Ten years ago this fall, several hundred protestors, many in their twenties and thirties, brought backpacks, sleeping bags, and makeshift tents to Zuccotti Park, a vest-pocket greenspace in New York City’s downtown financial district.
Thus began the pinnacle event of the Occupy Wall Street movement, a raucous, nonviolent protest against income inequality, undue corporate-political influence, and the crushing burden of higher education-related debt.
The widely televised spectacle elicited a good deal of controversy. More than a few of my financial services colleagues disparaged the protestors as anti-capitalist. Some even echoed the hurled insults I recall from the anti-Vietnam war demonstrations of my university days: “Get a job!” “Take a bath!” “Get a haircut!” Not much has changed since then. Indeed, economic gaps have widened, corporate-political influence has grown, and the rate of increase in average per capita student loan debt has significantly outpaced the corresponding rate of inflation.
At its core, acute frustration breeds desperation, which helps to explain the increasingly strident demands for ever higher values of student loan debt forgiveness. Unaffordable installment payments, indelible credit bureau records of derogatory payment histories, and the inability to discharge in bankruptcy the very obligations that have wrought personal financial ruin to so many can all be traced back to this.
As alluring as amnesty might be to those whose debts severely limit or preclude their social and economic independence, its broader consequences must first be objectively deliberated, not least because:
- Loan forgiveness may well exacerbate economic disparity. First, because more than 90% of all student loans are backed by the federal government. Amnesty would then saddle taxpayers with the unpaid bills. Second, because those who’ve yet to repay their debts would be favored over those who already have.
- This proposal is the financial equivalent of a temporary salve on a festering wound. The student loan portfolio’s abominable record of payment delinquencies and defaults, which eclipses that of all other forms of consumer credit combined, is testament to a program that was improperly structured at the outset. Consequently, discharging existing debts without addressing the reason for the problem in the first place, assures its recurrence.
- Indiscriminately dispensed forgiveness undermines trust, the fundamental tenet of credit. Absent the ready availability of installment payment plans, our purchases—regardless of size—would need to be settled with cash-on-the-barrelhead.
I have great empathy for those who are valiantly struggling to make ends meet: There but for the grace of God go I. At the same time, though, I am suspicious of those who are vociferously advocating for such a simplistic solution to so complicated a problem.
Amnesty should be the last lever pulled. The first should be the wholesale restructuring of the $1.7 trillion student loan portfolio so that repayment durations are extended to a more appropriate term. Monthly installments would then be reduced to more affordable levels and, therefore, more likely to be repaid. Prepayment penalties should be waived in conjunction with this so that those who have the means to accelerate repayment would be able to save on all the interest that would have been incurred had their loans run the longer course.
Second, all derogatory higher education-related payment histories to the point of that restructure should be expunged from borrowers’ credit bureau reports. So too should FICO scores, which are in large measure derived from those reports, be recalibrated so that prospective creditors and employers (who factor FICO scores into their employment determinations) are not negatively influenced by a past for which these debtors had limited ability to control.
Finally, declarations of bankruptcy should again include the discharge of all higher education-related debts. Student loans are unsecured. There is no collateral to repossess and sell, no additional security to liquidate in the event of a default. Once the prohibition against discharge is reversed, lenders—whether in the public or private sector—would then be properly motivated to seek alternative solutions to forestall the taking of this drastic step.
This is the point where amnesty should come into play in tandem with the Biden administration’s well-intentioned plans for exempting the value of forgiven student debts from federal taxation—after we have done all that we should to rectify this broken system.