The 10 Ways the Government & Colleges Could Solve the Student Debt Crisis
Solutions to Student Debt
The year has come to a close (in dramatic fashion of course in every aspect) and now it is time for the obligatory New Year’s Resolutions. Getting out of debt is always at the top of the list. It goes without saying that there are many uncertainties for 2017, but the resolution of student debt is on the minds of many Americans. With the swearing in of a new guard, I would hope our President Elect Donald Trump and our 115th United States Congress would take a moment to reflect on the lives of nearly 41 million Americans saddled with some form of student debt. The Trump team has put forward some ideas to tackle this problem before a possible financial bubble bursts, but maybe we need to consider new ideas.
To help move the process forward, here are 10 ideas open for discussion.
1. Allow student debt to enter bankruptcy court
Student Debt started to have some form of an exempt status from entering the Bankruptcy Courts starting in 1976. Initially, non-dischargeable government loans had a life span of only five years, at which point one could invoke bankruptcy to work on dismissal of the loan. The law then became bulked up in 1990, extending from five to seven years. Finally, in 1998, under the Clinton Administration, student loan debt became non dischargeable in bankruptcy, except in extreme cases of undue hardship. Since 1998, it is no surprise then the average tuition cost for a Public Four Year University has increased over 80% since the cookie jar had been busted wide open for schools to grab at.
For the last 20 years, student debt has accumulated at an incredible rate, recently surpassing credit card debt and auto loan debt, both of which are eligible for bankruptcy. If the current law were reverted back to the 1990 law of allowing a person to apply for bankruptcy to rid themselves of student debt, it would break open new avenues of settlement and payments. Most people cringe at the idea of bankruptcy, so naturally most would like to avoid it, but new discussion and dialogue would open with lenders. People would come out from hiding and answer the phone or respond to the email requesting to be contacted due to a simple reason, leverage. Companies like Navient have expressed frustration because many of their customers have decided to hide and barricade themselves in a cave. The “cave dwelling debtors” only answer calls from a “favorites” list, ignoring any other random number. Traditional communication methods, including snail mail, have become obsolete. Having the ability to apply for bankruptcy would give a person confidence to negotiate, something our President Elect has expressed is how our economy will be put back on track (see: “11 Negotiation Tactics from ‘The Art of the Deal”)
2. Give tax incentives for settlement
The concept here is simple. Motivate companies holding the management responsibilities of government issued school debt an incentive to negotiate. Similar to the idea above, the $1.3 trillion of student debt is stuck in non-negotiable marshy swamp of “no.” How then does real dialogue take place? Or the effort for an actual settlement? Companies like Navient, Nelnet, Wells Fargo… etc have no benefit of settlement since the school loans are now like death and taxes.
Provide each company a set of incentives or tax breaks on their profits to then encourage discussion and measured settlements. Congress can give American’s strapped with student debt a chance to manage their financial shortcomings such as was given during bailouts on wall street or in the auto industry. This idea will require tax dollars to assist, but it will also drive domestic growth, which last I checked was all the rage behind “MAGA.” If President Elect Donald Trump wants to “Make America Great Again,” then he must allow a fostering of his best practice of “making deals” to occur between the 41 million in school debt and the government.
3. Add 1-5% to federal tax bracket
The US government pays off the student loan in its entirety in exchange for the borrower applying for and staying in an increased federal tax bracket until the loan amount is paid. This is a balance sheet asset transfer for the US government. The student debtor has their credit/debt ratio improved, opening new avenues for investment and/or personal financial growth.
The idea promotes growth through incentivizing people to carry a tax burden rather than a debt burden. Small Businesses have been the life-blood of the American Economy, allowing a path to pursue the American dream for most. By removing the “slow drip” student debt obligation from the equation this potentially unlocks the shackles of someone looking to start a business. Taxes are a different type of obligation, allowing a person to invest for the benefit of a "write off." This could help short term domestic growth while immediately removing the burden of student debt and simply improving people's mental relief. Other areas of potential positive growth might be home purchases, retirement investments, and perhaps other debts paid off.
