How to avoid the impending crisis

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Federal student loan payments have been suspended for almost two years, under the CARES Act. During this period, the break was extended twice, last time by Biden administration in August with the announcement he would be the last time borrowers would get a stay. These are the facts.

Here’s another: borrowers aren’t ready to start paying off their debt in early 2022. Polls and polls have shown borrowers are worried about this with the most recent showing that “89% of fully employed borrowers say they don’t feel financially secure enough to resume their payments in a few months.

With this reality comes a surge in inflation to 30-year highs. Consumer goods costs 6.2% more in October than a year ago.

This gives the government two choices: extend the hiatus, which would seriously damage its credibility, or let repayments resume and face the consequences of millions of financially troubled borrowers with a significant portion in default. Defaults could be particularly severe among black and brown students who do not have the resources to pay, further exacerbating the income disparity related to student debt. Either option is undesirable. In the midst of all this, borrowers are forced to switch providers, which will only add to the precariousness of the situation.

Anticipating that many things will go wrong, the government is considering some temporary flexibility measures to facilitate the transition to reimbursement. While these are necessary and must be implemented, there is still a long way to go if the government is to avert a looming crisis.

First, if there has been a time to write off student debt, it is now. About 60 percent of all borrowers in default owe less than $ 10,000. Therefore, a simple cancellation of debt of $ 10,000 would prevent millions of borrowers from defaulting. Beyond justice, it is practical.

It is also time for the government to recognize that the student debt crisis will not be resolved with these small, short-term solutions. Student debt needs a complete restructuring, not just forgiveness.

When banks restructure their debts, the main objective is to find a sustainable level of liquidity to allow the entity to function in the future. This usually includes debt cancellation, but also includes measures to improve the borrower’s ability to make payments that are within their budget.

In the current system, the main culprit is the interest that accumulates and capitalizes on the principal of the loan. It represents about a third of a student’s debt. It should never have been the responsibility of the students but rather of the government to invest the student capital repayments to make the return necessary.

Interest is the bête noire of all attempts to reform the student debt system. Income-based repayment plans can only work if payments are made on a small scale, which extends the repayment term. But these plans keep the interest meter running, racking up mountains of additional interest charges for borrowers. Transferring this responsibility from the students to a government would solve this problem.

This is an example of one way to get student debt to fit better into a borrower’s budget, which would mitigate defaults. Comprehensive restructuring that cancels debt while limiting future payments is urgently needed. The constant drumbeat of simply canceling various amounts of debt corrupts the restructuring process. We can do better. We can both forgive and look to the future.

Robert hildreth is a former economist with the International Monetary Fund whose professional work involved restructuring South American debt and marketing sovereign loans. He founded the Hildreth Institute dedicated to restoring the promise of higher education.


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