The congressional negotiators trying to craft a new fiscal stimulus package have been discussing how to help the nearly 45 million Americans with student loan debt. In March, the CARES Act excused borrowers from making monthly payments until the end of September. By executive action, President Trump has extended relief for most borrowers (though the details aren’t yet clear) through the end of this year.
With unemployment still extremely high and millions of Americans under severe financial stress, it’s right to extend the reprieve. But this is not a long-term solution. Now would be a good time to fix the underlying student loan system once and for all.
A few straightforward principles should guide the effort. The size of borrowers’ loan payments should be tied to their incomes. Students who make regular payments shouldn’t be saddled with debt for life. And the range of repayment options should be streamlined, to limit confusion and ensure students enroll in a plan they can actually afford.
A reform proposal by Republican Sen. Lamar Alexander, a former secretary of education, checks all these boxes. It would enroll all federal student loan borrowers in a single income-driven repayment plan, in which borrowers would pay 10 percent of their discretionary incomes, excluding food and housing costs. Outstanding balances would be forgiven after 20 years for undergraduates and after 25 years for graduate school loans. Those wanting to pay off their loans faster could still opt out and enroll in a standard 10-year loan with a fixed monthly payment and interest rate.
The virtues of Alexander’s plan are simplicity – it would cut the number of repayment options from nine to two – and fairness. The poorest borrowers and those who’ve lost their jobs would be exempt from making monthly payments until their incomes recover. Average monthly payments would decline for recent graduates and Black Americans, among others; higher-income households would pay slightly more. The plan would most likely be good for taxpayers, as well, since borrowers on income-based schemes are less likely to default.
About one-quarter of current undergraduate borrowers are already enrolled in income-driven repayment plans. Increasing that proportion is a goal backed by members of both parties, including their presidential candidates. Joe Biden’s income-driven proposal would limit monthly payments to 5 percent of borrowers’ discretionary incomes, while the Trump administration would set the cap at 12.5 percent. Alexander’s plan attempts to strike a reasonable balance, matching the most generous of the income-driven plans introduced by the Obama administration.
Congressional Democrats have so far rejected Alexander’s reforms, saying they do too little to help borrowers affected by the pandemic. The $3 trillion HEROES Act, passed by the House in May, would allow all borrowers, regardless of income or job status, to stop making payments for an additional year. It would also cancel $10,000 of debt for some low-income borrowers and those in default before the crisis hit.
A compromise is in everybody’s interests. Democrats should drop their debt-cancellation demands and embrace Alexander’s push for universal income-driven repayment, eliminating monthly payments for borrowers who are out of work. In return, Republicans should waive tax liability on loan forgiveness granted after 20 years to those who’ve made regular payments.
Student loan debt has compounded the burdens on Americans coping with mass unemployment and vanished incomes. Lawmakers should provide relief to borrowers who need it most and, while they’re about it, fix a system that’s been broken for far too long.
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