If we want higher education to cost less, we should make it cheaper when people enroll.
But that’s not how things are done in the United States, where the first rule of personal finance is that it should never be simple.
Instead, we confuse people with a menu of half a dozen retirement accounts. We fetishize the tax code and its deductions and credits and refunds. We name gold, silver, and bronze health insurance plans after the precious metals, but we don’t award medals for clearing enrollment hurdles.
And so it goes with President Biden executive action around student debt cancellation. The potential aid of $20,000 per person is making headlines. But the sleeping thing here is a new income-focused debt repayment plan that would help many people pay off much less of their student debt over time, if they aren’t making a lot of money.
Instead of helping people upfront when they’re hit with five- or six-figure tuition, we’re taking a plan that served as a safety net and turning it into a stealth grant.
Fixing the student loan system is just the latest chapter in our long and sad story of making things difficult. In doing so, we confuse the very people we are trying to help: the young, the old, the sick, people who are short on time because they are working hard to make ends meet.
In some ways, that’s a feature of federalism. The US government helps pay for or subsidize unemployment insurance, Medicaid, and 529 college savings plans. States have rights, however. And so the amount of your unemployment check depends on where you live, your state may deny federal Medicaid funds that could help you get more health care, and there are dozens of 529 savings plans. -studies with different tax breaks – or none.
We also love the markets and the abundance of choice. Politicians, policy buffs, and product managers spend decades creating or navigating laws and regulations, and markets emerge as a result.
But then we get a result like the one we have in retirement savings. Do you have a 401(k) or a 403(b) or a 457 depending on where you work, or all three during your next three jobs. You can invest money in a TDF or possibly a REIT but probably not an ETF, and don’t forget to check ESG options. Or maybe you’d like one of the many flavors of IRAs, like a SEP or (you really can’t make that stuff up) a SINGLE.
Then it’s time to sign up for Medicare. Tempted by a “benefit plan,” where a company promises to help you understand and use your government benefits menu selections? You may be able to choose from HMO, PPO, PFFS, SNP, HMO-POS and MSA plans. The Centers for Medicare & Medicaid Services website has a glossary of acronyms with 4,420 entries, because personal finance is its own language. You learn as you go, or not at all.
What to know about student loan debt relief
What to know about student loan debt relief
Many will benefit from it. President Biden’s executive order means the federal student loan balances of millions of people could drop by as much as $20,000. Here are answers to some common questions about how it works:
With some social benefits, Professor Herd explained in an interview this week, the designers of the original program thought the barriers were appropriate. Anyone desperate enough would have to find a way to fend for themselves and prove their poverty, or so logic would go.
More recently, administrative burdens have resulted from the belief that private sector actors – who are often profit-seeking – would be the most effective intermediaries between people and federal programs involving money.
You see it in these Medicare Advantage plans, and it was a feature of federal PPP loans early in the pandemic. Rather than giving employers money up front to keep people on the payroll, there were repayable loans that required exhausted small business owners to beg a banker to rush to a government website reluctant on their behalf.
And so it is with the federal student loan system.
The income-tested repayment plans that have been around for years and a special debt cancellation program for public servants are already post children for administrative charges. Tracking your progress is a part-time job, supplemented by facebook support groups of frustrated debtors and companies to help people manage the process.
And wouldn’t you know it? There are several third parties that the federal government has contracted with the job of collecting student loan repayments and enforcing the rules.
But we can’t fire others because we would need them to administer this new student loan repayment plan.
Learn more about student debt relief
It would look like this: Monthly payments on undergraduate loans would go 5 percent of 10 percent of discretionary income; the amount of income of a person who does not meet the definition of discretionary would increase; and there would be a new, more generous way to calculate how balances go down or up over time. There are plenty of reasons to be skeptical that something this complex would go smoothly or quickly.
And it wouldn’t be cheap. Estimates of the Penn Wharton Budget Model estimate the 10-year cost of the new repayment plan at between $70.3 billion and more than $450 billion, depending on implementation details and how students and schools change their payment behavior borrowing and setting tuition fees. Again, it’s complicated.
By comparison, Mr. Biden had proposed spending $45.5 billion over five years to make up to six semesters of community college free nationwide. This would have paid for most of the cost, with the states contributing the rest. No tuition debt, no hoops to jump through.
Politics has stood in the way of free community college, and the Cut Inflation Act Mr. Biden signed last month did not include it. Instead, students who borrow would receive a grant at the end through the more generous repayment program, years later, if they know it exists, enroll without incident, overcome all the obstacles over a decade or two and their loan officer doesn’t make a hash of it.
There are bad words and associated acronyms we could use to sum it all up as we scream into the void. But our framing could just as well be centered on a single word: Respect.
Professor Herd surprised me this week when she mentioned the word in passing. I asked him to elaborate.
“Respect includes everything from respecting people’s time to not treating them like they’re trying to cheat or game a system,” she said. “It is about treating them as if they are full citizens and human beings who have basic rights to access the services and benefits to which they are entitled.
It seems simple enough. But too much of our personal finance infrastructure becomes adversarial due to its complexity. The “prove it” nature of Mr. Biden’s executive action, with his income metrics and repeated checks with third-party providers, doesn’t help, however generous it might be for people who would end up by succeeding.
Disrespect calls student debt cancellation “pardon” when it is really an apology for a dysfunctional higher education funding system. Disrespect does little to make tuition cheaper at the start of this process. Disrespect allows many for-profit schools to continue to deeply indebt people of color for certificates or degrees that mean little in the job market.
Lack of respect also guarantees full-time employment for personal finance journalists. I’m lucky to have the job, but it shouldn’t be necessary in the first place.