Four members of the Thinker team participated in the University of Chicago Institute of Politics (IOP)/Harris School of Public Policy’s most recent competition, which tasked students with solving America’s student debt crisis. Our proposal reached the second round, where it received plaudits for its creativity, and an IOP associate will be sending it to the relevant Senate committee.
We are publishing our policy brief in full for your consideration, but please note that this piece has not gone through the Thinker’s standard editing process:
We are sad to report that America is in the throes of a student debt crisis. Total national student debt tripled from half a trillion dollars in 2006 to $1.73 trillion in 2021. We attribute that morass to longstanding government policies that have incentivized colleges to jack up tuition.
In the early 1970s, private college tuition was less than $11,000—in today’s money. Then came the 1978 Middle-Income Assistance Act, which made federal loan subsidies and guarantees widespread, and, in 1979, the Education Department. Knowing that government aid would make students less responsive to prices, colleges raised tuition to $20,000 by the early 1990s. Then, in 1992, Congress extended loans to all students regardless of their financial need.
Tuition leapt to $26,000 in ten years and now sits at $33,000. College price inflation exceeds the rise in costs for almost every other good in the American economy.
Future Debt Solutions:
To rectify America’s student debt crisis, we propose phasing out the Department of Education’s (DoE) federal student loan program, which disburses loans without regard to the qualifications of recipient students, and replacing it with a market-based solution modeled after the health insurance marketplaces of the 2010 Affordable Care Act (ACA) and the “opportunity zone” provisions of the 2017 Tax Cuts and Jobs Act (TCJA). To finance our proposal, the DoE could sell $100 billion of the best-performing student debt (6% of its portfolio) and create an “American Opportunity Trust Fund” (AOTF) invested in U.S. Treasury securities.
The DoE should sell that debt to private lenders. Private lenders would discount the best-performing debt less, and borrowers, clearly financially sound, would be less at risk of high-pressure collection tactics.
We seek a federal student loan marketplace, the “American Potential Portal” (APP), that would pair private lenders with college students looking for loans. Students would upload their academic and financial information and long-term goals, and private lenders would “bid” to provide the students’ loans. To incentivize private lenders’ participation in the student loan marketplace, we propose allowing them to invest their realized capital gains into the marketplace without paying capital gains tax.
For instance, if the Carlyle Group netted $5,000,000 by buying a stake in a company for $10,000,000 and then selling it for $15,000,000, Carlye could invest $5,000,000 into the student loan marketplace without having to pay $1,000,000 (20% of $5,000,000) in federal capital gains tax.
The standard product in the marketplace would be an income share agreement wherein the student pays his “angel investor” a fixed percentage of his income annually for a fixed amount of years. Like the focus of opportunity zones on uplifting certain economically depressed communities, our proposal seeks to encourage investment in students who might not otherwise contribute to the economy but can now earn a comfortable salary and provide investors a healthy return on their investment.
The terms of each income share agreement would be based on a student’s choice of major and other relevant qualifications like SAT/ACT score and high school GPA, which incentivizes students to pursue majors likely to yield lucrative and socially beneficial careers. For instance, Purdue University’s income share agreement program allows math majors to pay off $10,000 with 3.96% of their salary for a period of 8 years, whereas English majors pay 4.58% for 9 years and 8 months.
Such a program could be expanded to encompass limitless combinations of major, school, and loan amount. For instance, a Purdue math major taking out $25,000 in loans could agree to pay 9.9% over 8 years, whereas a UChicago math major taking out the same amount would pay 5.29% over 8 years, given the higher median salary for math majors at Purdue versus UChicago.
As a result of the income-based flexibility of this program, the burden of prudent decision-making is partially transferred off of the shoulders of 17- or 18-year-old young people and onto the shoulders of investors. Moreover, we also propose setting a time and yearly payment maximum for students coming from households considered low-income by the 2021 Poverty Guidelines. They would pay at most 7.5% of their income for ten years. The difference is backstopped by the government from the AOTF.
The government would tax any capital gains that investors derive from the student debt marketplace at the standard rate and disburse that revenue to states to fund trade and vocational education with the understanding that attending a four-year university is not the optimal choice for every student.
Current Debt Solutions:
To solve the current debt load totaling $1.6 trillion, we will implement a new social support system for debtors. A one-time 5% tax on both public and private colleges and universities with endowments of $1 billion or more will fund the program, yielding $37 billion (note that total taxable endowments equal $732 billion). The government will put this money into a trust to fund novel programs to decrease and eventually solve the American student debt crisis.
The primary component of our solution is federally employed coaches and advocates, who will help debtors develop money-management strategies. Those in middle- and low-income brackets, who may view debt repayment as an impossible task, will be given resources to aid in making smart financial decisions prioritizing loan repayment. Those with debt greater than the average of $25,000 will be required to partake in quarterly 30-minute meetings with the federally employed coaches and advocates.
The government will enforce that requirement with a $250 tax for missed meetings due to non-extenuating circumstances. Coaches and advocates will help debtors develop achievable financial goals through budgeting plans and match unemployed debtors with income-generating jobs through a federal job portal geared towards these debtors.
The large qualifying population (22 million students) necessitates nearly 30,000 coaches and advocates to be responsible for 750 portfolios each. The program would cost $2 billion initially and would gradually cut costs as the number of debtors declines. After the more urgent needs of those with debt greater than $25,000 are addressed and corrected, the government coaches and advocates would counsel those with the largest student debts. We anticipate the program wiping out existing student debt in the next 15 to 20 years as a direct result of better job opportunities with higher payoffs.
Passing through Congress:
We would pass this proposal in the 119th Congress. Due to anticipated opposition to tax changes, we recommend passing this via the Senate’s reconciliation procedure with a simple majority vote.
* The views expressed in this article solely represent the views of the authors, not the views of the Chicago Thinker.
