A Fair Resolution to Student Loan Debt

With the political season upon us, we continue to see a lot of discussion and proposals surrounding the looming student loan debt crisis in the US. According to the Federal Reserve, the current student loan debt held by students is at $1.56 trillion and continuing to grow. While there is a lot of blame to go around as to why total debt continues to grow, we seem to lack the ability to come up with a common sense resolution to the issue.

Naturally, many candidates for president are discussing policies that would simply eliminate the debt. Frankly, that's not realistic. Taxpayers simply don't have the tolerance to - yet again - bail debtors out for the bad choices they made. We went through this during the housing bust starting in 2008, and most taxpayers simply don't have the desire for another bailout. Beyond the tolerance issue, relieving some people of their debt to the expense of others is seen as unfair. One doesn't need to look further than the recent conversation between Elizabeth Warren and a father of a recent college grad (with no debt) to understand that families that sacrificed to avoid debt are, in effect, penalized by making better financial decisions. Frankly, I wouldn't want to be the person who tells a father who couldn't afford to send his child to college that he should pay off the student loans for a student with a Bachelor Degree in Dance at a school charging $40,000 in tuition and fees. It would be safe to assume he wouldn't have a positive response.

Worse yet, debt elimination can hardly be defined as "progressive". In a recent article published by the Brookings Institution (https://www.brookings.edu/blog/up-front/2019/06/28/who-owes-the-most-student-debt/), the clear indication is that over 50% of student debt is held by the highest two income quintiles.

If anything, student loan debt elimination would adversely benefit those that are in a much better position to pay their loans back. That's not progressive, it's regressive. 

A Fair Resolution

Certainly, simply waiving debt is quick and easy, and would draw a lot of support from debtors. However, as noted, that's not seen as equitable, fair or affordable. Instead, taxpayers and debtors should consider options that would be sensitive to the needs of all stakeholders.

In my research on this subject, one of the areas that I found that should be well received would be to make a simple change to the current tax code related to tuition reimbursement programs. Currently, the tax code provides a limit of $5,250 per year per employee where the employee can receive a tax free tuition reimbursement which is also a tax deductible benefit to employers. According to the Society of Human Resource Management, approximately 56% of US employers provide some form of tuition reimbursement to employees. I can personally speak to the benefits of this program as it covered about 70% of the cost for my MBA.

However, the current tax code doesn't allow eligibility for repayment of student loans. Certainly, employers can (and do) provide reimbursement of student loans for employees, but there is no tax benefit to the employer, and it's considered taxable income for employees. Certainly it helps, but the availability of that program is likely very limited.

Ironically, this idea isn't new. Rep. Rodney Davis (R-IL) proposed H.R. 795, the Employer Participation in Student Loan Assistance Act with 129 co-sponsors that specifically addressed this issue. Additionally, a second bill HR 2551, the Student Loan Debt Relief Act, proposed by Rep. Steve Stivers (R-OH) was offered for consideration. Neither bill moved beyond committee. In 2018, Senator Bill Nelson (D-FL) incorporated employer based student loan reimbursement as part of the Economic Modernization Act (S. 2648). That didn't go anywhere either.

In 2019, Congress tried it again. Rep. Scott Peters (D-CA) proposed HR 1043, The Employer Participation in Repayment Act of 2019 with 238 co-sponsors. In the Senate, Senator Mark Warner (D-VA) proposed S. 460, also called The The Employer Participation in Repayment Act of 2019 with 60 co-sponsors. Yes, you read that correctly, a majority of the House and Senate co-sponsored the bill. Where did these go? Nowhere. 

Who Benefits?

While none of these proposals have gone through CBO review, the benefits for this option far outpace any limited benefit for loan forgiveness that's simply unaffordable. 

Debtors

For students, the benefit is immense. When you consider the average student loan debt is roughly $34,000, students with this option would be able to pay off their entire debt - tax free - within 10 years. In fact, if a student had this option available, and the employer provided up to $5,250 in reimbursement per year, a student with a $40,000 balance at a 4.6% interest rate (a fair average) could pay off all of their debt within 10 years. 

Employers

Employers would simply get the benefit of an income tax deduction that is already in place for tuition reimbursement. Certainly, some policy changes would need to be put in place for documentation, etc., but from a practical perspective, not much would change for an employer. Beyond that, in a tight labor market, student loan reimbursement is a very effective employee hiring and retention tool. 

Tax Payers

For tax payers, this option would be viewed as significantly more equitable in comparison to debt relief by the government as it's really no different than benefits related to tuition reimbursement options already in the tax code. Beyond that, it will also likely to be better received as it's an employer paid expense rather than a tax payer expense. 

Conclusion

This really should be a no-brainer, but our elected officials can't seem to get the job done. The current proposals are not only co-sponsored by majorities in both houses of Congress, they are bi-partisan as well. It's a benefit that's easy to explain, equitable and fiscally sound.