Student debt: It’s the interest, stupid
The constant, unrelenting, day-by-day buildup of interest is the beating heart of student debt. Its time Congress put a stake in it.
Borrowers will repay more than $240 billion in interest over the next 10 years. Getting rid of it would mean a lot of forgiveness. The COVID-19 moratorium on interest payments has provided borrowers with more than $100 billion in relief or about $4 billion to $5 billion a month, although the relief is set to end this May (maybe). Ask any student borrower — it’s been a big help. Ending interest permanently would also make overall student debt reform much easier. The Education Department struggles to ease the burden on students by promoting its Income Based Repayment plan. This plan reduces monthly principle payments by extending the time students have to pay. But adding time only builds up the interest offsetting the gain from lowering principal payments.
This is also an equity issue. The students who fall behind in their payments suffer the most. While the racial disparities in student borrowing, delinquencies and defaults, are well documented, studies now show that Black and brown borrowers see their student debt grow the most: only few years after graduation, the black-white debt gap more than triples. As you read this, more than 10 million of borrowers are seeing their loan balance balloon as unpaid interest capitalizes. But there is one congressman who is ready to raise a stake to the beast. Rep. Joe Courtney (d-Conn.) has introduced a bill to allow student borrowers to refinance their loans at zero percent interest. Despite it enjoying bipartisan support, the battle is far from won.
On the flip side, getting rid of interest denies taxpayers their rightful return from lending money to students. It’s not fair. But there is another way to ensure a return to taxpayers. The government could invest the principal paid by students to earn a return. A version of this comes from Social Security where payroll taxes are invested in Treasuries to create a return. The government could invest student payments in a bond issued by the Federal Reserve. When the bond comes due the Fed returns principle plus interest to the government.
But why would the Fed involve itself in student debt? Isn’t the mission of the Fed to foster employment and price stability? The answer is it already deep in the thicket of student debt. it is responsible for the Consumer Financial Protection Bureau (CFPB), which protects consumers from rapacious financial institutions. As such the CFPB educates and defends students with debt. Furthermore, the Fed’s research department already devotes much time and data collection to aspects of student debt. It has some of the best-known experts on the subject.
Recently, more than 110 student college presidents wrote to President Biden asking for debt forgiveness. If the president gives them a meeting, zeroing out interest with investments of principal should be discussed. Unlike other proposals, it would protect both the lender and borrower.
Robert Hildreth is a former International Monetary Fund economist whose professional work involved restructuring South American debt and marketing sovereign debt loans. He founded the Hildreth Institute dedicated to restoring the promise of higher education.