Monday, July 15, 2019

IT IS TIME TO START FORGIVING STUDENT LOANS -- AND HERE IS WHAT IT WILL COST

Student loans do not have a single, magic-bullet solution. Forgiving every single student loan is both politically and fiscally impossible.

But there can be immediate, targeted relief.

It is first worth asking:  What has gone wrong?

The loan regime for financing college works passably well in the following conditions:

1.    You start college before you have children of your own.
2.    You have a generous family.
3.    You finish college with very little interruption.
4.    You get a secure, well-paying job right after college.
5.    You do not have to change careers.

When all these conditions apply, student loans potentially operate like successful ‘leverage.’ The enterprising individual borrows $40,000 for a degree, but over many years they might earn an extra $500,000. Even after paying another $40,000 in interest, they are way ahead. Mitt Romney would be delighted.

However, not all degrees produce high-paying jobs. ‘Leverage’ leaves a lot of borrowers in trouble. Loans are much too precarious and dangerous for millions.

Historically about 40 per cent of college students ultimately drop out without attaining a degree. This has not changed with student loans. As a result, we have gone from having several million dropouts with no debt, to creating millions of dropouts who are buried in debt. Even Milton Friedman saw that debt was inappropriate for funding education, as far back as 1955.

According to the treacherous Betsy DeVos, only 1 in 4 borrowers is making payments on both principle and interest with their loans. Some are still in school, of course, but having your loans in deferment or forbearance does not stop interest from growing inexorably. 49% of borrowers have seen their loan balances increase in the last 5 years. Another 7 .4 million borrowers are using income-based repayment. This does keep them free of harassment by debt collectors, but their monthly payments may be so small that their loans are actually growing. 

The problem is not just that some borrowers are suffering. The real scandal is that NO borrowers should suffer. If higher education is to be a beneficial social program, no one should be worse off. 

Some nations actually achieve this with higher education. Germany, Sweden, and Finland among others charge no tuition. Higher education is not considered a personal ‘investment’ that can fail; it is a responsibility of the state.

Student loans are unheard of; they would be considered a ridiculous social brutality. Last year, Germany eliminated tuition because it was felt that charging students $1,300 per year was discouraging Germans from going to college. These nations do not want their own young people deep in debt. They do not eat their young financially.

In America, the concept of ‘land grant universities’ was socialistic. The government had provided huge amounts of land when we were an agrarian nation, and it kept providing income, housing, and educational benefits right through the 1960’s.

However -- as documented brilliantly by Melinda Cooper in her essay ‘All in the Family Debt’:

“The creation of a generous federal grant system under the Higher Education Act of 1965, along with a system of public universities offering tuition-free education, meant that an entire generation of students were able to go to college without relying on family support.
Neoliberal and neoconservative observers of the 1960s were convinced that these unheard-of economic conditions were responsible for the peculiar kinds of radicalism bubbling up on college campuses around the country. 

Observers were in agreement that the student movement could be neutralized only if free tuition was abolished and familial responsibility reinstated. Neoliberals then found a way to soften the blow by simultaneously calling for an expansion of consumer credit markets.”

America does practice solidarity with Social Security and Medicare, despite ongoing Republican opposition.  One can legitimately debate a citizen’s ‘return’ on taxes paid– but no one is impoverished just from being in the program.

When Medicare pays your hospital bill, this is not a ‘federally guaranteed loan’ that you have to repay with interest. Public money is just spent on your behalf, like a scholarship or a grant. (Medicaid does have a grotesque post-death recovery program for nursing home benefits.)

All the student loan sufferers share the same basic dilemma:

“We feel that society should be subsidizing higher education, both because it’s an investment in human capital and because it helps equalize opportunity. But how do you weigh the people who benefit from subsidized loans against the people whose lives are being ruined by them?”  (James Kwak)

“Rising indebtedness does pose a threat to some students and their families.  Debt, especially in combination with adverse life events, can tragically undermine opportunity.” (Jonathan Glater)

“As currently constructed, the student loan system has virtually no margin of error for those who do not succeed the first time around in college, or who encounter problems later”.  (National Consumer Law Center)

The surest sign of suffering under student loans is to be in default, which can be virtual financial suicide. Default can add 15% or more to your loan balance, trash your credit scores, and screw up apartment rentals, auto loans, and even cell phone contracts. It can even scare off potential employers… and yet:

·      34% of people who have started college – but dropped out – have defaulted on their loan payments.
·      13% of people who completed an associate's degree are behind.
·      11% of those who completed a bachelor's degree are behind
·      3% of those with a graduate degree are behind.

