Cut the profits out of student loan debt, tie interest rate to inflation

The Biden administration is expected to decide this month on a plan for student loan forgiveness to tackle the nation’s mounting debt crisis. While the numbers vary based on geography, the type of school attended and the program being pursued, there is little question that the cost of pursuing a college degree is rapidly increasing. And students and their families are being forced to make up the difference for changes in government funding priorities.

Adding insult to injury, the decline of jobs in manufacturing, together with the growth of jobs in sectors such as technology, banking and finance, and health care, mean that getting a college degree and even a graduate degree is increasingly essential to achieving a sustainable middle-class lifestyle.

The result, when adjusted for inflation, is that student debt at graduation increased by more than 240% in the past three decades and now tops $1.7 trillion.

Additional education-related debt is held by students and families who used family loans, short-term loans and credit cards to finance education-related expenses like textbooks, computers, commuting to school, and groceries.

Data shows that the burden of debt harms the U.S. economy as a whole. Rather than buying a home, starting a business, starting a retirement savings plan or engaging in consumerism, Americans with debt are likely to spend the rest of their 20s and much of their 30s using their expendable income repaying their student loans.

Most Americans support some form of student loan forgiveness, but not even a majority of student loan borrowers support outright forgiveness of all student debts.

Despite the divisions, two things are certain. The current system is not sustainable, and something needs to change.

Which brings us back to the much-anticipated decision of the Biden administration on how to tackle this crisis.

Debt forgiveness would provide millions of Americans with short-term relief — relief that is needed in the wake of a multiyear global pandemic that came on the tail of a massive recession just 15 years ago. But forgiveness does not actually address the problem of student debt in a long-term or sustainable manner. It simply resets the clock, kicking the can down the road to the next generation of borrowers.

That’s why it is essential for the Biden administration to retroactively reset and recalculate all interest on current and future student loans to the federal inflation rate.

This strategy recognizes that college isn’t free and that there are real costs to building and maintaining educational facilities, hiring and retaining high-quality faculty, and providing students with services to help them thrive both now and in the future. Not to mention the costs of housing, food, internet and other essentials of living in the Western world that a person is responsible for, whether they choose to be a student or not. Students should be held responsible for these debts, as they are beneficiaries.

But the federal government and banks should not profit from interest rates on loans for the education of our future generations.

From 2009-21, the years bookmarking the end of the 2008 recession and the beginning of the 2022 economic slowdown, inflation rates in the U.S. averaged just 1.8%. During that same 13-year period, interest on federal student loans averaged 4.3% for undergraduate students, 6.1% for graduate and professional students, and 7.2% for unsubsidized or PLUS loans — the most common type of loans for parents helping to finance their children’s education.

And the 2022-23 school year is set to be even worse, with undergraduate, graduate and PLUS loans set to incur 4.99%, 6.54% and 7.54% interest, respectively.

The result is that the federal government is making a windfall on the backs of the next generation.

Prior to the pandemic, the Education Department estimated it would derive more than $1.6 billion in profit from collecting student loan debt. That profit comes even after accounting for loans in default, public-interest forgiveness programs, incomebased repayment plans and other forms of canceling or delaying the payment of student loan debt.

More disturbing, a third of all payments collected by the government in 2021 did nothing more than service interest, with no impact on the principal. Even under today’s historically high inflation rates, most students would only see a slight increase in their interest, and only in the short term.

By adjusting interest rates to match inflation, borrowers would still be responsible for the cost of their education and required to pay off their debts, but with a greater percentage of their payments going toward the principal, rather than to government profiteering.

And for those Americans who chose not to be students, and instead invested in their future by opening a small business, we see no reason not to tie Small Business Administration loan rates to inflation too.

In nonpandemic years, the Small Business Administration issues roughly $45 billion in loans to more than 50,000 borrows who, like students, are trying to invest in a better future for their family and their country. Most SBA loans have interest rates between 8% and 13%. Interest rates like that hinder innovation and keep low- and middle-income people who lack access to liquid capital from pursuing small-business ownership.

These adjustments would result not just in relieving the pressure on millions of Americans facing an unsustainable loan payback but would also provide a windfall for all Americans by allowing these dollars to circulate productively in the general economy, rather than being sucked into a federal profit scheme.

Helping Americans with student and small-business debt to pay it back on a reasonable and sustainable schedule would benefit all Americans. It would help support business creation, the stock market, the consumer economy, homeownership and every other aspect of the economy that benefits from confident consumers with a little less debt and little more spending power.

Education and entrepreneurship are the bedrock of innovation. By supporting both, we can keep the American economy growing, without breaking the bank on the federal budget.