TWO WAYS TO EASE THE STUDENT LOAN BURDEN KEY RECOMMENDATIONS FOR STUDENT LOAN RELIEF AND REPAYMENT SUPPORT

JIMMY SENGENBERGER

POLICY OUTLINE NO. 005 JANUARY 25, 2019

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The burden and pace of student loan debt “is at crisis levels.” according to a study for the Brookings

Institution. 1 Using college entrants from 1995-96 and 2003-04 as guides, the report finds that “nearly

40% [of borrowers] may default on their student loans by 2023. And it’s no wonder we’ve gotten to this

point. Since 1985, tuition has grown by more than 500 percent – more than healthcare, gasoline, and

food. Sixty-nine percent of 2014 graduates graduated with student loan debt. 2 The student loan

default rate was 11.8 percent in 2015. 3

As of 2017, more than 44 million Americans owed student debt at nearly $1.5 trillion, the second-

highest household debt after housing. It is the one form of consumer debt which continues to grow

since the Great Recession. 4 The average graduate of the Class of 2016 left with $37,172 in debt – up six

percent from the Class of 2015. 5 Unfortunately, unlike most consumer debt, student loan debt is

extremely difficult – if not impossible – to discharge in bankruptcy.

In my 2018 policy paper, Restoring Higher Education in AmericaRestoring Higher Education in AmericaRestoring Higher Education in AmericaRestoring Higher Education in America6666, I explored the root causes of the

cost crisis and proposed several market-based solutions. This policy brief focuses more narrowly on

the student loan issue and includes a new MPC proposal. Given the gravity of the situation, some

government-sponsored relief is justified. But rather than forgiving student loan debt – and opening a

pandora’s box to all that will result from such a policy – policymakers should reinstitute borrowers’

ability to discharge student loans in bankruptcy. Also, Congress should approve legislation like the

proposed Student Loan Repayment Acceleration ActStudent Loan Repayment Acceleration ActStudent Loan Repayment Acceleration ActStudent Loan Repayment Acceleration Act.

1.1.1.1. LetLetLetLet borrowers discharge student loans in bankruptcyborrowers discharge student loans in bankruptcyborrowers discharge student loans in bankruptcyborrowers discharge student loans in bankruptcy. . . . It used to be the case that student

loans could be discharged in bankruptcy. In fact:

[I]n the 1970s Congress made it much more difficult to escape student loan debt via bankruptcy,

fearful that soon-to-be-wealthy medical students were gaming the system. Doing so changed the

terms of billions of dollars of student debt ex post from being dischargeable in bankruptcy to being

completely protected. The move made it easier for students to get loans, even to schools where they

had little hope of graduating or for degrees unlikely to pay off in higher future wages. The amount of

student debt grew precipitously, as did the amount of debt under technical default…The change also

contributed to boosting tuition prices across the country. 7

Prior to these changes, loans were harder to get and high-interest because they could be

discharged in bankruptcy. Moreover, the federal government was limited in its involvement in

doling out loans, meaning arrangements were typically with private lenders. At the time it was

a risk for the lender – but it is no longer a risk for the lender, now typically the federal

government, and qualifying for loans is perhaps much easier than getting into the actual school.

The absence of risk to the market is an exploitation not of the lender but of the borrower. The

only group that the current system – whereby students are virtually guaranteed loans but are

unable to discharge them via bankruptcy – works for is the lenders. Risk must be returned to

the student loan marketplace, just like all other classes of loans, to resolve the problem.

Two Ways to Ease the Student Loan BurdenTwo Ways to Ease the Student Loan BurdenTwo Ways to Ease the Student Loan BurdenTwo Ways to Ease the Student Loan Burden

Key Key Key Key Recommendations for Recommendations for Recommendations for Recommendations for Student Loan Relief and SupportStudent Loan Relief and SupportStudent Loan Relief and SupportStudent Loan Relief and Support

The AccessLex Institute has suggested that “education loans [should] be considered on equal

terms with other unsecured debt in a bankruptcy proceeding if the loan in question has been in

repayment for at least seven years (exclusive of deferments or mandatory forbearances).” 8 A

gap before a bankruptcy declaration is reasonable because it helps ensure that students are

making smarter decisions and reduces the incentive to take out loans with the promise of

bankruptcy by encouraging them to think through their financial decisions more closely. A

five-year period, though, seems more appropriate.

In the future, schools ought to have some stake when a bankruptcy gets discharged, giving them

added incentive to be responsible stakeholders in their students’ education. For example, the

institution might continue to get its money up front for each loan disbursed, but it immediately

becomes, in effect, a co-signer on the loan. When the student defaults, the school could be

liable for up to 5 percent of annual losses on the value of the loan. As with anything, there may

be unintended consequences insofar as institutions’ desires to avoid penalties; however, overall,

the likely net benefit is worth consideration.

In addition, borrowers should at any time have the option of consolidating and/or refinancing

their loans with a private loan servicer at a negotiated interest rate (either fixed or variable).

Offering deeply-indebted borrowers a way out of student loan debt through bankruptcy is a

critical step to addressing the student loan issue. However, providing a useful means of helping

to speed up the repayment process would be very useful to borrowers who just need support.