In terms of loan amounts, we find that:

·      19% of people with less than $10,000 of outstanding debt are behind on payments.
·      20% of those with between $10,000 and $25,000 are behind.
·      8% of those with $100,000 or more in student loan debt are behind. 

Some conservatives still believe there is no major problem. Says one:  "If you choose a major without researching its employability or if you decide to borrow heavily for college without considering the possibility of repaying your loans, you are the only one who is responsible for the consequences of your decision. No one forced you to take out loans.”  (Yanwen Xia)

Or, in the words of David Salisbury, former director of the Cato Institute’s Center for Education Reform, defending for-profit colleges: “My gut feeling on diploma mills is the whole idea of having to regulate this is the denial of intelligence of consumer and marketplace. If people want to waste their money buying a diploma from a diploma mill, let them do so.”

I hear shades of Andrew Mellon’s praising the Great Depression. This Treasury Secretary told President Hoover to “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate... it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people."

Well, most drug addicts were never forced to use cocaine or opioids in the first place. But we still consider these drugs worth banning, and we still offer treatment. We let people try and recover from their mistakes. 

Student debt has become a modern version of Pinocchio’s Pleasure Island – unlimited candy today, but eventually a form of lifetime suffering. You can add to your student debt in minutes, often online; but paying it back can be hellish.

A better question might be: “Why do we let young, financially ignorant people borrow so much?”  

In the words of Daniel Austin:

“Student borrowers are the Indentured Generation, starting from a young age, and many will become permanent members of an economic underclass. They are living in American society, but from a financial perspective, always on the outside looking in.”

Of course, this has happened before, and not long ago.

In the 1990’s, America felt that home ownership should be more widely available, and that federally-supported debt was the best way to achieve it.

But we vastly underestimated the potential for fraud and ignored the danger of compound interest.  House prices were supposed to rise forever, which would make expanded loans both helpful and harmless.

When house prices actually fell, we neglected the victims of subprime loans. Obama’s ‘solution’ for predatory mortgages relied on servicers to do the repair -- a ridiculous and venal concept. Loan servicers and banks have no incentive to make things work out. They want to get their bloated collection costs, extra interest, and other fees paid first, and worry about bankrupt borrowers later, if at all.

With student debt, we have already let thousands of borrowers “learn their lesson”, in a way that would make Andrew Mellon proud. Without the strong rescue policies outlined in this paper, there will be millions more.

All our reforms will be driven by the Golden Rule:

Namely, what would we want for our own children? I think that a vast majority would say “a fresh start.” As a nation, we should have done a better job protecting our young people – from loan sharks and frankly, themselves.

Therefore, our solutions will be a combination of “Relief and Replace.”

Relief:  Clear, quick, easy-to-access rescues to those who are in deepest financial trouble

Repair: For future students, replacing loans with grants and scholarships.

·      These reforms will cost the taxpayers money.  When a federal student loan is forgiven, the government no longer receives monthly payments. When a private, government-guaranteed loan is forgiven, the feds must cut a check to the lender.   
·      These reforms will cause debt collectors to lose revenue or even go out of business.  Employees at for-profit colleges are already losing their jobs.
·      These reforms may cause lower incomes for college professors and administrators. Some colleges will close (as is already happening), and nearly all colleges will have to cut costs. This is not unjust. According to Arnold Kling:

         “The right way to think about student loans is that they are a gift from taxpayers to the higher education industry, both non-profit and for-profit. Most of the benefit goes to those who work in that industry, not to students. Most of the risk is borne by students and taxpayers, not by those who work in the industry.”

The entire history of debt is that at some point, debtors and creditors are in a state of war. You have to take one side or the other. Either the creditor class prevails at the expense of everyone else, or popular governments find ways to reduce the debt burden.

Tucker Carlson is no one’s idea of a liberal, but even he was moved to say:

The campuses are filled with people who benefit from student debt. Drive through rural America, and you can see how well they’ve done. In a sea of poverty and despair, you will notice gated islands of affluence. These are colleges… If you haven’t been to an American university lately, see it for yourself. There’s been a building boom and a flood of six figure administrators on campuses, all of it funded by debt that is destroying a generation of American kids.”

Solution #1

Forgive all student debt for borrowers and co-signers over age 65.

There are approximately two million persons over age 65 who still carry student debt.

Either they owe money on their own loans, or they owe money in support of a child’s loans. 

The total amount owed is approximately $90 billion.

