers choosing a conventional student loan to make their payments on time.??

·????? The payment on a 20-year $30,000 student loan at 0 percent is $125 compared to $198 for a 20-year 5.0 percent loan.?

?The allocation of all monthly payments in the first three years of the loan to reduction in the loan balance quickly reduces the loan balance and lifetime loan payments.

·????? The loan balance after 3 years of zero interest on a $30,000 loan is $25,500 compared to $27,172 on a comparable 5.0 percent loan.

The cost to the taxpayer from the lower initial interest rate on the student loan is partially recovered by the elimination of the deductibility of student loan interest.

Many student borrowers either are forced into an IDR loan program or fall behind on their student loans shortly after graduation because most initial salaries are low.? The lower initial payment on the conventional student loan contract will allow many student borrowers to initially start repayment in a standard loan contract instead of an IDR program.?

Student borrowers with low salaries in need of assistance after the zero-interest period could apply for the revised IDR loan program when the interest rate changes after three years or repayment. ??Student borrower with higher salaries could continue with their conventional loan.

Student borrowers have more information about their need for IDR loan programs after a few years in the workforce.?? This modification to standard loans could reduce problems associated with the selection of the wrong loan plan, a change that could benefit both borrowers and taxpayers.

Discussion of modification of IDR programs:

·????? Partial IDR loan discharges after every 24 payments instead of total loan discharges at the maturity of the loan.

·????? A non-zero monthly minimum payment on IDR loans.

·????? Replace loan discharges at maturity with a clause eliminating all future interest charges on student loans 15 years after the initiation of repayment.? Allow the IRS to lead collection efforts on the new zero-interest loan formed by the elimination of interest charges.

?Many initial IDR loans, which became eligible for discharge, were not discharged at the scheduled time because the loan servicer could not confirm the required payments were made on time.

?Partial discharges after every 24 payments would reduce the need for long look back periods to confirm proper payments needed for a complete discharge.? It is easier to verify a payment from two years ago than a payment from ten years ago.?

?It is difficult for loan servicers to distinguish a borrower making a $0 payment because she has low income from a borrower who is making a $0 payment because she is avoiding her student loan obligation.? A small non-zero monthly minimum IDR program would allow loan servicers to more accurately identify people who have made the required payments for a loan discharger.

?The loan discharge decision has become somewhat political.?? Democrat Administrations appear to be placing a higher priority on loan discharges than Republican Administrations.? (Some Republicans would eliminate or curtail IDR loan programs.) Collection efforts on student loans should not be politicized.? Reforms that facilitate quicker and more reliable loan payment verification should reduce the level of political interference with the loan discharge decision.

?The partial loan discharges combined with the zero interest at maturity eliminates the situation where an increase in the initial amount borrowed does not lead to higher lifetime repayments. ??This incentive protects taxpayer and should provide some bipartisan support for the new IDR loan programs.

?Concluding Remarks:? James Carville, in a September 3, 2024, NYT article, argues that one of the things Kamala Harris must do to win this election is to introduce new policy proposals and become the candidate of change.? The Supreme court decision to halt the Biden Administration’s executive orders on student debt created a situation where it is likely that new proposals are the only way to move forward on this issue.? It is also apparent that Congressional actions will be needed to reduce student debt burdens in a way that is less expensive to taxpayers.? It is a good time to put forward proposals fixing these problems.

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