From the onset of the pandemic until today, the terms of federal student loan repayment have changed over and over again. It is often forgotten that President Trump was the first to pause payments through the CARES Act, signed in March 2020. But it was President Biden who tried to put a stake in the heart of student debt, forgiving most of it only to see the Supreme Court deny him the right to do so.
In his second term, President Trump has concluded that it’s time to collect on the debt. The administration announced in early May that it is resuming aggressive collections on defaulted federal student loans. The government is threatening to garnish wages, tax refunds, and Social Security benefits from those who fail to pay.
For many borrowers, it will feel like being flogged while already down. Defaults are expected to balloon. This isn’t about individual irresponsibility. It’s about a broken promise -- that student debt would pay for itself through higher earnings. For millions, it hasn’t. And it never will.
Is there any escape from what is broadly seen as a failed policy? Here’s an idea that would be a win-win for government and student loan holders: Sell the debt before it becomes an even bigger problem.
Student debt operates under a fundamentally different set of rules than most other types of debt—a fact that often goes overlooked. Federal student loans are not traded in financial markets and are not “marked to market” like corporate or sovereign debt. In fact, by law the government can only trade the debt if it involves no loss, a condition which has effectively prohibited any trading. This means the value of student loans remains on the government’s books at face value, even when long-term repayment is unlikely -- due to defaults -- or delayed through income-driven repayment, deferments, or forgiveness programs.
Thus, a first step toward a sale of the debt would be to recognize that the $1.6 trillion in student debt sitting on the federal government’s books is worth much less due to growing defaults. Only by shining the light of the market on it will we learn the real value of the debt.
Sales of debt into the market may involve painful discounts. But this will force transparency. After the sale, students would pay the discounted price, which would represent real debt relief.
In size and method, this policy change would replicate how the government resolved the Latin American debt crisis of the 1980s -- by negotiating steep discounts from the bank lenders, which allowed countries to repay much lower amounts, restoring their credit ratings. The combination of the government working with the private sector succeeded in lifting the entire region from depression and despondency.
We can borrow from this experience. Before a debt sale the government must set terms with prospective buyers that whatever discount is achieved in sales will favor the student borrower. Thus, if a bank buys a lot of debt at a 50 percent discount it will mean that the debt of the student borrower will be cut in half.
The bank will benefit from the ability of the student to keep up with lower payments. Right now, the credit ratings of students are in the cellar. Cutting the debt load on students would raise these ratings, making them better able to participate in the market for houses, cars, and other big-ticket items.
Meanwhile, debt sales would provide substantial cash to the government that could be used to provide student grants, pay down national debt, or meet any number of priorities. To maintain the status quo would keep the government in the collection business forever given the $1.6 trillion of debt, which will only grow over time.
If this effort were running smoothly, it would be one thing. But the government has wrapped itself into a pretzel trying to meet its fiduciary obligations to taxpayers while easing burdens on students. Meanwhile, the servicing companies it contracted to collect the debt infuriate students with false information, incorrect payment demands, and overall poor communication.
Selling the debt would free politicians from the trap of having to compel payments from those they seek votes from. It would also alleviate distortions, including how the easy availability of loans has allowed colleges to raise tuition levels to stratospheric levels.
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