Nearly 40 percent of federal student loan borrowers age 65 and older are in default.  

(In comparison, 29 percent of federal student loan borrowers age 50 to 64 are in default, and 17 percent of federal student loan borrowers age 49 and under are in default. These are all horrible statistics, but they are worst for the oldest debtors.)
 
Over 114,000 seniors have had their Social Security benefits offset because of unpaid student loans. Social Security benefits may be their only source of regular retirement income. This means that benefit offsets may impose serious financial hardship.

The principle behind our forgiveness for seniors is simple: “Enough is enough”. 

People deserve a financially untroubled retirement.

(In England, all loans are in fact written off at age 65.)

Most debtors over age 65 have been paying on these loans for a long time. Their incomes are not going up. Often, they cannot even cover the interest on their student loans. They have likely been hit with extra fees, capitalized interest, and unconscionable collection costs.

Many of their debts come from ‘Parent Plus loans’, which are a form of grotesque financial cruelty. These loans have higher interest rates and even a 4% origination fee. 

Since students generally have no financial assets, lenders want access to the parents’ money. This certainly does ‘bring families together,’ but in a destructive cycle of intergenerational debt.  

The Parent Plus loans must end immediately. If the current limit of $57,000 in undergraduate federal loans (over 4 years) is not enough for a student -- then that student is in the wrong college.  

Forgiveness for seniors will not be complicated. The over-65 debtor can request forgiveness with proof of age, and their loan can be cancelled.

For any private loans that are forgiven, the government will have to compensate the lenders.  

Seniors’ loan forgiveness could be spread out over several years. In the first year, loans could be forgiven for borrowers over 75; then in the next year, for those between 70 and 75, and so on. 

Alternatively, we can start forgiving any loan to seniors whose current income is less than $20,000 a year and move up quickly from there. We need to start putting statutes of limitation on student debt. 

The federally-originated loans can just be cancelled, and no more payments would be due. Our government had no difficulty purchasing thousands of mortgage loans in 2008. The Federal Reserve bought up bad loans, and essentially warehoused them until the losses could be recognized.

Skeptics may point out that when loans are written off, the federal government “loses” an asset on its balance sheet.

So what?

Student loans are a precarious asset at best due to the large rate of delinquencies. If 40% of loans will ultimately go bad, this asset has limited value. 

As Kevin Williamson (again, no liberal) notes:

“If we just gave the universities money, that would show up on the books as an expenditure; whereas lending it to students allows us to pretend that we have created an asset, when all we have actually created is a great deal of debt and horses—t.”

In fact, government loans are a toxic asset, to the extent they create impoverishment of our own citizens. 

A bank in Oklahoma in 1932 might have owned a lot of farmland, due to foreclosures… but their community was being ruined. Owning bad loans does not make a nation prosperous.
In the long run, debt forgiveness could make the nation better off. The greater spending of ex-debtors should eventually produce more tax revenue than the loans ever did.   

Compare the handling of German war debts in 1946 vs. 1919.

·      After World War I, America righteously demanded full debt repayments… and what did we get? Not much money, then a Depression and then Hitler.
·      By contrast, we forgave the Nazi war debts after World War II -- (except about $2 billion reserved for Israel and Holocaust survivors) -- and we got an economic boom in America and West Germany.

In America itself, Alexander Hamilton paid off Continental Congress war bonds at one cent on the dollar. Perhaps half of the white people who came to the USA were escaping their debts and indenture in Europe.  

In the words of James Galbraith:

Public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets. Private households get more cash. They own that cash free and clear, and they can spend it as they like. If they wish, they can also convert it into interest-earning government bonds or they can repay their debts. This is called an increase in "net financial wealth." Ordinary people benefit, but there is nothing in it for banks. Bankers don’t like budget deficits because they compete with bank loans as a source of growth. When a bank makes a loan, cash balances in private hands also go up. But now the cash is not owned free and clear. There is a contractual obligation to pay interest and to repay principal. If the enterprise defaults, there may be an asset left over–a house or factory or company–that will then become the property of the bank. It’s easy to see why bankers love private credit but hate public deficits.”    

Solution Number Two

Forgive all debts for students who have been defrauded by for-profit colleges

There are approximately 157,000 “Borrower Defense” fraud complaints in process at the Department of Education.

These borrowers have declared -- under penalty of perjury -- that their schools misled them by using false job placement rates, lies about credit transfer, or other unrealized promises that had a financial impact on the student.  However, Under Betty DeVos the Department of Education has been delaying action on these complaints. Even when claims are approved, only a portion of the loans is typically forgiven. 

