According to the Washington Post, Hillary Clinton has proposed a
three-month moratorium on student-loan payments to allow borrowers time
to restructure their student loans at lower interest rates.
Let me say flat out that this is a good
idea. As the press has widely reported,
about 40 percent of college-loan borrowers who are in the repayment phase of
their loans aren't making payments. These people are seeing their loan balances
go up as interest accrues on unpaid debt, and they desperately need repayment
options they can afford.
In addition, millions of people who are
making their loan payments would benefit from repayment plans that would lower
monthly payments and take advantage of lower interest rates.
Hillary's proposal underscores this stark
fact: The federal
student-loan program is in chaos. There are currently eight income-based
repayment plans, and even experts are confused about how the different options work
and which students are eligible for the various repayment plans. Giving
students a three-month hiatus to sort all this out is an excellent
idea.
But why is Hillary making this proposal
now? Was she prompted by pure politics--making a play for young people's votes?
Is her proposal an attempt to win over Bernie Sanders' supporters?
Obviously, Hillary's proposal was driven
by political consideration. But I think there is something more going
on--namely panic. I think Hillary and the Democratic establishment finally
realize that millions of Americans are overwhelmed by unmanageable student-loan
debt. These distressed debtors are frustrated, demoralized and angry; and they
won't vote for Hillary unless they think she will provide them with tangible
relief if she is elected President.
In short, the Democrats see blood in the
water; they know they must do something substantive to keep young voters in the
Democratic column in the November election. And even Hillary's fiercest
critics must admit that her massive student-loan refinancing proposal is substantive
and significant.
Nevertheless, I don't see how Hillary's
plan can be effectively implemented. The federal student loan program is like a
massive battleship plunging across a raging ocean at full speed--it can't be
turned around quickly. Here are some of the problems:
First, simply determining who is eligible
for Hillary's refinancing program will be a huge challenge. More than 40 million Americans have
outstanding student loans, and most of them are in the repayment phase.
Just figuring out who is eligible to stop making loan payments and who is
not will be an enormous headache.
For example, a lot of borrowers took out
private student loans that aren't part of the federal student loan program.
Of course, private loans won't be covered by Hillary's moratorium. But
research has shown that many borrowers don't know whether their loans are
federal or private, and some have both kinds of loans. If Hillary implements a
moratorium, a good many borrowers will stop making payments on their private
loans, which will get them in trouble with their lenders.
And 5 million borrowers are
already in income-based repayment plans under very favorable terms. Can these
people stop making payments for three months? If not, who is going to notify
them that they are not eligible to participate in the moratorium?
Second, the Department of Education may
not have the capacity to meet the bureaucratic challenge of refinancing
millions of loans over a three-month period. There are 43 million people with outstanding student
loans, but many borrowers signed multiple promissory notes--perhaps a dozen or
more. And some of these documents date back 20, 25, and even 30 years.
Refinancing all these loans will be a
gigantic undertaking, the bureaucratic equivalent of launching Obamacare. I
seriously doubt whether DOE or the various creditors have the resources to
refinance all these loans over a three-month period. After all, DOE has had great difficulty coping with Corinthian Colleges' former students who sought loan forgiveness in the wake of Corinthian's bankruptcy.
Third, once college borrowers are given
license to stop making payments for a brief period, it will be very difficult
to get them back in the repayment mode. In some ways, Hillary's proposal is like the European Union's
decision to accept refugees from the Middle East. Once the stream of migrants
began moving, the Europeans found themselves unable to handle the volume of refugees
that crossed into the EU. And there was no effective way to regulate the flow.
Likewise, Hillary's proposal to allow millions
of college borrowers to stop making loan payments while they refinance their
student loans will create a massive upheaval in the federal student loan
program. If her plan goes forward, I think we will see millions of people stop
making loan payments, whether or not they are eligible for Hillary's
moratorium.
Finally, Hillary's student-loan
refinancing plan may be nothing more than a way to shove borrowers into 20- and
25-year repayment plans. The Obama administration has been
aggressively pushing college borrowers into long-term income-based repayment
plans. It has said it hopes to have nearly 7 million people in IBRPs by the end of
2017.
Hillary's pan will accelerate the
movement of student borrowers into long-term repayment plans. If it is
implemented, we will surely see 10 million people or more in IBRPs, which will
effectively make them indentured servants to Uncle Sam, paying a percentage of
their income to the government for a majority of their working lives just for
the privilege of going to college.
As I have said repeatedly, IBRPs are a bad
idea and nothing more than a way to keep a lid on the student-loan crisis. It
would be very disappointing if Hillary implemented a student-loan refinancing
plan that has the primary effect of lengthening the loan repayment period for
millions of Americans.
Conclusion: In spite of its drawbacks,
Hillary's loan refinancing proposal is a good idea. In spite of all the drawbacks to
Hillary's refinancing idea, I hope she goes forward with it if she becomes
President. Almost anything is better than the present state of affairs.
Lowering interest rates will give millions of borrowers some relief from
their debt. And even if her plan forces more borrowers into IBRPs, that option
is better than having them continue to shoulder monthly payments that are
so large as to be unmanageable.
Besides, Hillary's scheme, if implemented,
will expose the utter chaos of the federal student loan program, which the
federal government has hidden from the American people. Once the public
realizes how many millions of people are suffering from their participation in the federal
student loan program, maybe we will see real reform--which is nothing more and
nothing less than reasonable access to the bankruptcy courts.
References
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/?hpid=hp_special-topic-chain_clinton-loans-11pm%3Ahomepage%2Fstory
Josh Mitchell. More than 40% of Student Borrowers Aren't Making Payments. Wall Street Journal, April 7, 2016. Accessible at http://www.wsj.com/articles/more-than-40-of-student-borrowers-arent-making-payments-1459971348
Alia Wong. When Loan Forgiveness Isn't Enough. Atlantic Monthly, June 15, 2015. Accessible at http://www.theatlantic.com/education/archive/2015/06/government-corinthian-college-loan-plan-problems/395513/
