Home Consumer debt Redefining Student Debt | Regulatory review

Redefining Student Debt | Regulatory review


Experts urge the government to treat student loans like scholarships and collect taxes.

Over 45 million Americans owe an estimated “$ 1.6 trillion in student loan debt.” But the real problem with America’s higher education funding system is not the size of the debt but the lack of relief for distressed borrowers, according to a recent article by two law professors.

John R. Brooks and Adam J. Levitin of Georgetown University Law Center conclude that if the government applied existing protections to all qualified borrowers, it could make student loans more affordable for borrowers as well as for the government. However, implementing the necessary changes would require an existential change in the way the federal government regulates these loans, argue Brooks and Levitin.

A fundamental principle of the current federal education financing system is that a student loan is indeed a loan. But Brooks and Levitin argue that student debt works unlike regular consumer debt. Conventional understanding misses the “economic reality” of student loans.

Brooks and Levitin suggest that, realistically, student loans function as government grants “coupled with progressive income tax.” Unlike borrowers who take out mortgages and auto loans, the vast majority of student borrowers owe their debt directly to the US Department of Education, not to private lenders. Additionally, unlike consumer borrowers, student borrowers receive loans regardless of their ability to repay, which can lead to higher default and default rates than other loans.

Federal student loan borrowers have access to a variety of protections that most consumer borrowers do not. Most of these federal student loan borrowers can opt for “income-based repayment” plans, which write off any debt remaining after borrowers have paid off a percentage of their discretionary income over a specified period of time. Some borrowers can pay off their debt in full if they can prove they are “totally and permanently disabled”. Others can pay off their loans if their schools close before graduation or if they are employed in the public service for a specified period.

These protections are essential because, if borrowers do not repay their student loans, they usually cannot pay off their debts in bankruptcy. The government also has several collection tools that private lenders do not have. For example, the government can seize wages without a hearing by withholding tax refunds or seizing social security benefits. Unlike private lenders, the government can sue defaulting borrowers for the rest of their lives to collect outstanding debts.

Although they have access to a variety of unique protections before default and relatively little post-default, student borrowers underuse these protections. Brooks and Levitin argue that the government could solve this service problem by “abandoning the debt paradigm” in favor of a “subsidies and taxes” model. While the federal government would still treat student loans “like a loan program” to the Department of Education for budgeting, Brooks and Levitin suggest that the Internal Revenue Service (IRS) – not the Department of Education – should be responsible for collection operations.

Brooks and Levitin propose that the federal government implement “a phased and progressive schedule of marginal repayment rates” for payroll deductions and borrower tax returns. Instead of providing an income-based repayment option that borrowers must apply for, this would be the default repayment plan for all borrowers.

If the government were to collect repayments through a progressive tax, Brooks and Levitin argue that it could limit the amount borrowers owe on principal by reducing interest rates to the rate of inflation, as is currently the case. ‘Australia. To subsidize this interest rate reduction, Brooks and Levitin would ask the IRS to remove the loan forgiveness currently offered as part of the income-tested repayment.

Eliminating loan cancellation may appear to place an additional burden on borrowers, but Brooks and Levitin argue that doing so while reducing interest rates to inflation would reduce the total amount borrowers pay more than n ‘. any current income-based repayment plan. Borrowers would need less loan cancellations after a set period of time because the total amount they owe would increase more slowly with the proposed interest reduction and because their monthly payments would be determined by income.

Additionally, since taxes do not appear as liabilities on consumer credit reports, income-based repayment would not affect people’s access to consumer credit. As a result, borrowers could take much longer to repay their loans without incurring the financial damage typically associated with longer repayments, including lower credit scores.

In an age when the public debate over student loans tends to focus solely on whether and to what extent President Joseph R. Biden should pursue student loan cancellation, Brooks and Levitin offer a separate point of view. on the root causes of the problem. “Subsidies and taxes” may elicit less enthusiasm from some than “write off the debt,” but the reforms proposed by Brooks and Levitin can be just as powerful and perhaps more appealing to a president who is wary of him. ‘a more dramatic intervention.