2.2.2.2. Approve the Student Loan Repayment Acceleration ActApprove the Student Loan Repayment Acceleration ActApprove the Student Loan Repayment Acceleration ActApprove the Student Loan Repayment Acceleration Act9999 or similar legor similar legor similar legor similar legislation islation islation islation to assist to assist to assist to assist

borrowers in repaymentborrowers in repaymentborrowers in repaymentborrowers in repayment. . . . In late 2018, U.S. Senator Cory Gardner of Colorado introduced the

SLRAA to help make repayment easier. According to Sen. Gardner’s office, only 4 percent of

companies currently offer a benefit that helps pay off debt, even though there are about 45

million student loan debtors and 25 percent owe $100,000 or more. This legislation would

encourage employers to provide more assistance for employees to pay off their debt quicker.

The SLRAA would permit employers and employees to together contribute up to $10,000

annually to a 401k-style account. Employer and employee contributions would be exempt from

income, payroll, and federal unemployment tax so long as they do not exceed the $10,000 limit.

Employers would be able to determine how they want to structure their contributions, such as

choosing to “match” an employee’s contribution or to make monthly payments.

In fairness to sole-proprietors and the self-employed, the SLRAA would also let them claim

student loan debt as an above-the-line deduction up to $10,000 per year. The bill does not

allow employees, sole-proprietors, and self-employed individuals to claim double benefits via

the student loan interest deduction.

The SLRAA is not a sweeping legislative proposal like restoring bankruptcy protection. But if

passed and signed into law, it would offer some relief to workers and help make student loan

repayment a normal part of being an employee when you have existing student loan debt.

Many employers already offer retirement plans, but for deeply-indebted borrowers making

diligent payments on student loans, it may be premature to allocate limited money to build up a

nest egg. Employers should be able to offer alternatives: tax-exempt retirement account and/or

a tax-exempt student loan account.

Moreover, the legislation does not reinvent the wheel in how the accounts would be set up.

Rather, they would mimic existing structures, such as 401k plans, and it is like what some

employers have already started to do on retirement side. Finally, employers are reportedly

eager for new opportunities to attract new workers beyond simply offering higher pay. One key

benefit that many young people are looking for from employers is support with student loan

debt, and a handful of companies already offer such support. An initiative like the SLRAA

would provide more incentive for employers to offer such competitive benefits and thereby

result in this being an expected form of support so long as student loan debt is an issue.

Forgiving student debt would require an astronomical fiscal cost and result in numerous, catastrophic

economic implications across the higher education system. Even more, it forces other people to

effectively buy the college student something of value for nothing in return. The lender (the taxpayer) is

stiffed, or the borrower steals the loan by favoring the borrower over the lender. But that does not

mean that government cannot or should not take certain actions to help address the student loan crisis.

Along with an array of reforms to the higher education system discussed in Restoring Higher

Education in America, reinstating a deeply-indebted borrower’s ability to discharge student loan debt

in bankruptcy is integral to aiding those in need while returning risk to the lender for future borrowers.

Moreover, instituting a program like that proposed in the SLRAA maintains personal responsibility

while offering a way to accelerate repayment of student loan debt for average borrowers without a new,

massive government entitlement. Taken together, this is a far more reasonable and pragmatic

approach to the student loan crisis than outright forgiveness.

Contact tContact tContact tContact the Millennial Policy Centerhe Millennial Policy Centerhe Millennial Policy Centerhe Millennial Policy Center 10101010

To contact the Millennial Policy Center, please reach President and CEO Jimmy SengenbergerJimmy SengenbergerJimmy SengenbergerJimmy Sengenberger at 720-

316-1072 (office) or Jimmy@LibertyDay.org (email).

EndnotesEndnotesEndnotesEndnotes 1 Scott-Clayton, Judith. “The looming student loan default crisis is worse than we thought.” The Brookings Institution. 10 Jan.

2018. 2 Student Debt and the Class of 2014: The Project on Student Debt. The Institute for College Access & Success. 2014. Web. 3 Stratford, Michael. "Student Loan Defaults Drop as Obama Admin Again Tweaks Rates." Inside Higher Ed. N.p., 1 Oct. 2015. Web. 4 Nicolaci da Costa, Pedro. “America's student debt crisis is 'worse than we thought'." Business Insider. 12 Jan. 2018. Web. 5 "U.S. Student Loan Debt Statistics for 2018." Student Loan Hero. Student Loan Hero, Inc., 2 Jan. 2018. Web. 6 Sengenberger, Jimmy. “Restoring Higher Education in America.” Millennial Policy Center. 15 Jan. 2018. 7 Brannon, Ike. "How to Change Bankruptcy Law." The Weekly Standard. 6 June 2016. Web. 8 "Policy Proposal: Bankruptcy Discharge and Education Loans." AccessLex Institute. Web. 9 United States, Congress, Cong. Senate, Senate Finance Committee, and Sen. Cory Gardner. “Student Loan Repayment

Acceleration Act.” Student Loan Repayment Acceleration Act, United States Senate, 2018. 115th Congress, 2nd session, bill S.3595.

https://www.congress.gov/115/bills/s3595/BILLS-115s3595is.pdf 10 The Millennial Policy CenterMillennial Policy CenterMillennial Policy CenterMillennial Policy Center is a policy research, development, and education program (a think tank) whose mission is to

address public policy issues that affect the Millennial Generation (born between and including the years 1981 to 1998) and to

develop and present policy solutions that advance freedom, opportunity, and economic vitality for Millennials throughout the

United States. Our website is www.MillennialPolicyCenter.org.