The student credit crisis led to a debt strike. Experts have other ideas.


As of 2015, a small number of Americans went on strike: they stopped paying on their student loans to protest the student debt crisis. US borrowers owe more than $ 1.5 trillion in total.

“For many of us, this student debt shouldn’t have existed at all. It’s about seeing education as a public good, ”said Thomas Gokey, an organizer of the Debt Collective, a union of student debt strikers based in Canton, NY

41 today, Mr. Gokey studied art in undergraduate and graduate schools. He hasn’t paid his $ 37,000 student debt since 2015; his loans are currently on hold.

The debt collective has 1,600 active strikers who believe that “massive civilian financial disobedience” is the way to extend and eventually terminate a current pandemic relief period cancel all student debts. Its members use deferral, deferral or income-based repayment – a means of stopping payments in financial need – to avoid making monthly payments.

Debt strike is an extreme measure. Skipping payments entirely is an approach that personal finance experts strongly advise against because it can have a lasting negative impact on a person’s creditworthiness.

Still, such tactics, along with the window of change that comes from Pandemic relief efforts, have some education and personal finance experts who envision major and permanent changes to the current system.

This year, Relief efforts allowed those with the most federal loans to put them on hold until December 31st, without incurring interest, credit damage or risk of default. More than 22 million borrowers on direct federal student loans have suspended their payments during this period, according to data analyzed by Mark Kantrowitz, editor and vice president of research at Savingforcollege.com.

Any proposal to reduce student debt in the longer term would pose significant hurdles, including reaching political consensus at the federal level. Such proposals could also raise objections from borrowers who have paid off their debts.

Here are three ways student debts might be rethought in the future, according to experts in personal finance and education.

Funding funding for students in need

The Pell Grant is a federal program that provides financial assistance to college students from low-income families. The maximum grant this year is $ 6,345, depending on family dues, school fees, and more, and students can reapply each year to use this money for school attendance.

Mr Kantrowitz has proposed triple the average Individual Pell Scholarship to eradicate borrowing inequality for low-income students and increase the number of eligible students as qualifications now limit a family’s contribution. According to Mr. Kantrowitz’s calculations, tripling the performance of the Pell grant would cost an additional $ 60 billion per year, or triple today’s costs.

“The solution to the student debt problem is not to take out loans after the fact. It should have a lot more scholarship money in advance so that the students have to borrow less, ”says Kantrowitz.

The Ministry of Education declined to comment on the proposal.


Illustration:


Brian Stauffer

Make income-based repayment automatically

Another suggestion from student debt advocates is to automate an existing option: income-based repayment programs. Currently, all federal borrowers who have not been in default are eligible to register, but they must submit an application to the Ministry of Education every year and provide evidence of their income.

In 2017, according to a report by the Congressional Budget Office, 24% of undergraduate borrowers and 39% of college graduate borrowers participated in income-based repayment programs.

Today, many students whose payments are unmanageable skip and default on payments altogether, says Adam Looney, executive director of the Marriner S. Eccles Institute for Economics and Quantitative Analysis at the University of Utah. “That’s a bad result for the borrower,” he says.

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The proposal aims to change the current system of flat-rate payments and the paperwork hurdle when registering for automatic payments. The Internal Revenue Service would pass information on student income to the Department of Education, which would set monthly payments accordingly, Looney says.

“In the ideal system, you would only receive one monthly invoice from the Ministry of Education, which would already be measured at 10% of your income,” he says. “You set it up and forget it.”

Another option is to manage loan payments as a deduction, similar to a wage tax. This is modeled after the Australian student loan system, where the payments automatically come from the borrower’s paychecks every month.

A problem with this approach? “It’s backward-looking, requiring borrowers to file pay slips or tax returns to verify their income,” said Constantine Yannelis, assistant professor of finance at the University of Chicago Booth School. “If your income goes down, it may be some time before you see a cut in payments.”

As a candidate, President-elect

Joe Biden

outlined an automatic income-based repayment schedule in its agenda.


Illustration:


Brian Stauffer

Change bankruptcy rules

A group of Democratic Senators has argued that expanding current coronavirus relief efforts will be crucial for borrowers who recover from the pandemic. Some feel that broader and more permanent rule changes are needed.

“Student loans hold a special place in consumer debt portfolios because there aren’t that many backstops,” says Paige Marta Skiba, law and economics professor at Vanderbilt University. “We can change the rules for credit and bankruptcy by loosening what constitutes ‘unreasonable hardship’. “

Currently, student loans can only be redeemed in bankruptcy if the borrower can prove that continuing payments would represent this “undue hardship”. But the decision rests with the individual judges. Should this standard change, borrowers who fail this hurdle today may have another option.

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