We should move the other way! It is time to approve the complaints rapidly, in full. 

The average forgiveness on the approved claims has been $14,100.    

Even if this average goes up to $25,000, approving the current claims plus 100,000 more would cost about $6 billion. 

The federal government has been deeply complicit in the misery that for- profit schools have caused. The Department of Education has normally chosen to protect predatory businesses, at extraordinary expense to students. Top officials at the Department have been stockholders in Sallie Mae and other profiteers. As Bob Shireman documents, the government has released one study after another – over decades -- revealing massive wrongdoing in the industry… but Washington is very slow in closing down the worst offenders.

Just one example, from Toby Merrill: “The Department of Education litigated for two years to avoid suspending collections and notifying former students of Wilfred Academy that they were eligible for debt relief despite the agency’s findings that, as a result of pervasive fraud throughout the company, all applications for discharge it received should be granted.”

David Halperin’s account in Republic Report should be read in full detail…

“Trump Secretary of Education Betsy DeVos owns the ongoing, awful meltdown of the chains of career colleges — the Art Institutes, Argosy University, and South University — formerly operated by for-profit Education Management Corporation. Yet now, as campuses across the country have devolved into chaos, faculty and staff have lost their jobs, and students are left, short-term, lacking money for necessities like rent, and long-term with their futures in doubt, the DeVos Department is doing little to assist students. The Department isn’t even providing students with basic information.

DeVos’s conduct, and that of her subordinates, notably Acting Under Secretary Diane Auer Jones, a former for-profit college lobbyist, constitute dereliction of duty and malfeasance, and a complete disgrace.

Prior to Trump and DeVos coming to power, EDMC, many of whose programs offered quality instruction, devolved through a series of greedy and unethical owners and CEOs — including Goldman Sachs, Jeffrey Leeds, and Todd Nelson — into a predatory operation that deceived, coerced, overcharged, and under-educated students, while taking billions in taxpayer dollars. Ultimately, federal and state law enforcement went after EDMC, resulting in a settlement that did not come close to making students whole or adequately penalizing the company and its executives, but at least created concrete accountability mechanisms.
Everything DeVos, Jones, and their team have done have made the situation worse. They have worked to dump the various Obama-era regulations aimed at curbing predatory college operations and protecting students. They re-instated ACICS, the country’s worst college accreditor, which had turned a blind eye to bad behavior at for-profit schools, including some EDMC schools. They approved a wave of bogus conversions of for-profit colleges to non-profit status, and tentatively approved the conversion to non-profit of the EDMC schools after they were acquired by a new non-profit group, Dream Center Education Holdings (DCEH).”

The number of Borrower Defense claims will grow rapidly, and it should. Richard Fossey notes that “Such claims are nothing compared to the fraud committed by the for-profit college sector, the exploitation by student loan debt collectors and the venality of college presidents making million-dollar salaries while students are forced to borrow more and more money.”

The Obama administration did a decent job in closing down some of the worst for-profit schools… but that is not enough.

Extra effort must be made to guarantee affected students that at least some of their credits will be accepted, and that students will not be charged additional tuition and fees to start over again. There must be a federal agreement on better transfer opportunities.  

Unwinding the venal for-profit industry will not be done overnight and it will not be cheap. By the time these schools get into financial trouble, there is usually no money left for students or taxpayers. The crooks at Argosy University had actually seized federal aid money that was intended for students.  It has been a huge legal struggle just to cancel the high-interest loans made to desperate students by the colleges themselves. All taxpayers truly owe a form of reparations here.

Solution #3

All debt forgiveness must be income-tax free.

When loans to seniors are forgiven, and when predatory loans from non-profits are forgiven, there should be no income taxes due. Also, anyone who completes income-based repayment in the future should not be taxed. 

James Brooks proposes that loan forgiveness could be classified as scholarships, which are excluded under the tax code. The purpose of loan forgiveness is similar to the purpose of a need-based scholarship.

Picture a graduate student with a loan balance today of $100,000. If they go on income-based repayment, their loan may still grow because their payments may not even cover the interest. Compound interest is lethal!

Twenty years from now, their loan balance might be $200,000. Can the government really collect $60,000 or more in income taxes when the loan is forgiven? The issues of affordability, bankruptcy and forgiveness will return all over again. 

Long-term, this tax forgiveness could reach $200 billion, but that would be over a multi-year period. The cost in any one year’s federal budget should be manageable.  

