This post is the first in a series to describe policy initiatives to help the United States economy recover from the depression that the COVID-19 pandemic has caused. Based on the slow national response to the pandemic and the growing wave of stay-home and shelter-in-place orders, I sadly expect it to be a long series.
The Republican leadership in Congress (there is none in the executive branch at the moment) is supporting some relief for consumers and a lot of relief for large businesses. "The devil is in the details," as the saying goes, and Congress is going to be occupied for some time in negotiating the details of any business bailout.
Any relief program should start by providing some help to many people, instead of a lot of help to very few people. I propose that Congress start with a simple step that requires little administration and provides debt and expense relief to 45 million Americans. The step is to pay off the $1.6 trillion of student loans that those 45 million Americans owe to public and private lenders. Some of those 45 million borrowers are in deferment; many of them are making monthly payments, often from the earnings of jobs that don't now exist. Paying off the student loans has two immediate effects: first, the borrowers who are making payments will have more disposable income when conditions return to normal; second, the lenders that are now holding the loans will have $1.6 trillion of liquidity that they can redirect to more productive uses. They might, for example, use the cash to make masks and toilet paper.
The Laquedem Student Loan Payment Plan will come with three conditions, each of which Congress can mandate. The first condition is that the borrowers will not report the repayment as income from cancellation of debt. Lenders will not issue 1099-C forms to the students. The repayment will be treated as if Grandma had paid tuition directly to the schools, which under current tax law is neither a taxable gift from Grandma nor taxable income to the student. The second condition is that the government will neither make nor guarantee student loans for tuition at any proprietary (for-profit) school. The third condition is to again make student loans cancellable in bankruptcy.
The reasons for the three conditions are simple. The first condition ensures that students whose loans are paid off don't incur a tax liability for which they aren't receiving cash with which to pay it. The second condition recognizes that the default rate on loans to students to attend for-profit schools is far higher than on loans to students who attend public and private non-profit colleges. In 2016, the latest year for which I can find statistics, the default rate on loans for private college tuition was 6.6%, the default rate on loans for public college tuition was 9.6%, and the default rate on loans for tuition at for-profit schools was 15.2%. The default rates for public and private non-profit schools were heavily skewed upward by defaults on loans for students who attended for less than four years.
The third condition corrects one of the missteps of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which made student loans mostly nondischargeable in bankruptcy. We should not expect 18-year-old borrowers to be smarter than the large and sophisticated banks that make the loans.
Instead of giving the lenders money and trusting them to do the right thing by their borrowers, let's remove the debt from the borrowers.
My next post on the topic will synthesize ideas for rescuing the domestic airline industry.