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I’ve been wrestling with the ongoing “Forgive Student Debt” discussion.
As a retired community banker who spent his life lending money to those who needed it and expecting those folks to repay the loans, I am sympathetic with those who ask why someone who signed a document to borrow money with the promise to repay should be forgiven that debt.
On the other hand, I have much empathy for those who borrowed student loans not expecting repayment to take as many years as it does to pay a mortgage. Something doesn’t add up.
When I was lending money, I always considered whether the loan met the needs of my borrower and whether the proposed repayment schedule made sense. In fact, I often told my borrowers that my real job was to get them out of debt. Something doesn’t make sense with student loans.
The problem is that student loans are not competitive or controlled by an open market. Interest rates charged are higher than market rates for other loans, and terms are not negotiable. This has been especially true for the past 10 years or so. Mortgage rates have been declining and were below three percent for several years. The Prime Rate has been at or about three percent during the same time. Student loans however have been in the seven percent range. This is costing borrowers thousands of dollars and making repayment of their loans more than difficult. At best, getting out of student debt has become a long-term financial goal, more like paying off a mortgage than paying off an auto loan. Addressing the unjustified high-interest rates of student loans offers a way to reduce student debt without forgiving the principal balance borrowed.
Instead of forgiving the principal that borrowers promised to repay, we rebate the excessive interest that lenders charged during an agreed-upon period. For example, if someone had a $20,000 loan and has been paying seven percent on that balance for 10 years, they would have paid $1,400 per year or $14,000 during that 10-year period. If they had been paying a more competitive rate of three percent, they would have paid $600 per year or $6,000 over 10 years. The difference is $8,000 which would be rebated and applied to the loan making the balance $12,000. (Granted, something would have been paid on the principal during the 10 years, but to make it simple and to get the point across, I’ve used this rudimentary calculation.)
Taking this approach does not forgive what was borrowed, it just rights the wrong of unfairly high-interest rates that make repayment difficult. Further, we then can call it something other than “Forgiving Student Debt,” which has enough negative connotations to keep anything from happening. Repayment of principal is accelerated by charging affordable and fair interest rates. Granted there are details to be worked out, such as how large a balance would be eligible for a rebate. But regardless of the balance owed, the interest rate on all principal moving forward would be three percent. If a borrower is due a rebate for paying excessive interest, those funds would go toward paying down the principal of the loan. There wouldn’t be a direct distribution to borrowers.
There will be detractors to this approach. Some will say, “I just paid off my loans. Why shouldn’t I get some money back?” That is a fair question, but the program must start someplace. If I bought a new car today, and the price of the same car goes down next week, I’m probably not going to get any money back.
The interest rebate also does not address the fairness of student loans and whether colleges are abusing the use of student loans or if borrowers are getting the education they were promised. Those are separate issues and need to be addressed on their own. Mixing them into the rebate program will keep the program from happening.
To make progress, sometimes issues need to be addressed one at a time. Let’s keep it simple and let’s help those who are being hindered by unpayable student loans while collecting the principal borrowed.
A lender’s job is to get people out of debt. Let’s start today.
Art Kimball worked in community banking for more than four decades. He lives in Athens, Tennessee, a city of about 14,000 residents located between Knoxville and Chattanooga.
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