4. Dismiss the loan for volunteered hours of service
The federal government pays off the loan in exchange for volunteer hours of service at the city, state, or federal level. This service could be social services at the city level, like helping the homeless epidemic, promoting a big brother/sister program, or simply a neighborhood litter initiative. State levels could include infrastructure work like road repair, trash pick up, graffiti removal, etc. Federal level could be National Guard weekend service, or veteran assistance and training.
The point here is to harness the will power of a motivated person. The 41 million Americans who work each day to pay a loan could be enrolled in a program to benefit communities nationwide while giving them the relief they search for.
5. Dismiss all student debt as a stimulus
Similar to the auto industry and bank bailout idea, this one uses tax payer funds to dismiss the debt, but the difference is it’s not paid back. The money for student debt has already been issued and paid, so this would be a stroke of the pen dismissal and absorption in the budget. Although a tactic many find favorable, this actually is a major Mulligan (see golf terms).
The problem is resolved instantly, but discussion about fairness to those who paid their loans back will spring up. It also doesn’t solve the issue of people taking student loans out today. Do they get free college, a platform Bernie Sanders ran on. This would fall under an entitlement program, moving college education as a right rather then a privilege which could cause a political eruption.
6. Package student debt into home mortgage
The state of Maryland is rolling out a program catering to people with student debt who are looking to participate in the real estate market. For many carrying student debt, purchasing a home is not possible since their debt to income ratio is not favorable to a bank for a home loan.
In this case, the “Maryland SmartBuy” is a $10 million program designed to help people purchase their home while providing up to 15% of the purchase price toward their student debt. Due to the growing number of people with student debt, which has slowly taken a negative toll on the real estate market (see: The Ripple Effect), Maryland decided to intervene with a creative solution.
If successful, the Federal Government could adopt this program on a national scale driving first time home buyers to new highs. It will also relieve many retiring baby boomers who are seeing a record number of millennials not moving out (or moving back in) putting a damper on their retirement and golf handicap.
7. Require credit agencies to remove student debt
Frankly my favorite, the idea or removal of student debt from credit agencies will empower the borrower. Currently, the penalty of not paying a student loan does affect a person’s credit report, negatively impacting their ability to make purchases or take out loans. This concept will still require the loan to be paid, but the game changes. It does provide the debtor more leverage to negotiate from a better position.
If the removal of student debt from credit reports is prohibited by lobbyists and the banking community, an alternative could be to change the credit score algorithms. This would be similar to a medical bill, where the debt is mitigated from the credit score.
8. Balance transfer Social Security toward student debt
The Millennial generation, which now holds the title as the largest working generation, will more then likely not be entitled to Social Security benefits unless serious entitlement reform is passed (not likely).
That said, allowing those with student debt to use their withheld Social Security benefits to pay off the debt would ensure they receive their benefits today. They would forego getting Social Security benefits until a delayed age of over 70 or higher, getting a benefit on the front end. The 115th Congress could get their wish by finally balancing this entitlement program while at the same time helping a future generation of voters. Clearly math is crucial, but I’m sure our representatives could faithfully make the numbers work.
9. Alumni get a 50% tuition discount
The schools which created the majority of the student debt would be required to offer tuition discounts to a member(s) of the debtor’s immediate family. This pay-it-forward solution ensures kids of the millennial generation will get an affordable education, without going into debt like their parents.
The onus is then placed on universities to become creative in their incentives, relieving the government of the responsibility. In a competitive market, a university could then generate an ability to draw more students depending on how aggressive their plan is.
10. College fund has matched contributions
All student debt payments made can have a matched contribution by both the federal government and a school of choice into a future fund for the children of the debtor. This again pays it forward for the children of the millennial generation.
All ten of these creative solutions are a basis for creative legislation. They are not the only ideas, but are a starting point for serious discussions. Without federal laws addressing the $1.3 Trillion problem, nothing will get done. Therefore, members of Congress on both sides of the isle need to address the debt problem before another financial bubble bursts.
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