The student loan payment moratorium is set to expire in January of 2022. The Biden Administration’s Department of Education has already announced that it will be the last extension of the moratorium, meaning borrowers will start paying these loans back.
Arguments over the best way to proceed from here have heated up along predictable lines. Let’s unravel the twisted braid of argumentation into several threads:
An American Always Pays Their Debts: Start payments again on February 1st 2022. No more delays. Student loans, like any other loans, should be paid back. Financial obligations are a matter of practicality and morality and the taxpayer should not be on the hook for deadbeats. Kids who took out these loans knew what they were getting themselves into. The inflation of college costs has come from the bloated higher education sector. Coronavirus is basically over, so the excuse of corona for not paying your loans is stale.
Argument 1, an American Always Pays Their Debts, relies on a popular moral play having to do with why debts need to be paid (David Graeber answers this moral play in his book) and appeals to the concern of taxpayers about getting their dollars and cents.Debt Injustice: Student loans should be forgiven, in the amount of $X,XXX (choose your level of forgiveness here, from $10,000 to 100% of the value of the loan, the amount seems to be arbitrary). People who sought to better themselves are being taken advantage of by predatory schools. Not, not the for-profit schools, but those which pose as non-profits but have had record-breaking endowment growth. The kids taking the loans out were minors when they took out the loan. They didn’t know any better. It’s a bailout, yes, but for the average American, even though it’s a minority of Americans with loans (45 million). Speaking of minorities, student loans hit minority groups harder.
Argument 2, Debt Injustice, appeals to a moral play of victimization, where those who have pulled out student loans to better themselves have been victim to an unfair system of rising college costs. They worry about those falling behind in the economy and think student loans are a drag on these people.Kick the can. Extend the moratorium for another year and we’ll figure it out later. It’s not like corona is over, which was ostensibly the reason for halting payments in the first place. Argument 3, Kick the Can, is the usual attitude when the country is presented with a terrible problem.
Well SOMETHING should be done! What is Something? Hard to say. Argument 4, Do Something, is probably the attitude of most people. Most people do not walk around with a technocratic view on life. They want results.
If I forgot a thread of argument, feel free to comment on this piece.
Let’s cut through that braid of argumentation. Unlike Alexander, compromise is our sword.
Where does student loan interest come from?
“Interest is paid to a lender as a cost of borrowing money. Interest is calculated as a percentage of the unpaid principal amount.”
“What is interest?”, from Federal Interest Rates and Fees, Department of Education, https://studentaid.gov/understand-aid/types/loans/interest-rates, Retrieved 10.19.21
The lender is the federal government, which is allegedly concerned about the borrowing cost of money. Student taxpayers are paying the federal government the cost of borrowing money in the form of interest.
But who sets interest rates?
Congress. Specifically 20 U.S. Code § 1087e - Terms and conditions of loans. Here's the code having to do with Federal Direct Stafford Loans, one of the types of student loan mechanisms the government uses, to use as an example:
(b)Interest rate
(1)Rates for FDSL and FDUSL For Federal Direct Stafford Loans and Federal Direct Unsubsidized Stafford Loans for which the first disbursement is made on or after July 1, 1994, the applicable rate of interest shall, during any 12-month period beginning on July 1 and ending on June 30, be determined on the preceding June 1 and be equal to—(A) the bond equivalent rate of 91-day Treasury bills auctioned at the final auction held prior to such June 1; plus (B) 3.1 percent,except that such rate shall not exceed 8.25 percent.
Interest rates, set by Congress, float depending on the market’s decision on the cost of borrowing (the Federal Reserve plays a large role in this). The maximum any student loan can be is 8.25%. Interest on the loan also is subject to capitalization, where the interest is added to the loan value in some cases.
A 20 year repayment on a student loan at 3.5% interest looks like about $10,000 in interest. At 8.25% on the same loan, the borrower pays another $25,000 for the original loan over twenty years.
The Case for Zero
Our argument is that, on February 1st, student loans should have an interest rate of zero percent. This answers several concerns:
An American Always Pays Their Debts: Argument 1’s representatives will be glad to hear that loans will be paid back. They may even be glad to know that the default rate might drop and repayment rate may go up. The compromise they face is that the borrowing cost of money will be set aside as these loans are paid off. Then again, the economic boost from more disposable income on the part of those with loans will be significant. The government’s collection of student loan interest in 2019 was $22 billion. A lot of money, but really a drop in the bucket of federal spending.
Debt Injustice: Argument 2’s representatives will be pleased to know that those falling behind will not fall behind further, as unpaid interest on student loans gets capitalized into the loan, and default is not an option since student loans cannot be discharged in bankruptcy. They will, however, have to compromise on borrowers paying back what they owe. But the perpetual slide by those of the least means will be slowed.
Kick the Can: Argument 3 relies on doing nothing. This will be…
Something: This will, at the very least, be a solution.
Whoever floats this solution would have a fantastic opportunity to get biblical, with the injunction against usury mentioned all over the Bible: “Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the LORD thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it.” (Deut 23:20).
Stubborn Issues
One major player whose interests need to be considered here is the Department of Education. The $20-30 billion raised each year by student loan interest goes into the general fund for the Department of Education, allowing the Secretary to dictate where these funds flow. Entrenched bureaucracies rarely like to dispose of their disposable income. Congress would also whine about lost income, while simultaneously spending on everything under the sun.
Student loan interest may be a classic case of the Laffer Curve. Interest payments are a tax on time, after all. And 43 million Americans carry student loans. Borrowers have reported that student loan debt has dragged down their spending in markets like housing. As far as I know, nobody has tracked how discretionary spending changed during the forbearance period of 2020 to 2022. With inflationary pressures heating up, and the White House reporting that Americans have more money in their pockets, it stands to reason that discretionary income can increase in a meaningful way given a waiving of interest payments.
Higher education also faces an upcoming crisis. With the Federal Reserve poised to taper its asset purchases and potentially raise interest rates in the face of persistent inflation, the prime interest rate set by the Fed will rise. It is possible that in several quarters time, the rate to borrow for student loans will rise. A 5-6-7-8% interest rate will start to dissuade young people from entering college. If that happens, higher education, already facing recruitment issues due to demographic trends, will struggle.
The Upshot
This isn’t a panacea. But it is a solution that the average American could understand, appreciate, and support. It would be a compromise where nobody is truly happy with the outcome, which makes for the best compromises.
For another excellent take on 0% interest: What if Federal Student Loan Interest Rates Just Stayed at 0% Forever? By Kenadi Silcox September 28, 2021 https://money.com/federal-student-loans-no-interest/