Student loan borrowers are poised to take a breather after President Joe Biden unveiled a plan last month to forgive up to $20,000 in federal student loans per borrower. But some experts say the one-time presidential pardon won’t do much to ease the student debt crisis affecting millions of borrowers across the country. Laurence Kotlikoff, an economics professor at Boston University and president of the financial planning software company Economic Security Planning, has spent much of his career focusing on the intergenerational redistribution of wealth. Government programs like Social Security and Medicare take from younger generations and give to older cohorts while running huge deficits, Kotlikoff said. Government-provided student loans similarly place an undue burden on younger Americans, he said. More from Personal Finance: How Student Loan Forgiveness Will Apply to Your Debt Key Facts on the Path to Student Loan Forgiveness How to Calculate Your Student Loan Forgiveness Bill “My message would be, ‘Don’t borrow for college for a start — period,’” Kotlikoff said. “That’s for the president to say,” he added. “That’s what everyone should be saying.” Under Biden’s plan, millions of borrowers would see $10,000 in federal student loan forgiveness or up to $20,000 for Pell Grant recipients. As a result, nearly 20 million people, or nearly 45 percent of borrowers, will have their debts completely canceled, according to the White House. This comes as more than 40 million people have $1.7 trillion in student loan debt. “Bailout of some people, many of whom are still paying off college loans in their 60s, is not a sin,” said Kotlikoff, who estimates there are about 3 million people in that age group who are still paying off student loan debt. Those debts could come from their Social Security checks as their balances have grown because they may have been charged interest if they were unable to repay, Kotlikoff said. “There’s no reasonable argument for the government forcing you to literally pay it back when you’re 99,” Kotlikoff said. Instead, other potential fixes may help borrowers avoid this situation in the first place.
1. Make student debt dischargeable in bankruptcy
Student loans are one of several types of debt that cannot be discharged in bankruptcy. Kotlikoff argues that this needs to change. “If you go bankrupt, you should be able to discharge that obligation just like you would a mortgage or credit card debt,” Kotlikoff said. “Of course, it will affect your credit score.” Another notable economist, Larry Summers, a Harvard professor and former Treasury secretary under President Bill Clinton, also supported the idea, despite calling Biden’s student loan forgiveness plan inflationary. “I believe the best way to relieve student debt would be to allow it to be discharged in bankruptcy,” Summers tweeted last month. “I would support this reform.” Such a move would also penalize private creditors, rather than subsidize them as Biden’s plan partly does, Summers wrote.
2. Set all interest rates on the 10-year Treasury
Everyone should be able to borrow at the rate on the state’s 10-year Treasury note, which is currently used to set the interest rate on student loans each year, Kotlikoff said. Parent PLUS and graduate student loans should also be set at 10-year Treasury, he said. Additionally, if that rate drops, the loans should be automatically refinanced immediately, so borrowers pay less interest without having to fill out paperwork, Kotlikoff said.
3. Limit the maximum amount people can borrow
Borrowing should also be limited to an amount that parents and students can actually pay, Kotlikoff said. Kotlikoff suggests the maximum people should be able to borrow should not affect the standard of living of average lifetime incomes by more than 10%. This would prevent parents from borrowing an unlimited amount on behalf of their children without knowing who will pay it back, he said. It pays for itself in terms of more people being able to repay. Lawrence Kotlikoff chairman of Economic Security Planning “There’s a limit, and once that limit is set, that’s going to put some pressure on higher-priced demand to lower their prices,” Kotlikoff said. Overall, eliminating super high interest rates and giving people a chance at the lowest prevailing rate without putting people in debt forever will make money. “It pays off in terms of more people being able to repay, but secondly there’s an improvement in productivity in the economy,” Kotlikoff said.