Whatever action we take, it must be universal for all debtors. The ‘Public Service Loan Forgiveness Act’ should never have been limited to just public employees! (Especially when government employees already have more job security, health benefits, and pensions than most private sector workers.)

For now, all existing applications for the Public Service Forgiveness program must be approved immediately. Debtors of all kinds would not need to navigate all the current barriers -- regarding the right kind of loan, the right forms filed with the right servicer, and the shifting rules of the Department of Education for approved forgiveness.

The borrower would just submit 120 cancelled checks -- made to any payment plan – and proof of covered employment. The arcane rules about direct loans vs. FFEL loans, covered repayment plans, et al. would disappear. Servicers would be deservedly left out of the picture.

Solution Four

No student loan payments will be due -- and no interest will accrue -- until the borrower’s income exceeds $40,000.

This is not a deferred payment; the payment amount is $0.

Loan balances would not increase while a person was in school.  

If a lower-income student drops out and never earns $40,000 a year, they owe nothing. Such loans are just mistakes.

(This has been done successfully in Australia. Julian Castro has proposed a similar reform for the USA.)

The borrower will have to take the initiative here. They can submit their prior year’s tax return, and that could give them a grace period from payments or interest accruals.

(This need not be done on a real-time, income adjusted basis, which has been a dubious feature of the Affordable Care Act. If your income goes up or down during the current year, you are still stuck with last year’s assessment status. We can live with a certain imprecision.)

The government will have to give up its loan interest during these deferrals -- about $18 billion in interest would not accrue each year.

(Note: Private lenders cannot be forced to go along with this deferral… which is just one more reason to avoid private loans.)

We must shed the goal of the government “breaking even” or even making money on student loans. This has constantly led to higher interest rates, aggressive collections, and debtors’ misery all around.   

It is not wrong if student loans have a ‘net cost’ to taxpayers. In fact, we should assume that much of the loaned money is just “gone”.    

When it comes to student loans, the Department of Education still acts like a private sector lender: its officials worry about preserving their ‘bottom line.’ They think they are performing a valuable service when they crush forgiveness plans and fight every bankruptcy filing. Sadly, this stinginess has had the endorsement of Congress, which wants student loans to stay ‘budget-neutral’ whenever possible. No one seems to notice that borrowers are taxpayers too.

This is wrong and must change!  Student loans should not be counted on as a significant source of revenue for the government.  Today the federal government collects over $3.5 trillion a year in all taxes. If the Department of Education shows a large deficit, we can raise taxes on wealthy persons. The goal of reducing the federal debt is not a bad thing in itself – but for heaven’s sakes, let’s not meet this goal by beating up on bankrupt ex-students. Right now there is an actual debate on whether loans can be forgiven to disabled veterans… how pathetic and stingy can we get?

When the Corinthian schools went under, a large percentage of their students had household incomes under $10,000. These students should not have been getting any loans of any kind in the first place. The way to help them is not loans, and never has been. The key is to expand Pell Grants, as discussed below.

Solution Number Five 

Allow student loans to be discharged in bankruptcy.

We all know that bars. restaurants, and casinos can declare bankruptcy. Huge airlines can declare bankruptcy (often to destroy their unions and shed their pension plans) ;  Donald Trump has declared several times. 

Gamblers can declare bankruptcy; credit card abusers can declare bankruptcy; VA mortgage holders can declare bankruptcy; virtually all small businesses can declare bankruptcy. The worst non-profit colleges (c.f. Corinthian) can declare bankruptcy, though only after the owners have cashed out massively. American businesses value the bankruptcy laws for their own purposes. They understand that debt forgiveness does not mean the collapse of economic civilization.

We would not be “coddling” ex-students, if we give them the same bankruptcy standards as all other borrowers.

This is not to deny that some borrowers have made huge mistakes. They did not keep track of all their loans; often they kept taking loans to get an advanced degree in a dormant field… which (they prayed) would lead to higher incomes. 

The question is, how long are we going to make them (and their parents) suffer for bad bets? The rest of their lives?  Lenders don’t care; they never have. But public policy should care.

Bankruptcy is a recognition that both borrowers and lenders have made a mistake.   

Bankruptcy gives some satisfaction to both “sides’ in the student loan crisis. Desperate borrowers get relief, but they also may lose assets, and undergo some degree of humiliation. This should keep the general public from feeling dangerously resentful.

