Time For Student Debt Forgiveness?

Elizabeth Warren's position on intolerable student debt isn't bad; it's a reasonable, moderate compromise. Cutting accruing interest from exorbitant rates meant to bolster banksters-- and government-- bottom lines, to market rates banksters pay to borrow is a good first step. But it isn't enough, not by a longshot. Sunday I had dinner with a senior congressional staffer who is very worried that the focus on interest rates will leave the real problem-- wealth creation-- to fester and choke economic development. There was a New York Times editorial over the weekend that explains the problem-- if not the solution:

Since the housing bust, renting has been in and owning a home has been out, especially among young adults who in earlier decades would have been first-time home buyers. As the rate of homeownership has declined, from a peak of nearly 70 percent in 2004 to a 20-year low of 64.3 percent recently, the number of owner-occupied homes has barely budged, while the number occupied by renters has increased by nearly 25 percent.

Those trends have led to questions about the future of homeownership. Would more and longer rentals be a bad thing? Are the benefits of homeownership overrated? The answer to the first question is yes; the answer to the second is no.

Homeownership long has been central to Americans’ ability to amass wealth; even with the substantial decline in wealth after the housing bust, the net worth of homeowners over time has significantly outpaced that of renters, who tend as a group to accumulate little if any wealth.

A recent study by researchers at the Joint Center for Housing Studies at Harvard University analyzed the reasons for these differing outcomes. Paramount among them is that homeownership requires potential buyers to save for a down payment, and forces them to continue to save by paying down a portion of the mortgage principal each month.

The Times' editors solution is primarily about avoiding the ruin of foreclosure by thwarting Republican plans to devastate the consumer protections that were put in place by Dodd-Frank. "[L]egal and regulatory protections against practices that inflated the housing bubble need to take root," they state flatly. "The Dodd-Frank financial reform law, for example, requires lenders to ensure that borrowers have the ability to repay their home loans and outlaws complex mortgage terms that enrich lenders but expose borrowers to payment shocks. The law also established the Consumer Financial Protection Bureau, with the purpose of looking out for consumers’ interests in financial transactions. The C.F.P.B. has gotten off to a good start, but Republicans, who now control Congress, have consistently tried to weaken the agency and the provisions of Dodd-Frank generally. President Obama must be prepared to veto legislation to repeal or weaken mortgage-finance and consumer-protection reforms."

They also talk about long-term wage stagnation as an obvious detriment preventing working families from accumulating enough for a down payment. "The solution," they propose, "is to lift wages, not only with new policies like higher minimum wages and toughened labor standards, but also with approaches to managing the economy to ensure that a fair share of growth goes to wages and salaries, rather than going disproportionately to corporate profits." Sounds like Bernie Sanders' message is getting across.

But that is only one piece-- albeit a crucial one-- of the puzzle. The other is the college debt we are thrusting on our young people. It's too much-- way too much. College grads don't have the money to buy homes or cars or start businesses. The ripple effect has been devastating-- not just on the lives of individuals, but on the economy as well. Students feel "scared and hopeless... with their mountain of debt, because they have graduated without finding a job or are working at such low-paying jobs that they are unable to make payments."

[S]tudent loans are never dischargeable in bankruptcy except in cases of severe physical hardship. This is abusive.

Our country has done more to help our failing big businesses, big banks and defaulting homeowners than we have done for young people who don’t understand the significant financial ramifications of borrowing for their college tuition.

Let’s review the facts. As of 2013, a student who chose to attend four years in the University of Minnesota undergraduate program would pay $101,496 ($25,374 per year) for tuition, fees, books, personal miscellaneous expenses, and room and board. Add another three years of law school at $176,338 for a total of $277,834 over seven years.

This is like a mortgage without a house.

If this student amortized a $277,834 debt over 25 years at 6.5 percent interest, the monthly payment would be $1,875-- $22,500 annually. Many new graduates are not making the income that would allow them to pay such student loans back, forcing many to use income-based repayment options or chronic deferment, causing interest to accrue exponentially.

Compare home mortgages to student loans. Current interest rates for 30-year home mortgages are fixed at around 4 percent and 15-year mortgages at around 3.3 percent. Federal student loans vary from 4.66 to 8 percent, and private bank student loans can charge up to 15.74 percent.

But, unlike with student loans, before the home buyer commits, the loan agency must submit an amortization schedule to inform borrowers of the principal and interest rate so they know exactly how much they will pay back each month. Unfortunately, the full amortization of a student loan is usually not provided to students until they are ready to graduate.

...We must end this predatory lending practice, or tuition debt will be the next financial tsunami. Too many of our graduates are already unable to buy homes, raise families and contribute to strengthening our economy.

OK, so why not debt forgiveness-- right now-- for student loans? You want to talk about economic stimulus? The economy needs graduates to buy starter homes, buy cars, start businesses and invest in their futures. Instead students owe over a trillion dollars. The average student debt last year was around $30,000 per student-- with the 20 high-debt public colleges averaging debt levels ranging from $33,950 to $48,850 and the 20 high-debt nonprofit colleges ranging from $41,750 to $71,350. And it's everywhere in the country.