How student-loan debt got so big and some possible ways out

Law prof Ted Afield has written Compromising Student Loans, which explains why, in Afield's view, our student-loan programs do not properly assess a borrower's ability to pay back the loan. He also proposes a repayment program that he thinks would help borrowers who presently are unable to pay. Here is the abstract:

Access to higher education is on the road to becoming a public crisis as it increasingly becomes unaffordable. Given the decline in public funding for universities, other forms of public investment designed to make higher education more affordable, such as income based repayment programs, are becoming increasingly important. The income based repayment programs currently in place do not properly allocate benefits, however, and they also produce unnecessary economic distortions because these programs do not consider all of the relevant variables that establish a borrower’s true ability to repay the loan. 

Specifically, current income based repayment programs produce the following distortions and unanticipated inequitable outcomes: (1) institutions of higher education are insulated from market pressure; (2) an inefficient preference is provided for government and nonprofit work over private sector employment that is not justifiable; (3) certain married couples are disadvantaged by being forced to file as married filing separately, which causes them to forgo valuable tax benefits; and (4) borrowers are able to plan for the possible tax consequences far enough in advance to allow them potentially to obtain excess free funding from the government without having to repay it. Restructuring these programs so that relief is tied to a borrower’s overall ability to pay rather to his or her income would minimize these distortions. 

These repayment programs have assumed the characteristics of both an income tax and a loan, given that repayment is a function of adjusted gross income and that a potential tax liability is created through debt forgiveness. Because loans are established liabilities, student loan repayment should be structured similarly to repayment of established tax liabilities. Tax collection and enforcement procedures provide a useful model for how to structure repayment based on the ability-to-pay principles that typically arise in the context of paying established tax liabilities.

Specifically, the IRS’s Offer-In-Compromise (“OIC”) program provides a potential framework that could be applied in the student loan repayment context. A student loan repayment program modeled off the OIC program provides a more nuanced system of repayment that would be better suited to providing relief to those who need it the most by tying repayment to a host of economic factors that go to the heart of a borrower’s ability to repay a loan. The OIC program’s goal is similar to that of student loan repayment programs: namely, to provide relief to those who legitimately need it while avoiding giving a windfall to those who are capable of paying their liability. The OIC program accomplishes this goal in a way that produces fewer distortions than the current student loan repayment programs.

This article examines how the OIC program can be applied to provide more tailored and appropriately targeted debt relief than current income based student loan repayment programs. In doing so, this article sketches out the contours of a potential Student Loan Compromise Program (“SLCP”). While the SLCP would not eliminate completely the distortions caused by current repayment programs, the SLCP would minimize them by basing student loan relief on a borrower’s overall ability to repay the loan as opposed to basing relief on borrower income. Although such a program might have certain drawbacks in regards to administration costs, it would likely have benefits that outweigh such costs by bringing in more revenue in the form of repaid loans while limiting relief to those borrowers who need it the most.

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