U.S. Student Debt: Dems Give it Some Attention

I do not ordinarily use this blog to focus on a particular article I have read, but this post will be an exception. In today’s The Economist (Feb 22), there is an article in the “Leaders” section entitled “Student debt: Getting the Maths Right”. This article discusses the different approaches put forth by some of the U.S. Democratic candidates to address mounting student debt, which has now reached $1.5 trillion in the U.S., or 7% of U.S. GDP. The Economist believe that the “forgive all student debt” being exposed by Bernie Sanders or the “forgive all debt up to $50,000” proposed by Elizabeth Warren is wrong, because these approaches provide the same benefit to all students regardless of their (post-graduate) income. I agree with this - why should high income professionals like bankers, doctors and lawyers have all of their loans forgiven just like low-income earners like school teachers or social workers? If we go down this path, any forgiveness should certainly be means-tested and prorated accordingly. But even if the U.S. does not partially or fully forgive student loans (which I don’t think the U.S. should), something needs to be done to address this growing problem, because student loans seem to be getting out of hand. The Economist feels the same way, which puts this newpaper’s much more in line with moderate Democratic candidates Mr Biden and Mr Bloomberg, both of whom propose some of the ideas below to ease the burden on student borrowers and to address the growing amount of student debt:

1. Repayments normally have to begin six months after graduation, but should instead begin when a threshold amount of income is reached as far as earnings post-graduation,

2. Once the threshold is reached and repayments begin, the monthly repayment amount should be linked to income (meaning say 5%-10% of salary), as opposed to requiring repayment of a fixed amount irrespective of the person’s income,

3. The interest rate on student loans should be decreased. The rate is now around 5% to 6% for student loans (varies undergrad vs graduate), of which 92% are provided by the U.S. government. The government should offer a lower interest rate to students who have gone into debt to finance their education.

4. The forgiveness of student loans should be non-taxable. Currently, if a student loan has been serviced continuously for a period of time, it can be forgiven in 10 years (public sector workers) or 20 years+ (private sector workers). However, the amount forgiven is treated as taxable income by the IRS, imposing a burden on the borrower.

5. Clamp down on low-quality for-profit colleges, which charge high prices, “facilitate” loans to pump up their students (and income), and often provide degrees that are not particularly marketable to potential employers.

The U.K. has adopted many of these provisions already, so student debt in the U.K. is less of an issue. When a student graduates from university, repayments are not required until a student is earning a threshold income of around £26,000 ($33,500), and the monthly repayments are based on a percent of income earned making the burden more manageable for those that have borrowed to finance their higher education. (The fact that in England, undergraduate degrees can be earned in three years (rather than four as in the U.S.) and tuition is capped at £9,250/annum ($12,000) helps, too.)

To give the party credit, the Democrats are at least talking about this issue with vigour. I have seen little from the Republicans on this budding issue so far, but perhaps I need to do more research. The fact that student loans in the U.S. are larger now than both auto loans and credit card loans should cause politicians on both sides of the aisle to pay attention to this issue no matter who is in the White House or which party controls Congress.