How To Fix America’s Coming Student Loan Crisis

The cost of higher education has run rampant to the point that Americans are likely to graduate college with a mortgage worth of debt, just without the home. Americans currently owe more in student loan debt than they do in credit card debt, with current figures putting the debt well in excess of $1 trillion.

Unlike all forms of other debt, student loan debt cannot be wiped out in bankruptcy court — it literally follows one to the grave (and sometimes beyond depending on cosigners).

A recent NY Times Article highlighted the growing problems with student loans. The article quotes several state government officials (mostly from Ohio) who maintain that today’s students should simply accept loans as inevitable and deal with it. But, what these officials fail to realize is that while debt is indeed personal, a generation’s collective debt has a broad impact on all members of society.

Case and point — my wife and I. We own our own home (thanks to my veteran’s benefits…no bank would have ever lent to us with out a VA backed mortgage). We’re about to welcome our first child into the world. Indeed, we’re an abnormality when compared to the many in our generation who are forsaking marriage and home ownership to move back in with their parents and work multiple low paying jobs just to be able to maintain minimum payments to a seemingly endless student loan balance. And on top of it all — the economy still hasn’t rebounded to the extent average Americans would deem beneficial (i.e. significant and sustained improvement in employment, wages, etc…).

In short — my generation cannot find meaningful work, are not buying homes, and are not having babies — all of which will negatively impact the health of the economy, social security, medicare, and the mortgage market for many years (if not decades). Indeed, if my generation doesn’t start buying homes or having babies real-estate will continue to stagnate and America could suffer a significant labor shortage in the mid 21st century, respectively.

But it doesn’t have to be like this.

During my run for Congress in 2010 (NY-29), I made fixing the Student Loan Debt problem a hallmark of my campaign, and advocated the following fix to our current system:

I propose we abandon our current system of public and private student loans as a means of financing higher education and replace it with an idea first advocated by Milton Friedman — the Income Contingent Repayment Plan.

Here’s how it works.

You pick where you want to go to school. If you can self fund, earn enough scholarships, or use the military to finance the cost of your education, then great!

But, if in the end, you don’t have the means to fully fund your education after exploring all these other options, rather than seek out a bank or government loan to fund the cost of your college education, the federal government will pay what you can’t in full.

When you graduate or leave school you will enter the labor force at a special higher federal income tax rate. The incentive is simple and resoundingly American: work hard, move up in the ranks, make more money, and pay off your debt to the government as quickly as possible. Once your debt has been paid (with the initial expense tied to the inflation rate) you’ll move back down to the regular federal income tax rate given your level of income.

Right now, if you lose your job, the bank holding/servicing your loan debt does not care if you cannot pay your loan. You miss payments, they add penalties — with interest. Your credit score drops. And though you may have that million dollar idea that only needs a small business loan to get going — and thus help you pay off your student loan debt, grow jobs, and return as a productive member of society — you cannot get the loan because your inability to pay back your student loans has destroyed your credit.

Under my plan, none of that happens. If you lose your job, you aren’t making money, and thus, you aren’t paying income taxes — thus, your credit score is fine. You are still free to get that small business loan, start your own company, and run with that million dollar idea. You get the loan, you re-enter the labor force, you begin repaying your debt to the government at the special tax rate until no debt remains.

Read more about my idea here.

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About Matt Zeller

Matt Zeller, a native of Rochester, New York, is a consultant on alternative energy and defense issues, working in northern Virginia. His latest book, Watches Without Time (Just World Books, 2012), gives a vivid description of what he experienced while serving as an embedded combat adviser with the Afghan security forces in Ghazni, Afghanistan, in 2008. Matt is a Captain in the US Army Reserve and a former officer of the Central Intelligence Agency. He was the Democrat candidate for Congress in 2010 in NY's 29th Congressional District.
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