Student loans: Don’t just forgive, restructure

Can we all agree that the government is really bad at lending money to students? The government lends to young people who don’t have any credit. The hope is that each student, through luck or pluck, will experience a financial transformation allowing them to repay their debts. But far too many students enter a world of low wages that make this wish a pipe dream.

Say what you will about banks, but they know how to lend money. They do it by basing their decisions on who has good credit. But the government program created to help students in need go to college has only ended up hurting them.

The monthly bill to repay student loans is unachievable for low-income students. On average it amounts to $370 per month. Anyone can tell you that is way too much. Just do the math. 

Many recent graduates in their 20s make between $30,000 and $40,000. That means that before a student pays for rent, food, daycare or anything else they must first carve out 10 to 15 percent of their take-home pay for student loans. How about assets or wealth? For most of these students that would be zero — no house, no savings account, no retirement. The income they need to build their wealth goes straight into student loan repayments.

And these loans don’t even cover a student’s total college costs. A big reason why tuitions and fees go up every year is because university presidents know that any increase in tuition will be covered by the government loaning more to students to cover the increase.

In the real world, loans are forgiven everyday by bankruptcy courts. A restructuring plan is created to ensure the individual or company gets back on their feet. But the debate over forgiving student loans has become so ideological and heated that there is no discussion about what happens the day after forgiveness to both students and colleges when they will need continued financing. At the end of the day, it is all about arithmetic, but no one seems to be adding and subtracting.

Comprehensive student loan reform should take a page from bankruptcy courts and combine forgiveness with restructuring. Much concern swirls around groups that will or will not benefit from forgiveness, but too little attention is given to the student borrowers who will come after. What financial aid will they receive?

Restructuring should make clear the future of funding as well as the structure that will replace student loans or not. Sen. Elizabeth Warren (D-Mass.), for example, would have us forgive loans and turn to the government for future funding. That works, but it would cost trillions.

Other plans exist. Here’s one that could work: relieve students from paying interest. Just ask them to repay what they have borrowed and make up what is lost in interest by investing the principal. This reform would accomplish several things. Students would see their monthly payments drop appreciably. It would also simplify the process as the amount students pay would never change. And it would allow the government to earn back some of what it spends.

The government is a better regulator than it is a banker. The reforms suggested here can be introduced along with loan forgiveness. They could convince taxpayers that today’s losses from canceling debt will not occur in the future and that may make skeptical voters more forgiving.

Robert Hildreth is the founder of the Hildreth Institute, a nonprofit research and policy center dedicated to restoring the promise of higher education as an engine of upward mobility for all. He also founded college access nonprofit Inversant and other organizations with complementary missions to get low-income students to college.