This is a good idea. Forty-three million people have outstanding student loans, and many borrowed at high interest rates--much higher than today's rates.
For example, in the Murray bankruptcy case, decided last year, a married couple in their late forties consolidated their student loans at an interest rate of 9 percent. At the time of consolidation, the Murrays owed $77,000; and they paid back 70 percent of that amount. Nevertheless, there were periods when the Murrays did not make payments due to financial stress; and they now owe $311,000, with the growth largely due to their loan's high interest rate.
Likewise, Brenda Butler, whose bankruptcy case was also decided last year, borrowed $14,000 and paid back $15,000. Like the Murrays, Ms. Butler's loans were in deferment from time to time. By the time she entered bankruptcy--almost 20 years after graduating from college--she owed $33,000, more than double what she borrowed. Again, the growing loan balance was largely due to accrued interest.
As Senator Elizabeth Warren has pointed out, millions of student-loan debtors took out student loans at interest rates far above the federal government's current cost of borrowing money. Therefore, if these people were permitted to refinance their loans at a lower interest rate, as Hillary Clinton proposed last year, their student-loan debt would be a lot easier to manage.
As I said, Hillary Clinton's idea is a good one, but I would like to propose an amendment. In addition to allowing college borrowers to refinance their loans at lower interest rates, the government should forgive all the default penalties that have been assessed against student-loan defaulters.
Currently there are 8 million people in default on their student loans, and most of them had a 25 percent penalty attached to the amount they borrowed plus accumulated interest. I have a friend whose daughter borrowed $5,000 to attend college, made loan payments for awhile and then defaulted. How much does she owe now? $12,000!
Are there any downsides to Hillary Clinton's proposal as I have amended it? Yes, the student-loan collectors who have gotten rich chasing down student-loan defaulters would make less money.
But there are no downsides for the government. Why? Because millions of student-loan defaulters and millions more in income-driven repayment plans will never pay off their student loans. The income-driven repayment plans are nothing more than a fraud on the public that allows the government to claim that people in these plans are not in default.
But in actuality they are in default. Educational Credit Management Corporation, for example, wanted to put the Murrays into an income-drive repayment plan that would cost them around $900 a month. The bankruptcy judge, to his credit, rejected that idea, pointing out that the Murrays' debt was accruing interest at the rate of $2,000 a month. Even if the Murrays made regular payments for 25 years, their debt would balloon from $311,000 to about half a million dollars.
So here's my suggestion. Senator Elizabeth Warren should dust off Hillary Clinton's moratorium idea and propose it to the Trump administration, adding a proviso that default penalties would also be waived.
Donald Trump is not everyone's cup of tea, but I believe he comprehends the world of finance. He will understand that the government is running a shell game, telling the public that the student loan program is under control when in fact it is a train wreck.
If Republicans, Democrats, and President Trump would adopt Hillary Clinton's amended plan, they would provide immense relief to millions of Americans who are being buried alive by their student loans.
Wouldn't that be a lovely outcome?
Butler v. Educational Credit Management Corporation, No. 14-71585, Adv. No. 14-07069 (Bankr. C.D. Ill. Jan. 27, 2016).
Anne Gearan and Abby Phillip. Clinton to propose 3-month hiatus for repayment of student loans. Washington Post, July 5, 2016. Accessible at https://www.washingtonpost.com/news/post-politics/wp/2016/07/05/clinton-to-propose-3-month-hiatus-for-repayment-of-student-loans/?
Ruth Tam. Warren: Profits from student loans are 'obscene.' Washington Post, July 17, 2013.