Loan forgiveness is a poor solution to the US student debt crisis

Trillions of dollars have emerged from recent US stimulus packages and budget proposals, but student loan forgiveness has yet to be addressed. Still, the American people have not forgotten their new president’s campaign promises to solve the disaster of spiralling student debt.

Some small steps have already been taken in light of the pandemic and ensuing economic problems, which saw the federal government pause student loan repayments and interest accrual through this September. This sticking plaster has happily resurfaced the debate on how to address the US’ $1.7 trillion (£1.2 trillion) in student loan debt, which has left millions unable to buy homes and start families.

President Biden has long campaigned for $10,000 in student loan forgiveness, while the more progressive wing of the Democratic Party has called for at least $50,000. Republicans are holding firm with no forgiveness or, at least, grandstanding to that effect during negotiations. But all these positions fail to address the root cause of the problem: that, each day, we issue thousands of new loans to students in response to rising higher education costs and decreased funding for a public post-secondary education.

That is why Covid-19 must be the catalyst for financing higher education in a way that is not just morally right but politically practical. After all, we have seemingly spent $5 trillion over the past year in stimulus; a previous package even included a provision that student loan forgiveness would be tax-free, signalling imminent executive action.

Yet while student loan forgiveness might be sexy, it’s not a sustainable solution. Don’t get me wrong, as a former tuition-paying student, I would love forgiveness personally but it’s bad public policy. A one-time fix via executive order – which, theoretically, could be overturned by the next administration – fails both future students and taxpayers.

There are three effective actions that the federal government can take to begin to heal the catastrophe it created.

First, freezing interest accumulation for current borrowers and reducing rates for future undergraduates to 0.5 per cent (and 1 per cent for graduate students) would lower the compounded dollars over time. This is significantly lower than our current rates, starting at 3.73 per cent. The government should aim to cover costs, not book $1.2 trillion in student loan receivables under assets.

That still leaves the problem of how graduates can repay the capital. The first step here is to completely re-engineer Public Service Loan Forgiveness (PSLF), which allows federal, state or local government employees to pay back their student debt at a fraction of the actual cost within a decade.

I balk at the current form of this programme, which is limited to less than 1 per cent of all borrowers. We are all part of the public good. Those gaining higher education experiences better engage in civic duties, understand climate challenges and pay it forward. So, place everyone in a reformed Public (Good) Loan Forgiveness programme, starting with an income-based 10-year repayment plan. To incentivise continued participation, each person making on-time payments within a year could have 10 per cent of their balance forgiven. Ultimately, those making 120 payments within a decade would have their debt relieved. This reconciles the narrative that personal responsibility requires people to pay back their loans with a recognition that higher education serves a public purpose since everyone in society benefits from the presence of highly educated people.

The final step to making debt easy to repay is to make it easier to discharge student loans in bankruptcy (like other types of debt). This not only moves the forgiveness limit beyond amounts proposed by liberals to the total borrowed but also accounts for the consequences in a way that might favour well with fiscal conservatives, as this would be etched in the borrower’s credit report.

These federal-level strategies are only a start. States and schools must also work on creative solutions. For instance, let’s look at three-year degrees, frozen tuition models that keep costs the same for each class, student-retention programmes to increase completion rates, lifelong-learning interventions, and better accountability measures for schools.

Using Covid-19 to enact enduring change in our post-secondary system’s principal calamity is crucial. If President Biden and Congress continuously squabble over forgiveness limits, student debt will ceaselessly amass. There is a better way.

Avery M. D. Davis is a PhD student at the Johns Hopkins University School of Education. His research focuses on post-secondary innovation.