Opinion | Student loans are wiping out millions. But blanket relief isn’t the only answer.

Joe Biden hasn’t made anybody happy lately when it comes to student loans.

The administration tried to find a balance last month when he announced he was extending the Covid moratorium on federal student loan payments. But the move has been criticized by both moderates who consider the moratorium unnecessary and regressiveand progressives who think it’s not far enough and want to see full loan forgiveness

Anyway, this debate overlooks the true nature of the student loan debt problem. What really matters is not the total debt of any borrower, but the amount of the monthly payment in relation to the borrower’s income. The large debt of high-income borrowers is often affordable, while the smaller debt of those who have not graduated from college or attend extortionate commercial schools can create crushing difficulties.

There is no doubt that student loan debt is out of reach for the large and growing number of borrowers. Twenty years ago, the amount of student loan debt was so small that the Federal Reserve didn’t even keep track of it. Today it is the largest volume of consumer debt after mortgages, even though it is concentrated among a smaller proportion of the population. Student loan debt is starting to have negative macroeconomic impacts, including from delaying debtors’ entry into the home ownership market and discouraging Americans from getting an education

Thus, some measure of student loan debt relief is clearly warranted. The question is how best to do this.

Offers to forgive some amount of student loans across the board – be it $ 10,000 offered by the president or $ 50,000 Called for by Some Democrats in Congress or all this as some advocates of borrowers would like – problematic for legal, economic and political reasons.

Legally, the President’s authority to forgive any student loan amount for general basis not defined… While there are strong legal arguments for the education minister to have this power, it could be viewed as an unauthorized waste of funds by the administration, especially by the hostile Supreme Court.

From an economic point of view, the widespread loan forgiveness raises serious concerns about fairness both among existing borrowers and in relation to future borrowers. General loan forgiveness makes no distinction between borrowers who can easily pay off their loans and those who cannot.

Comprehensive help can ultimately lead to too much help to those who do not need it and too little to those who need it.

A Harvard graduate earning half a million dollars on Wall Street will receive the same relief as a community college graduate working as a barista. This could provoke a violent political backlash, as Republicans are too happy to argue that Democrats are saving young elites.

Complete relief may also seem unfair to former and future borrowers. Those who scrape together last year to pay off their loans may feel like suckers for having done a responsible job, while those who are just entering school will face an even greater debt burden without the prospect of forgiveness. loan at any time in the near future, because political pressure to do so will be eased by a one-off forgiveness measure. While some forgiveness may be warranted due to the failures of the credit system, it will leave some of the biggest problems unresolved.

In the future, there is a better and fairer way to help student borrowers: let them make payments based on their income level.

Federal student loans now allow nearly all borrowers to choose income-driven repayment plans (IDRs). These plans limit the borrower’s annual payment to a percentage of the borrower’s income shown on tax returns with the IRS, just as the Affordable Care Act does for health insurance premiums. Under these plans, the borrower only pays the available amount for 20 or 25 years, after which any remaining amount is forgiven. Thus, under the IDR, the borrower’s total debt is largely irrelevant, as most of it will eventually be written off.

The problem is that under the current student loan system, IDR is not the default repayment plan for borrowers. Instead, borrowers must take positive steps to register with IDR and then re-certify their eligibility each year. Many borrowers are unaware of IDR options, and federal lending services are not interested in making borrowers aware of their choices. Even those borrowers who are aware of the IDR options often fail to complete their annual paperwork. In the event of default, it is difficult for borrowers to get into the IDR, although they need it most of all. As a result, hundreds of thousands of borrowers who are required to be on the IDR do not have and end up receiving significantly larger – and often unaffordable – student loan payments.

Congress could easily solve this problem: ensure that all federal direct loans are repaid. done according to the IDR plan and sent to the IRS submit tax returns of all federal direct loan borrowers to the Federal Student Aid Service and its credit institutions. Alternatively, by moving all borrowers to IDRs, Congress could simply collect student loan payments through withholding tax, as has been done successfully in other countries such as Australia and the UK.

Getting Congress to do anything is difficult, but in the past, both parties have supported IDR reforms. For example, the first major expansion of the IDR occurred during the George W. Bush administration.

Repayment based on income is an not an ideal system and other reforms are necessary for it to deliver on its promise of affordable student loans, including ensuring that borrowers are not taxed on forgiven amounts. Moreover, the IDR is not the right solution for those borrowers who have been making payments for decades; these borrowers need some degree of immediate forgiveness. But some of these changes are in the works and could easily be part of a larger overhaul that would make the IDR the default or even the only repayment plan.

Moving towards a system in which all borrowers benefit from the reformed IDRs will ensure that everyone pays what they can afford. A Harvard graduate banker would have to pay more than a college graduate barista. A universal IDR system will also ensure generational equity. This will benefit not only current borrowers, but future borrowers as well, ensuring once and for all that student loans are no longer an impending economic policy issue.

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