Slowing the turnover of the student loan market

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With a nod to Oliver Hardy, here’s another pretty mess the feds got us into.

When Congress passed the CARES Act in March 2020, it placed student loans on “administrative forbearance” until September 2020. That is, there was no penalty for borrowers to cease to make payments. Through executive action, the Trump and Biden administrations have repeatedly extended the pause on student loan repayments, with the latest extension ending August 31, 2022.

On April 27, former White House press secretary Jen Psaki sang, “Not a single person in this country has paid a dime on federal student loans since the president took office.” By the end of August, student borrowers will have enjoyed two and a half years without having to make a payment on their outstanding debt.

Any private lender knows that once loan repayments stop, it’s hard to get borrowers back into the habit of paying. How exactly is the federal government going to claw back taxpayers’ money? More importantly, if the federal government goes down the road of loan forgiveness, what then?

Don’t taxpayers deserve answers to $1.6 trillion questions?

About 43 million people have chosen to take on student loan debt. A recent poll claims that 81% of respondents say the government should make it easier for borrowers to pay off their debt. Do all borrowers have trouble repaying? Is it wise to write off billions of debt without doing any credit reform that would prevent the problem from reappearing?

In the Consumer Credit Protection Act of 1968, Congress created a National Commission on Consumer Finances. Congress wanted the Commission to study the entire consumer financial market in America. At the time, however, student loans were virtually non-existent.

We need answers to what’s happening in the student loan market. As in 1968, Congress is expected to set up a new bipartisan national commission to study all aspects of the student loan market. This commission should review the history and current status of the student loan program. A rigorous, thorough and unbiased study could inform us all.

The need for a depoliticized commission is obvious. Battle lines have already been drawn and political pressure for further executive action is mounting. There seems to be little thought given to the problems a general debt jubilee can create.

Some proponents of student loan relief worry that when payments resume, confusion could reign and we’ll have a “mess” — implying the federal government should just forget about trying to get reimbursed. And it looks, at least in part, that debt cancellation may soon become an unfortunate reality before the final break ends on August 31. On Thursday, April 29, President Biden himself confirmed that he was “looking closely at whether or not there will be additional debt forgiveness.

Others have spoken out against a forgiveness program. Arguments exist that such a cancellation program is not a pardon, that there are tax implications, and that there are thorny legal issues. Moreover, this program is clearly recessive: it benefits high-income borrowers much more than low-income borrowers. Canceling most of that debt is probably not a stimulus. So why do it?

A basic prediction of economic theory is that incentives matter. If you encourage bad economic behavior – even in the name of “fairness” – you end up with more bad behavior.

Suppose the federal government “gives away” college education by removing student loans. Does this action encourage future borrowers to borrow even more? Does it encourage higher education institutions to raise tuition fees? What incentives would students have to shop among colleges for the best value if they don’t have to pay? If the government prints money to wipe out student debt, won’t there be calls for the cancellation of other consumer debt?

This beautiful mess took more than 20 years to prepare. Current student loan debt exceeds $1.6 trillion. Why the rush to write off student loan debt before the August 31 extension expires? The economic forces underlying the perceived chaos around student debt will not disappear by then.

The path to student loan forgiveness through executive action is fraught with legal pitfalls and moral hazard. That certainly does nothing to reign in the current costs of college education. The unintended consequences could even hurt student borrowers who need help.

We need answers before we act. A bipartisan national commission brings both sides to the table and provides empirical research to guide Congress toward a solid solution.

• Thomas W. Miller Jr. is Professor of Finance and Jack R. Lee Professor of Financial Institutions and Consumer Finance at Mississippi State University and Senior Fellow at Consumers’ Research.

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