Student loan reform has always been the point of attraction for any candidate in the primary election. The student loan reform platforms I’ve seen for this year tell you a lot about the range of possible proposals that might come out of the Democratic Party now and in the future. This might interest you!
Overview of Student Loan Reforms
The Biden administration has been reforming student loan repayment plans so both existing and future low- and middle-income borrowers will have smaller and more manageable monthly payments.
The Department of Education has the authority to make income-driven repayment plans, which cap what borrowers pay each month based on a percentage of their discretionary income.
Many of these plans cancel a borrower’s remaining debt once they make 20 years of monthly payments. However, the existing versions of these plans are too complex and too limited.
As a result, millions of borrowers who might profit from them do not sign up, and the millions who do sign up are still often left with unmanageable monthly payments.
Reasons Student Loan Reform Proposals Have Failed
Why haven’t we seen action on student loan debt yet? Republicans tried passing the Prosper Act, and Democrats tried to pass the Aim Higher Act. Neither succeeded. Both would have simplified income-driven options from many to just one.
That’s where the similarities end, though. Republicans want borrowers to pay 15% of their income for more than two decades.
Democrats want borrowers to pay 10% of their income for 20 years, while also reducing the payment even more for lower-income families by giving them a higher deduction.
This simple partisan disagreement is one big reason why we haven’t seen progress on student loan reform yet.
Why it Could Succeed in 2024
In all seriousness, the Republicans aren’t engaging with President Bidden on student loan reform because they believe they can beat him in 2024.
Why would you compromise and make a major change to a long-term federal program right now if you were House Speaker Kevin McCarthy?
You likely believe you’ll keep the House, take the White House, and possibly deal with a more moderate Republican Senate — if not win that, too.
Then you’ll have the power to push through whatever you want on student loan reform, which is what the Republicans are doing.
If Trump wins the election, then I doubt the Democrats will lose the House or gain the Senate. This means the most likely outcome, in that case, is that nothing would change.
To summarize our prediction on the chance for student loan reform:
- Republicans win in 2024: We should be expecting major changes if that happens.
- Democrats win or win a split decision in 2024: In this case, no or limited student loan reform is expected.
Student Loan Predictions
The Democrats have a huge range of opinions concerning what to do about the student loan crisis (we’ve chronicled all those opinions, too).
Here’s what some of what the major candidates want, in no particular order:
- Refinance federal student loans to a 2% to 4% interest rate
- Expand the Public Service Loan Forgiveness (PSLF) program and make many borrowers qualify retroactively
- Simplify income-based payment options
- Make high-income borrowers pay more under most income-driven programs
- Give low-income families a much bigger deduction before they have to pay anything on their student loans
- Make public colleges and universities free at the undergraduate level
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Student Loan Reforms to Watch Out for in 2024
I anticipate that student loan debt which currently tops $1.5 trillion will be one of the biggest issues discussed on the campaign trail. After all, over 40 million Americans have student loans.
Candidates will need to craft bold policy proposals to differentiate themselves and make them stand out to voters.
And if even some of these policy ideas get turned into actual legislation, they could transform the student debt landscape and our entire system of financing education. Here are some bold ideas to watch for during the next year and a half;
Multiple proposals to reduce or eliminate college tuition at public universities will be in motion.
House Democrats have already proposed the Aim Higher Act, which would increase grant-based federal aid and provide federal financial incentives to states to eliminate or reduce tuition at state universities.
Some states have already gotten ahead of the curve to implement debt-free college programs. New York, for example, has proposed colleges for students from lower-income families who commit to remaining in New York after graduation.
Steering students away from debt-financed degrees will be an important component of any student loan reform policy. But lawmakers will still have to address the $1.5 trillion in student loan debt that already exists.
One idea to help borrowers contain the cost of student loan repayment would be a federal program that allows them to refinance their student loans – both federal loans and, potentially, private loans – at much lower interest rates.
Caps on Interest Accrual
Reducing interest rates would be one way to lower the cost of student loan repayment. Another option would be to cap the amount of interest that can accrue on a student loan – perhaps at a percentage of the original principal balance.
It’s not uncommon for student loan borrowers to wind up repaying their original principal balances many times over. This is during the course of repayment due to interest that accrues during school.
Student Loan Forgiveness and Cancellation
Some consumer advocates argue that student loan interest and repayment reforms wouldn’t go far enough to address the student debt crisis.
We are already seeing more radical ideas – such as the cancellation of student debt to stimulate the economy – discussion.
While I think it’s rather unlikely that a proposal to instantly wipe out $1.5 trillion in student debt could become law absent a fundamental shift in public opinion, we could certainly see a shoring up or expansion of existing student loan forgiveness programs.
One of the biggest roadblocks for struggling student loan borrowers is the fact that the bankruptcy code makes it extremely difficult for most people to discharge their student loans in bankruptcy.
Advocates are calling for reforms to reinstate the ability of borrowers to discharge their student debt in bankruptcy, just like any other type of consumer debt.
There is near-universal agreement that the current student loan system; which consists of a patchwork of government entities and private third-party servicers and debt collectors – is an unwieldy mess.
The system is plagued by accountability. Meanwhile, colleges and universities have little “skin in the game,” and thus they have minimal incentives to make sure their graduates get employed and can pay back their debts.
Framework for Student Loan Reform
Here are some wild predictions about what we’ll see after the election in 2024:
- A push for restrictions on high-income professionals using PSLF (for future borrowers only)
- Elimination of the tax bomb for student loan forgiveness in the private sector
- A new kind of federal student loan with a single income-driven repayment option
- Poorer families will pay less; richer families will pay more (on new loans only)
- Current repayment options will remain
- If Democrats win, federal student loan interest rates might decrease; if Republicans win, they might stay the same
- Both parties at some point will realize that uncapped borrowing is a terrible idea.
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If you can predict the future of the 2024 election, I could tell you a lot more about the future of student loans and that it will be a nice time for American students.
Until we have that result, should you be forced to move to something new, it will likely be more generous, not less.