The following steps are the beginning of bankruptcy reform:

1.    Loan holders will not fight a borrower’s requests for discharge, any more than Visa or Master Card sends out an attorney to every single bankruptcy hearing today. In other words, the Department of Education stays out of this. The government should not be squeezing every last dollar out of student borrowers, and certainly not taking bankruptcy cases to appellate courts.
2.    The court should just accept simple documented proof from borrowers that they cannot repay their loans on a reasonable ten-year schedule, and still maintain a basic standard of living. In fact, if the borrower earns less than 200% of the poverty line, bankruptcy would be granted without challenge.
3.    The court need no longer require a ‘certainty of hopelessness’ from the borrower.  This would no longer be an adversary proceeding. The borrower need not prove permanent illness or disability.
4.    Student loan bankruptcy would not be permitted for five to ten years after graduation.
5.    An attorney would only be needed for counseling, and also to file the correct bankruptcy forms. The cost should be no more than $1500-$2000. There would be no lengthy, adversarial hearings.

Here is a how a sample calculation will work in court: 

1.    Assume The debtor has income of $40,000 and two children. (Each state has income limits governing who can file for Chapter 7 bankruptcy.)
2.    The standard formula might state that this person can devote no more than $300 a month to debt service.
3.    If $300 a month is not enough to make minimum payments on credit cards and student loans, then bankruptcy is permitted, and the student loans can be cancelled.
Note: The bankruptcy judge can alternatively “cram down” the student loans – i.e. by demanding that smaller loans be repaid if the income is there, but still cancelling the unpayable debts.
4.    Again, this will not be a lengthy inquisition. The debtor need not prove that their situation will never improve.

It is hard to predict how many student loans can be discharged in this manner. Dr. Robert Lawless estimated that $2.8 billion in loans would be cancelled, but that was using 2012 numbers. For now, if 200,000 debtors went this route in a year, and the average cancelled debt was $50,000, the nominal cost to lenders in that year would be $10 billion. Private lenders will complain, even if the federal government gives them some compensation. (Bankers really want that future flow of interest.)

Of course, this will make future loans harder to get – which is on balance a good thing.

Repair No. 1

Increase Pell Grants to $10,000 and make them available to any family whose household income is under $80,000.

This will benefit at least 9 million students. The federal expense would be $90 billion in total, less the $35 billion we pay out in Pell Grants today… in other words, $55 billion more spending each year.

However –

As Pell Grant spending goes up, new federal loans must simultaneously go down.

The government has been spending well over $100 billion a year on new federal loans and loan guarantees.

New loans must be vastly reduced. Loan limits will be lower --(see Repair No. 3, below) -- and loans will virtually disappear in for-profit colleges.

The Pell Grant is a voucher, as was the GI Bill in the 1940’s and 1950’s. When we give vouchers to parents for elementary education, even right-wingers applaud. 

The Pell Grants must be available to any student --even those who are in default -- plus any students whose earlier loans have been forgiven.

(Note: Some Pell Grants can include child care benefits and housing credits for adult students. This is what the GI bill covered for millions of veterans with new families.)

This is a large change in policy, but one that is overdue. Congress has been shifting public funding away from grants for thirty years, in order to increase student loans and loan industry subsidies. Even the Democrats proposed cutting Pell Grants in 2014. We have even allowed a small grants program called TEACH to collapse, when many awards were converted to loans beciuse the correct paperwork was not submitted each year.

Like so many Republican schemes, this is partly from libertarian ideology, but also a desire to reward  cronies in the lending and debt-collecting businesses. (No one ever got rich servicing Pell Grants.)  Taxes were reduced on well-off Americans, but debts were increased on the non-wealthy young to make up the difference. A public responsibility (i.e. higher education) was converted into private burdens.  

Fortunately, we already have a means for financing future Pell Grants. It is called the progressive income tax. Students’ tuitions should be funded with grants. No grants would ever be repaid. People would simply pay their taxes.

We should pay for college education by taxing individuals and corporations now --- rather than have students pay all the costs out of future wages. This will be unpopular among anti-tax conservatives, but again it is overdue.

Repair No. 2

Provide more federal funds to community colleges and vocational schools.

One example would be full funding for the America's College Promise (ACP) Act:

This law would provide $61 billion over the next decade to make two years of community college free, so students   can earn the first half of a bachelor's degree or an associate degree at no cost.  

Giving more money to community colleges will help replace the for-profit colleges.

As for vocational schools – their current federal funding for vocational schools is well-intended, but pathetically small at present. Here is a recent legislative proposal:

·      ESSA Title IV-A Student Support and Academic Enrichment Grants – Increase of $70 million, to $1.17 billion. This program can provide funding to CTE programs, particularly in the areas of college and career guidance services, education technology and STEM education.
·      Apprenticeship Opportunities – $160 million, an increase of $15 million.
·      Adult Education – State grant program increase of $25 million.

