In this video, I will be laying out some simple reforms that could fix the student loan crisis in America.
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Last week, I made a video about the Biden Administration’s loan forgiveness plan and why it is a bad idea. But I realized, I did not provide any alternatives on how to fix the problem. Student debt in America is a huge issue, that clearly needs to be addressed. One of the big problems with the Biden plan, is that it forgives debt, but does absolutely nothing to fix the problems in the system. We do need student loan reform. I think this is something that both Republicans and Democrats can support. So here are my recommendations on how to fix student loans.
All these solutions are based on a similar premise, allow people a “path to repayment.” There are clearly a lot of people who are struggling with their student loans. Rather than forgive their debt, we should make it possible for them to repay it. Many of the reforms we need are basic consumer protections for student loan borrowers. Many banks are taking advantage of poor, unsophisticated students. This ends up with situations where people are faced with unreasonable terms they cannot pay back. The government’s job should be to provide people a fair playing field to use these loan products.
The central issue with student loans is they are unable to be discharged in bankruptcy. This is important, because if banks are worried about bankruptcies, they will not lend to poor people. If we want poor people to have access to loans, we need to give banks bankruptcy protection. However, the law currently makes sure the banks are protected, but does very little to protect borrowers. It is very one sided. Giving more consumer protections to average citizens would create a fair playing field for everyone. Of course, the banks are going to hate everything I am going to propose in this video. But if nothing changes, the whole student loan system is heading towards collapse. So, the banks should really consider these reforms. Otherwise, the government is going to end up taking over the entire system, and I do not think the banks want that.
Now these solutions are not going to fix every single student loan issue, but I believe these are the areas where you would see the biggest impact.
- Bundle Private and Government student loans. Any solution needs to recognize that most people have a combination of both private and public student loans. Everything that the White House recently proposed only affects government loans and not private loans. For example, if your government loans allow you to have an income based repayment plan where you only have to pay back 5% of your income, it does not help you if you are paying 50% of your income to private loan companies. Private loan companies have notoriously bad repayment terms that are much worse than the government loans. Now people will say you cannot regulate loans from private companies. Why not? They are getting the benefit bankruptcy protection. If private companies are getting that government subsidy, consumers should receive the same protections as government loans. It is not fair that banks are receiving the benefit without receiving the costs. So, I say give private loan companies the choice. Either accept the same consumer protections as government loans, or private companies lose bankruptcy protections on the loans. College graduates should be able to bundle their private and government student loans together and pay them back under the same government protected loan. This way, income based repayment plans would cover both private and government loans.
2. Disallow all fees. Student loan companies, like most banks, charge excessive fees. If a borrower misses a payment or defaults on a loan, the fees are immense. The problem with student loans is that the banks are already receiving the benefit of bankruptcy protection. They should not be able to receive fees on top of that. It is not like the borrower is going anywhere. Banks are already charging interest. Fees should not be allowed. Excessive fees make it more likely people will not be able to repay their loans.
3. Loan Principal Should Never Increase. What happens with a lot of student loans is a borrower will receive a certain amount of money to pay for school, say $50,000. Then the student graduates and they may have to post-pone payments. Every time they do that, the bank takes the interest and fees that have accrued and adds it to the principal. Then the banks start charging interest on the increased principal amount. So then, people look at their loan documents and it shows they owe $100,000 in principal, when they only borrowed $50,000. This is another situation, where the bank is already receiving bankruptcy protection. They should not get the added benefit of increasing the amount of money that was borrowed, making it more likely people will not be able to repay their loans.
Let me emphasize this example. You have a lot of people that took out loans, that miss a payment for whatever reason. The interest and fees get added to their loan. There is a group of people whose loans keep growing year after year after year. There is no way mathematically that they can ever pay off their loan. This is the situation that bankruptcy normally prevents. If bankruptcy is not possible, there needs to be some pathway to repayment that covers both private and government loans.
4. Provide Options to Work for Forgiveness. There are limited work programs that allow loan forgiveness, but they are hard to qualify for and none of them cover both private and government loans. Even the GI bill through the military will not wipe out a lot of past student debt. Since student loans have become such a bad problem, we should create a work forgiveness program that is simple and covers all student debt. If you are willing to work at a job that no one else wants to do for five years, you should get your loans forgiven. There is a need for college educated employees for a lot of important social programs. Let us make it easy for people to take these low paying jobs. If you are having trouble paying your loans, this could be an attractive option that would be good for everyone. It could be run through the military and provide an option for people.
5. Special terms for dropouts. People do not make it to graduation for a number of reasons. College dropouts have the worst of both worlds. They have student loans they can never discharge, and they do not have the benefit of a college diploma in the job market. For many of them, dropping out is not their choice. They might have had a family emergency. We need to acknowledge that these people are going to have a difficult time paying the loans back. They should get their loans frozen so no further interest accrues. This is an acknowledgement that the loan was bad because it did not result in the degree. It also provides the borrower a reasonable pathway to pay back the original amount.
6. Stricter rules for universities. Universities are the place where these loans are being signed, and colleges should be responsible to not allow predatory practices on their campus. One simple example is that every college sends out marketing materials to every prospective student containing the salary information they can expect to receive if they obtain a diploma from their university. From my experience, these numbers are always massively inflated. They are marketing materials, so of course the university is going to choose the statistics that make them look the best. So, a young person looks at this information, and says “There’s no problem with taking out all these loans, because I am going to be making a ton of money.” Then when they enter the labor market, the salaries they are competing for are much less than they were promised. There should be strict laws that colleges cannot lie to students. Students need to be presented with clear information that shows if you are going to be an Art History major, this is how much money you are likely to make out of college, and these are your loan payments.
7. Tax universities. There are so many tax loopholes with universities, and universities have benefited greatly as they increase tuition every year. Many universities have built up massive foundations. When so many people are suffering under student loans, it is not fair that universities are getting rich at the same time. The simple solution is to increase taxes on universities. Then use those taxes to reform student loans.
These are seven ideas that I think would have the biggest impact on fixing the student loan problem in America. Banks receive protection from banktrupcy, but borrowers receive very little consumer protections. The banks take advantage of this and layer on enormous fees and interest. If students cannot discharge the loans in bankruptcy, we need to at least provide them with basic consumer protections so they always have a reasonable path to repayment.
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Neither Zach De Gregorio or Wolves and Finance shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.