Student Debt: It’s Stupid Interest
The constant, relentless, daily accumulation of interest is the beating heart of student debt. It’s time Congress took notice.
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 $4-5 billion per month, although relief should end in May (maybe). Ask any student borrower – it’s been a big help. Permanently waiving interest would also make comprehensive student debt reform much easier. The Department of Education is working to ease the burden on students by promoting its income-based repayment plan. This plan reduces monthly principle payments by extending the time students must pay. But adding time only accrues interest that offsets the gain from reduced principal repayments.
It is also a question of fairness. Students who fall behind in their payments suffer the most. Although racial disparities in student borrowing, delinquency and default are well documented, studies now show that black and brown borrowers see their student debt increase the most: only a few years after graduation, the black-white debt gap more than tripled. As you read this, more than 10 million borrowers see their loan balances swell as unpaid interest accumulates. But there is one congressman who is ready to pull a stake on the beast. representing Joe CourtneyJoseph (Joe) D. CourtneyLawmakers introduce bill to examine veterans’ opioid use House Veterans Affairs GOP campaign branch expands list of targets after brutal night for panel Dems House Approves B Increase for Defense Budget MORE (d-Conn.) a introduced a bill to allow student borrowers to refinance their loans at zero percent interest. Although she enjoys bipartisan support, the battle is far from won.
On the other hand, the elimination of interest deprives taxpayers of the income that is theirs by lending money to students. It is not fair. But there is another way to ensure a return to taxpayers. The government could invest the principal paid by the students to earn a return. A version of this comes from Social Security where payroll taxes are invested in treasury bills to create a return. The government could invest student payments in a bond issued by the Federal Reserve. When the bond matures, the principle of the Fed returns more interest to the government.
But why would the Fed get involved in student debt? Isn’t the mission of the Fed to promote employment and price stability? The answer is already deep in the thicket of student debt. he is responsible for the Consumer Financial Protection Bureau (CFPB), which protects consumers against predatory financial institutions. As such, the CFPB educates and defends indebted students. Moreover, the Fed’s research department already devotes a lot of 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 written to President BidenJoe BidenStudent debt: It’s stupid interest that the US keeps pressure on Russia amid fears of a possible invasion of Ukraine To stabilize Central America, the US must create better incentives to trade MORE ask for debt forgiveness. If the president gives them a meeting, zeroing interest with principal investments should be discussed. Unlike other proposals, it would protect both lender and borrower.
Robert Hildreth is a former International Monetary Fund economist whose professional job was to restructure South American debt and market sovereign debt loans. He founded the Hildreth Institute dedicated to restoring the promise of higher education.