Support for vocational schools should be ten or twenty times this amount. These schools have no dormitories, no sports teams, no meal plans, and no professors earning $150,000 to teach one class and do research.

Meanwhile: The graduates of vocational schools reliably find jobs in machining, auto repair, heating ventilation, computer repair and electrical installation.  In fact, due to partnerships between corporations and schools. there are over 500,000 apprentices who have decent jobs while still in school.

Vocational schools have no dormitories, no sports teams, no professors on paid sabbaticals, etc. The message to conventional colleges might be “If it costs you more than $10,000 per year to educate a student, your costs are bloated.”

For the past twenty years, the loan monies which have gone to dishonest for-profit colleges could have funded every vocational school and community college at 100%, with ease.

Repair Number Three

Establish Loan Limits      
                                     
In 2009, the U.S. graduated 38,000 students with bachelor’s degrees in computer and information science, and 2,500 with bachelor’s degrees in microbiology.

However, we also graduated 89,000 students in the visual and performing arts, psychology, and journalism.  

Many of the saddest student loan stories involve degrees in counseling or liberal arts. Time after time, one reads of students who borrowed over $100,000, in order to get a social worker job or an art therapy job that pays $28,000 a year.

The workers who clean hotel rooms in Las Vegas make more than $28,000 a year, thanks to a strong union. The workers at McDonald’s in Germany make $36,000 a year, again due to unions.

Americans would not be so desperate for college credits, if they could earn a living wage in all occupations. Instead, Americans look to college as an insurance policy against low wages, unemployment, and downward mobility.

Unfortunately, we have to start denying federal loans for careers that do not reliably produce high earnings. No one would be barred from studying social work – and they could take out non-guaranteed private loans, if a lender is foolish enough to offer one ---but they could not borrow federal money to do so.

If an industry actually needs new employees – whether it is plumbing, welding, or computer science – let the industry provide money for grants and apprenticeships. For example, Audi is paying tuition for young mechanics, in order to create a steady pipeline for their workforce. IBM is going directly to high schools in Louisiana to train programmers.

This is in stark contrast to fields that have a tremendous oversupply of candidates already. For-profit colleges are not the only exploiters……what about PhD programs that recruit and retain graduate students, use them as teaching assistants, but leave them virtually unemployable? This is the opposite of a public good.

Bottom of FormIf an industry has no real demand for new workers, then without loans there will be very few new students, other than wealthy kids who can study anything they want. How bad is that? 

(Actually, we need more schools like the new Lambda programming colleges; Instead of tuition, students can pay for their education once they receive a job with a $50,000 annual salary. Once students snag a job that meets the salary minimum, graduates pay back 17 percent of their salary over a period of two years (with the maximum payment capped at $30,000). If you don't find a job, or meet this income level, you don't have to pay a cent. And if you lose your job, or your monthly pay dips below $4,166.66, you can pause the repayment for that month.)

We must shed the notion that every student should get huge loans to ‘follow their dreams’ in an over-crowded field, or to attend the over-priced ‘college of their dreams’ on borrowed money.  

Is this paternalism? Of course, and not a moment too soon. Letting millions of debtors learn harsh lessons is extremely wasteful. Anyone who can read history knows that debt is dangerous. Look at the wreckage that has been wrought by guaranteed loans for any course of study, and at any age. People in their 50’s should not be getting student loans at all.

(Note: Loans do have to be phased out over a few years. Abruptly ending all federal loans would leave millions of students scrambling for funds and could quickly ruin too many schools. Anyone in their third or fourth year of study in any field would still be able to get loans – but after that, the spigot stops, especially in liberal arts.)

It is true that the richest colleges already offer enough aid so that loans are unnecessary. Over twenty-five major schools do not let their students use loans at all.

Of course, not all students can get into Brown, Dartmouth, Harvard, Northwestern, or MIT. In our future, those who still want college and cannot get loans can receive a Pell Grant and go to vocational schools – where they will often get better jobs anyways, and they should have no debt if they live at home.

If workers do need further education, grants are a far better way to help them.  When a German or a Danish worker is laid off due to “globalization,’ first of all their union negotiates a respectable severance package. Their health insurance is uninterrupted. They may receive a family allowance, a housing allowance, even a utilities allowance plus free vocational-school tuition as needed. Government aid does not just go to the poor, or to college students. Working people are never left out.

