Occupy Wall Street: Student Loan Forgiveness

Some Occupy Wall Streeters are calling for student loan forgiviness. This sounds like a great idea, especially for people like me with high debt. However, I disagree with this proposal. Rep. Hansen Clarke (D-MI) has sponsored a bill to forgive student loans and MoveOn.or is sponsoring a petition in support of this.

I do not agree with complete loan forgiveness. Nor do I think it should be discharged in bankrupcy court. They tried that once and young people ended up filing for bankrupcy at alarming rates. 1) moral hazard arguments still stand 2) So long as the price of education is inflating faster than that of medical care, student loans are going to be a necessary and permanent evil. We cannot create disincentives for lenders or further barriers to qualified students. 3)Currently, there is a new bubble forming around student loans as they are packaged and sold as derivatives. The chain reaction has been sent into motion just like the housing market. This will encourage larger loans to lesser qualified students, and further fuel rising tuition costs.

But the program rules should be changed to make the loans more fair on borrowers. I have some more moderate suggestions that I would like lawmakers to consider.

Some background: I graduated with my MA in 1999 with over $60K in debt- of which about half was used for tuition and the other half for housing and expenses. I took on this debt freely, but out of necessity. The job market requires a graduate degree, I needed the money to help pay for it. I consolidated my debt with the USDE at 7.26% interest, low compared to many of my predecessors.

When interest rates began to fall in the mid-2000s, I called the USDE to see about re-financing and was told that this was not legally possible. Once consolidated, borrowers are not allowed to refinance unless they are willing to take out a private loan, usually a second mortgage. I didn't own a home and couldn't afford one with my debt levels froms school, and even in 2004 most lenders were not going to provide a loan without collateral. Therefore, I continue to pay an interest rate more than twice the current market rate.

I do receive a tax deduction on the interest I pay. However, this is little help throughout the year as monthly bills come due. Nor does it adequately address the inherent unfairness (almost usury) in how interest is handled in the student loan programs. And let's face it, it isn't an asset-backed necessity like housing. So I'd be willing to sacrifice it for some real reforms.

Interest on student loans accrues daily. And no matter how much you pay beyond your fixed amount, the interest is always paid first and it usually eats up most of the payment. And what’s worse, it's a moving target. The amount I pay in interest changes constantly and is nearly impossible to budget for, calculate, or get around. To date, the amount I have paid back in interest is nearly equal to the principle balance I started with and I still have $42K to go. Currently, if I were to make payments so that I could pay the remaining balance in 10 years, I would have to pay over $750 a month, down from the over $800 I would have paid 10 years ago. Either
way, that's not possible. But the debt is still my responsibility, students still need loans, and the USDE needs the revenue stream these loans create.

Rather than forgive debt entirely, I would suggest the following:

1) that the law be amended to allow for refinancing of all student loans down to current rates
2) once the amount paid back in interest exceeds more than say 20% of the original principle, the interest should be curtialed entirely while the remaining principle is paid down.
3) if #2 is not feasible, then the interest should be regulated in the same way has home loans.
4) outlaw the selling of derivatives on student loans.

These changes would lessen the burden on borrowers without the moral hazard associated with total loan forgiveness or the loss to the lenders, which includes the USDE. They may be enough to prevent fueling education inflation. Making the terms a bit more fair would be welcome and would help the longer term economy and a generation of young people trying to get started in a jobless economy who will default in droves if we don't do something.