Tuesday, February 26, 2019
The latest plan to make federal student loans less appealing: cut repayment period from 25 years to 10, draft employers as debt collectors (Michael Simkovic)
Private student lenders have been trying for at least a decade to stifle competition from public student lending programs. Their advocates have come up with a myriad of reasons to raise the price of federal loan programs, reduce their availability, and make terms less generous, even though these public loan programs are profitable for the federal government and provide massive positive externalities to the economy.
The latest salvo in this decades long struggle comes from Lamar Alexander (R-Tenn).
Senator Alexander proposes to force federal student loan borrowers to repay their loans in 10 years instead of the 25 years that are currently permitted under extended and graduated repayment plans. Senator Alexander refers to this as "simplification."
People typically finish their educations in their 20s. Highly educated people live longer than their less educated peers, are healthier, and usually keep working until their late 60s or early 70s.
Professional degree holder's earnings do not peak until their 50s. It makes little sense to excessively burden them with loan payments in their early years when earnings are typically lower and many other expenses may be higher.
The benefits of education, in the form of higher wages per hour and increased work hours, are typically spread over decades. Financing degrees so that the positive cash flows match the negative cash flows (i.e., loan repayments are made over the course of a career to correspond to earnings premiums) enables students to invest in higher quality degrees with a higher total payoff over the long run, but that might take longer to produce high earnings. Consider the case of medical students who will work low paid residencies, internships and fellowships prior to securing highly paid work, or law students who will work clerkships prior to pursuing more lucrative work.
In the name of "accountability", Alexander would deny institutions access to federal student loans if their students take too long to repay their loans. This risks encouraging short termism and underinvestment in education, selective admission of wealthy students with less need to borrow, and could pressure institutions to steer some students toward private loans.
The federal government should be expanding funding for education until the marginal benefit--including not only student loan repayments, but higher wages, higher employment rates, higher tax revenues, and more innovation and economic growth--drops to equal marginal cost. We are far from that point, and searching for ways to reduce public funding for education is likely to be counter-productive.
Alexander would also garnish borrowers wages automatically, making their employers responsible for deducting student loan payments from their paychecks.
Usually garnishment is only used for debtors in default after other collection efforts fail.
I teach bankruptcy and creditors rights. Employers do not like dealing with wage garnishment, so much so that federal and state laws are needed to prevent employers from summarily terminating employees whose wages have been garnished (there are exceptions permitting termination if the number of garnishments reaches a certain threshold, sometimes only two).
There's a serious risk that Alexander's wage garnishment proposal would burden employers enough that they would be more reluctant to hire workers with federal student loans than comparably well-educated and well qualified workers who are debt free or have private loans.
Alexander's proposal is supported by a conservative think tank, Third Way, which has close ties to private lenders. (Like New America, Third Way describes itself as center left, but those familiar with its policy advocacy and funding sources maintain that it is in fact conservative).
Senator Alexander has previously worked to advance the interests of private student lenders over those of students, opposing a bill that would have enabled borrowers to refinance private student loans by borrowing from less expensive public lending programs.