This is far, far superior to student loans. Tressie McMillan Cottom describes loans as “a negative social insurance program. Unlike actual social insurance programs, negative social insurance doesn’t actually make us more secure. It only makes our collective insecurity profitable.”

Cottom condemns the reliance on market-based solutions to fix systemic social problems    Student loans are a terrible system for attaining a credential, just so one can find a living wage job. 

To the Social Darwinist Republicans, it is a weakness that social insurance does not assess ‘fault.’  Social Security and Medicare, for example, are frankly quite forgiving to those who do not plan well.

Darwinists would say that social insurance actually makes us lazier and more careless… that we need Andrew Mellon’s massive suffering to ‘teach us a lesson’ about being responsible and self-sufficient. After all, the Chinese ‘tiger moms’ did not arise from a nation with social insurance.

However -- would it be better if college was denied to those whose parents did not save for it? 

Would it be better to have millions of poor-planning elderly in dire poverty and ill health, because they did not save enough?

I very much doubt it, and do not want to test the theory.

Even with fewer loans, remember, public support for education is not going away. Government already spend over $100 billion a year on merit scholarships, financial aid, community colleges and public universities. No one is proposing that this aid should be reduced.

Let’s add to those numbers through more grants, without the disaster of more student loans.

Five years from now, the government should be making no student loans at all. Students who only go to college for vocational training can take their $10,000 annual Pell Grant anywhere. Medical schools should be funded directly by the taxpayers as a vital industry. Scientific and engineering schools can be funded in large part by their industries. Fields that need new workers will subsidize new students.

For-profit schools will largely disappear. Four-year liberal arts schools without endowments may have to shrink and serve only wealthy students. Some schools will adopt video streaming, free textbooks, and online platforms to lower their tuition to the $10,000 range for Pell Grant recipients.

Meanwhile. the next page contains estimates of what loan forgiveness will cost to the taxpayers.

PART ONE: Reduced Federal revenue

1.    Forgiving all loans over age 65………………………………………..$5 billion per year, ongoing
(This reduction occurs because interest and principal payments will cease on these loans.)
2.    Forgiving student loans from fraudulent for-profit colleges………….$3 billion per year, ongoing
3.    Forgiving any income taxes due on cancelled debts………….……...$10 billion a year, ongoing
4.    No payments due when borrowers earn less than $40,000 a year…………….$18 billion a year, ongoing

Note: all the above are ‘static costs’ --they do not reflect the new tax revenue that will come in when debtors can now buy houses, etc. after loan forgiveness. I do not have the skill to make this estimate.)

PART TWO: New Federal Spending

1.    Pay off private lenders who have made Parent Plus Loans………………………………………$10 billion, one time
2.    Pay off fraud claims against for-profit colleges………………………………………………………..$6 billion, one time
3.    Pay off private lenders after bankruptcy discharges…………………$5 billion a year, ongoing
4.    Expand Pell Grants……………………………………………………..$55 billion a year, ongoing
5.    Expand support for Vocational School and Community Colleges………...$12 billion a year, ongoing

We do not want this spending just added to the deficit. One new source of revenue would be lifting the cap on Social Security contributions (currently there is no tax on any income over $$132,900.  Taxing all income at 12.45% would produce approximately $200 billion a year.
Here is a schedule -- subject of course to political reality -- of what we can do legislatively to get off the student loan treadmill.

Year One
  • Pass the ‘Student Borrower Bankruptcy Relief Act of 2019’
  • Pass the ‘Pell Grant Preservation and Expansion Act of 2017’
  • Pass ‘America’s College Promise Act’ and Title IV acts for enhanced Community College and Vocational School funding      
                  
Year Two:   
  • Restart the Public Service Loan Forgiveness Program, by passing the ‘What Can You Do for Your Country Act of 2019’
  • Pass the ‘Protection of Social Security Benefit Restoration Act’ to start helping borrowers over age 65
  • Pass a national version of New York’s For-Profit College Accountability Act 
 (This would ensure that for-profit colleges spend at least half of tuition revenue on student instruction and receive no more than 80 percent of their funding from government sources. The proposed legislation also would prohibit for-profit colleges from taking away students’ legal rights by sneaking forced arbitration into enrollment contracts.)


Year Three:   
  • Start to limit the income taxation of forgiven student debt by passing the ‘Relief for Underwater Student Borrowers Act of 2014’
 
Year Four
  • Start forgiving interest and principal to those who make less than $40,000