One Way to Fix Student Debt
by Daniel Luzer
Total student debt is some $1 trillion today. This high student debt load is preventing young people from buying houses and cars, getting married, and starting families. Can we fix this without some massive and expensive public intervention?
Perhaps. The Progressive Policy Institute has a new paper out about how to address student debt. The proposal would create a fund designed to help those who encounter severe problems and avoid going into default. As the organization explains:
[A] private-sector student debt investment fund (SDIF) would purchase existing student loans, refinance the debt at today’s historically low interest rates, and apply a discount to the loan amount. This could be the release valve that deflates the balloon, by reducing the financial burden to debt holders and transferring risk. That could free up government resources to address another important issue—rising tuition.
Basically it would allow for a fund to restructure debt when necessary. Former college students could take advantage of the fund to allow them to restructure debt at current low interest rates. The United States would support this fund through voluntary company “investments of corporate profits held abroad.”
This is an interesting idea, but ultimately the paper is flawed for two reasons: 1. it doesn’t address the main problem with education loans (people are just assuming too much debt to go to college) and 2. the thing it does address (the student loan “bubble”) might not be a real problem.
This proposal is designed to address what PPI seems to see as an imminent financial problem— “without action, the student debt crisis will be the next financial disaster”—a bubble, of sorts:
The ongoing student debt crisis has the classic symptoms of a bubble. There is an artificial inflation of value (here, tuition) that is in part fueled by low-cost funding (here, government-issued student aid). The latest Federal Reserve numbers show student debt is now a staggering $1 trillion and climbing. Yet the real earnings of young college grads are falling, down 15 percent since 2000. Already student loan defaults are at 11 percent and rising. Moreover, the true default rate is actually higher because of post-graduation grace periods. Not surprisingly, the Wall Street Journal reported earlier this week that student loan debt is now crowding out other borrowing and spending.
The PPI plan is to slowly deflate the bubble. This might not be necessary, however. As I pointed out earlier in the week, trade in education debt is actually a tiny portion of the economy, and the worst education debt is already deflating on its own (the number of people taking on the riskiest student loans is declining).
This isn’t ultimately the most efficient structural solution to this problem, either. As I’ve pointed out before, the real problem isn’t the terms of student loans (onerous as they may be) but that we are increasingly expecting students to fund their own educations through debt, rather than providing higher education as a public good, as is standard in most western democracies. What we really need to do is make sure fewer students go into debt to go to college; not address the debt through a complicated tax vehicle after they’re out.
In addition, because both corporate and individual participation in this project would be voluntary, it’s hard to know who or how many entities would participate, and thus what the scope of this sort of fund would really be.
Nonetheless, the policy idea looks interesting and could be potentially useful for some former college students facing particularly troublesome debt problems due to student loans.
Read the full PPI proposal here.