The Best Student Debt Solution: A Complete Lack of Interest
Updated: Oct 17, 2019
In describing the sheer magnitude of a trillion dollars, Ronald Reagan once said that if you had a stack of thousand dollar bills in your hand just four inches high, you would have a million dollars. For that same stack to equal a trillion dollars, it would have to be 67 miles in the sky. This eye-opening anecdote leads us right into the topic at hand and shows us why this current crisis is such a big deal. That is to say, one of the biggest problems our society currently faces is a nearly 1.6 trillion-dollar student loan debt, which is carried on the proverbial backs of nearly 45 million Americans. This amount of debt is a half a trillion dollars more than the total credit card debt in this country. (And I can pretty much guarantee you that almost everyone you know is carrying some kind of credit card debt.) So that should tell you something about how large and prevalent the student debt crisis is. Moreover, the average student loan borrower pays between $200 and $300 each month. I can already hear some of you saying,That doesn’t seem too bad, only about two or three grand per year. Yet the question still remains, how many years will each borrower have to keep paying this money -- money which could be used for more productive purposes, such as purchasing a new home to start a family or to invest in a retirement plan so that he or she doesn’t end up like the 42 percent of people expected to retire completely broke. Nevertheless, we got ourselves into this mess, so we must get ourselves out. But how? I think I have the solution. I know it’s a great idea, because even I don’t love it. Wait! What? I say that I don’t love my great idea, because for any real solution to be enacted it has to be practical and based on compromise: a dirty word in today’s ultra polarized political climate, I know, but unless both sides don’t really get what they want, we will never get anything passed.
The 2020 presidential campaigns are already in full swing, and it is only the fourth of July in 2019. What would a presidential campaign be without big promises for the future? There are two leading candidates in the vast field of Democratic presidential hopefuls, who have put forth grand ideas on how to solve the student loan debt crisis. First, Elizabeth Warren put forth a plan that would forgive up to 50 thousand in student loan debt for anyone with a household income less than 100 thousand a year. Warren says that she can pay for this plan by implementing a 2% wealth tax on those with over 50 million in assets. Warren’s plan would forgive most (but not all) of the student loan debt in this country. Nonetheless, and never to be outdone, Bernie Sanders takes student loan forgiveness even further. Just prior to the first Democratic debate he proposed a plan that would eliminate all student loan debt for everyone in the country regardless of income by implementing a micro-tax on millions of Wall St. transactions. Opponents of Sanders plan say, “Why should Wall Street have to pay for the debts of others?” To which one could easily respond by saying, In 2008, American taxpayers paid to bail out the banks with a 700 billion dollar check – an act rife with so much tragic irony that one can’t help but shake his or her head in complete disbelief at the sheer audacity of Wall Street and its collective selfishness. For a moment, let’s reflect back on the financial crisis of 2008. First, the banks and other financial institutions made money through predatory lending, and then when all those loans fell through (as they predictably would) the economy crashed. Furthermore, because the economy fell apart, people lost their jobs and could not find employment elsewhere. So let's put things in perspective, if experienced working professionals could not find work, what were those new to the work force supposed to do? The one avenue they had was to go (back) to school and train for a career that would hopefully be available and paying well by the time the economy recovered and they got out of school. The tragic irony really comes through when you realize that the amount of debt that has been taken on by students in the decade following 2008 was about 700 billion. Where have we seen that number before? So think about it, the same people who ran the economy into the ground and were seemingly rewarded for their corruption with a bailout, have a problem bailing out the people whose lives they destroyed twice and who were simply looking to better themselves and contribute to a fledgling society.
