How to Fix Federal Student Loan Debt without the Democrats’ Debt Forgiveness Promises

On the campaign trail, Democratic candidates fall over themselves to promise broad federal student loan forgiveness for votes; but when it comes to reauthorization of the Higher Education Act, which governs the federal student loan program and is before Congress right now, the Democrats offer no such large scale forgiveness because words are wind and keeping such promises will endanger the financing of the Pell Grant entitlement and burden the federal taxpayers with that debt as US Treasury borrowed the money that financed those federal student loans.

Student loan indebtedness is a real problem for many young people across the country, because of prior Democratic efforts in the Bush and Obama Administrations to nationalize the federal student loan program and expand it by raising federal student loan limits, especially for graduate school.  Journalist Tim Pool has opined that this is an issue that can’t be ignored as the young’s debt to the federal government makes them more open to sacrifice everyone else to Socialism in order to get from under their own personal unmanageable federal student loan debt.

Pool’s point is why I left the education finance industry in 2008 after 20+ years of experience solving problems, especially related to delinquency and loan default, that risked financially ruining the system.  The straw that broke my back was when my company gave up its almost successful effort to privatize the system and instead sold its federal student loan portfolio to the government before the 2008 US financial crisis.  At the time, I said that I may return when the system fails and people become open to actual solutions, which is the spirit in which my below suggestion is made.  Systemic failure has taken longer than I expected because I did not account for the Federal Reserve conjuring money to finance unsustainable federal borrowing.

Let us begin by correctly defining the situation. The vast majority of student loan debtors both owe the federal government money now and on an ongoing basis to pay off student loans that are owned by the federal government and at the same time, these debtors are making on-going payments for a future benefit through the Social Security Retirement Benefit program.  Let me restate that: at the same time as young Americans are not able to make ongoing payments for past education benefits, the government forces them first to pay for future retirement benefits before paying for past education benefits. How does that make any sense? It doesn’t make sense and it is the Welfare State cross that is breaking the back of America’s young workers.

How do we fix this legislatively created contradiction in which the same individual both owes money to the government immediately that they can’t pay and is owned money from the government in the future based upon payments that they continue to make? The simple solution is to redirect a student loan debtor’s past, current, and future contributions from the Social Security old-age retirement benefit program to repay their student loan debt.

While this will benefit the student loan debtor by accelerating the repayment of their student loans, what will it cost them?  Social Security retirement benefits require earning quarterly work credits in order to qualify for retirement benefits, so that employee old-age FICA contributions redirected to federal student loan repayment will not earn work credits towards Social Security retirements benefit, thus they will have to retire later in order to receive full Social Security retirement benefits [thus a targeted raising of the retirement age for those who didn’t work as long and borrowed from the federal government to attend a post-secondary school].  Further, the employer’s portion of the old-age FICA contribution will be added to the Social Security Trust Fund without the worker accruing any quarterly work credits towards retirement benefits.

Does this plan weaken the Social Security retirement program with its already existing unfunded liability? No.  Matching employer contributions still go to fund Social Security retirement benefits for other retirees while not incurring any additional future liability for retirement benefits until that debtor’s federal student loan has been repaid.  If previously paid employee contributions to the Social Security Retirement Benefit are redirected to federally owned student loan repayment, then such is offset by a reduction in the future benefit liabilities for the entire retirement program.  Overall, the reduction in the present value of future liabilities to the Social Security retirement program plus the retention of employer contributions will result in a reduction in the unfunded liability for the Social Security retirement program while employees who borrowed from the federal government will be able to repay their federal student loans earlier but will retire later so that future federal outlays overall for retirement are either reduced or neutral in particular instances.

In sum, student loan debtors have their federal student loans paid off sooner, the unfunded liability of the Social Security retirement program is reduced, and college-educated debtors can volunteer to retire later in life in order to alleviate their near-term cash flow deficiencies related to youthful student loan repayment.

Does this cover everyone with student loan debt? No, as public employees often do not pay FICA taxes nor do the self-employed.  Yet, this plan does cover most employed young people burdened with student loan debt.  There are already forgiveness programs for public employees so this issue is partially covered but may require an additional plan.  Related to the self-employed, Congress could change statutes to allow them to redirect retirement funds to federal student loan debt without a penalty.  Further, it is important to remember that the majority of federal student loan borrowers repay their debt, but this plan does give them options to be able to repay this debt earlier so that it is not a mortgage on their entire work life.

There is another category of student loan borrower that this suggested program does not cover and they may need to make different choices in their life.  I did not suggest that a man should be able to redirect his Social Security contributions to repay his wife’s federal student loans.  Given the number of men who are rewarded with divorce papers after repaying his wife’s student loans, I would not suggest the transfer of future retirement benefits from husbands to wives as such would be sexist in favor of the wife.  Instead, when a woman is burdened with federal student loan debt, she will likely need to continue to work with her retirement funds repaying her student loan while her husband may stay home temporarily with their young kids, which would be a great benefit to the children as #MenAreGood.

How does this look to the typical student loan borrower? They will continue to make some monthly payments to their student loan, possibly one set by income-contingent repayment; however, they will repay their student loan debt closer to the 10-year repayment term of prior generations instead of 25 to 30 years for the most indebted student.  Further, the federal government will have a tool to reduce the liability of defaulted student loans by offsetting their student loan debt with previous and on-going employee contributions to the Social Security Retirement Trust Fund.  Overall, it allows the student loan debtor and the federal government to offset liabilities immediately now in a way that benefits the potential of the individual federal student loan debtor.

Without any rational sense, federal student loan borrowers both owe for past student loan benefits that they cannot immediately repay while paying for future Social Security retirement benefits that they will not see for decades.  Frankly, the individual owes themselves and can’t repay themselves as the government programs are contradictory and self-defeating while grinding up the individual in that contradiction.  Instead of chewing up the lives of these federal student loan borrowers in these contradictions, we should alter the terms of these programs so that we can protect our children from these contradictions.  After all, do we love our children and want grandkids more than we are beholden to these contradictory federal government programs?

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