Restructure every loan-without regard for origination channel and payment status-for terms of up to 20 years. Longer repayment durations will do more for affordability than monkeying around with interest rates, although these, too, should be reconfigured because the consumer-unfriendly rate-setting mechanism that Congress put into place in 2013 has more to do with politics than it does finance.
Permit partial and full prepayments-without penalty. Just because a loan has a lengthy duration shouldn’t mean that it can’t be settled ahead of time. Penalty-free prepayments-where the additionally remitted amounts are appropriately applied against the principal-will help borrowers to limit the amount of interest they pay overall.
Expunge previous credit histories for loans that are subsequently refinanced. The standard 10-year repayment plan that was originally put into place is to a large extent responsible for the problems many borrowers have had. Creditors should therefore be more concerned about repayment performance after the contracts have been restructured.
Offer student-loan borrowers the same tax relief that has benefitted homeowners. Waive taxation on the value of the debt forgiveness that may be granted on an exception basis, just as it has been for distressed home mortgages that were permanently modified after the crash.
Permit student loan debts to be discharged in bankruptcy. This will motivate recalcitrant owners and servicers of government-guaranteed loans to come to the bargaining table with tangible, sustainable solutions.
The money exists to pay for all this.
The U.S. Department of Education rakes in enormous profits from its student loan programs. Much of that is a result of the risky manner in which the government has chosen to finance this activity (low-rate, short-term borrowing is used to support its high-rate, long-term lending at a time when the Federal Reserve is contemplating raising rates). But even if the department were to “match fund” its portfolio as lenders often do, it would still earn substantial profits from the combination of fees and interest that are charged.
What’s not so well-known is how these profits end up appropriated by Congress to offset the national debt. Said differently, lawmakers are, in effect, taxing the very same constituents it should be helping.