If I were to be completely honest, as someone with more than 100K in student loan debt, I would absolutely love it if all my debt were wiped away forever. However, I realize that making someone else pay for my decisions is a lot to ask, even if I was just one of millions of Americans who couldn’t find a job during the recession and was subject to the irresponsible lending practices of big universities and student loan companies. This is not an article about excuses, or a “woe is me” attitude, it is about a solution to a very real problem. Even financial titans like J.P. Morgan Chase CEO, Jamie Dimon, have spoken candidly about how student loan debt is a major roadblock to economic growth. And in this writer's opinion, Dimon is the man that has brought about major turning point in the student debt conversation. He is a living, breathing capitalist folk hero. Dimon, who was played by Bill Pullman in the HBO film “Too Big to Fail” and who if Capitalism had a Mt. Rushmore would have his face carved into it, has said that we need to do something to address the irresponsible lending to students. Most Republicans don't respect the opinions of Warren or Sanders, but they do respect Dimon's. So in other words, they might be willing to take some action on the issue, but they would never agree to complete student debt forgiveness, which would add 1.6 trillion to the ever-growing deficit. Even though that is still a smaller amount than was added to the deficit by the tax plan they passed in 2018. Again, this is not an article to assign blame or to point out hypocrisy; it is about putting forth a real, practical solution to solve a very real problem.
The L.O.I.S. Plan
I call my student debt plan the L.O.I.S. Plan. The letters in L.O.I.S. stand for “Lack of Interest Solution.” I think that all student loans should return to the original principle amount immediately. That is, all interest should be removed from the loan, and no more should accumulate going forward. (However, late fees may be applied in certain instances, because the debt does have to be paid back eventually and in a timely manner.) Not only should all interest be wiped clean from all student loans, but the amount of student loan debt paid each year should be completely tax deductible*. The L.O.I.S. student loan deduction will replace the current student loan interest deduction, which maxes out at $2500 a year. This new deduction will have no limit, and I believe should also consist of a $1000 bonus deduction for each year the borrower makes on-time payments with the loan provider. This will incentivize paying down the debt in a timely consistent pattern. Something that Wall Street and financial institutions love.
I think this is the best solution to the student debt problem because both sides get a little of what they want and a little of what they don’t. See, the left wants student debt forgiveness. The right doesn’t want to pay for the debts of others. Both sides hypothetically want the economy to grow and run smoothly. My plan helps rid student borrowers of a part of their burden like the left wants, and instills responsibility among borrowers (and does so through the tax code) like the right wants. Obviously, there will be opponents on either side of this plan. On the left, they will say, “Many do not make enough to even pay the principle loan amount back and the wealthy can afford to pay the burden of complete loan forgiveness.” On the right, they will say, “What about the financial institute that loaned the money, aren’t they entitled to the interest? They took the risk after all.” To the left I would respond, you shouldn't force people to pay for the poor decisions of others. And to the right I would say, What risk did the financial institutions take? It wasn’t really a risk, they were loaning “found money” to students, knowing full well they could never get out of the debt, not even through bankruptcy. (Although that might soon change).
Interestingly enough there was a second part of the 2008 Bailout that we often forget, or rather, don’t really think about as directly correlating with the bailout anymore: low-to-no interest rates. The banks were not only given a 700 billion dollar bailout, they were given the lowest interest rates in history, just to make loaning more money that much easier. It’s bad enough that tax payers were saddled with this 700 billion dollar burden during the financial crisis, and then again with student loan debt going from about 700 billion pre-crisis to well over a trillion during the recovery, the least that can be done for student borrowers is to give them the same break on the interest rate. In other words, I am not even asking for the large billion dollar bailout part of the of 2008 plan, like Warren or Sanders, I am just asking for the measly, often overlooked and forgotten part of the 2008 plan: the 0 percent interest rates.
I can already hear the jokes of L.O.I.S. opponents: “There is zero interest in this zero interest plan” or “the only lack of interest that we can all get behind is our own when we read this inane article.” Say what you will, but this is a plan that could actually solve the problem. It is not only practical, but it appeals (at least in part) to everyone. That is to say, no matter what side of the political divide you are on, this plan gets you some of what you want while also hindering the other side from getting everything they're after. I mean, how many student debt plans offer some loan forgiveness and a tax cut? It’s truly a win-win.
Or better yet, it is what used to be known as a compromise.