Biden Pauses Student Loans — Here’s a Better Idea Than Canceling Them!

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Abstract

ho knowingly borrowed huge sums of money with no plan to repay.There is another way…Eliminating all interest on government-owned student loan debt would achieve the same goals while avoiding the moral hazard of simply canceling all debt.Here is how it would work. The U.S. government would retroactively cancel all interest on outstanding government-owned student loan debt. Then, all new student loans would carry 0% interest rate terms.This would reward existing borrowers who have made payments for years by applying the full amount of all prior payments to the original principal balance. The benefit would be limited to the amount that would reduce the principal balance to zero. In other words, borrowers who have already paid an amount equal to or greater than their original principal would have their loans effectively canceled since they will have already paid off their principal balance after considering the interest cancellation. Those who have paid less than their original principal balance will have their

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original balance reduced by the total amount of their payments but retain the responsibility for paying off their loans in full at 0% interest under new 40 year terms.The immediate economic impact of this would be tremendous. Billions of dollars would now flow through the economy instead of being sucked up by student loan payments. Borrowers who have already paid more than their principal will no longer have student loan payments. Borrowers with outstanding loans will have very generous 0% interest rate loans recast over longer terms. Borrowers with loans in default would have the opportunity to get back on track with reasonable terms.Finally, new students would enter college with truly affordable loan options. Under this program, a student who borrowed 200,000 for college would make payments of a little more than $400/Month.Perhaps the most crucial aspect of this plan is that it would be free of the moral hazard of debt cancellation. Every borrower retains the responsibility of paying off their loans in full.</article></body>

Biden Pauses Student Loans — Here is a Better Idea

Recently, there has been a lot of talk about student loan debt and its impact on the economy. President Biden has announced that he will be continuing the pause in student loan payments through May of 2022. Many are calling for eliminating student loan debt as crippling student loan debt is severely damaging our economy.

The problem is, eliminating all student loan debt is likely a non-starter. There is a tremendous moral hazard associated with simply canceling the debts of people who knowingly borrowed huge sums of money with no plan to repay.

There is another way…

Eliminating all interest on government-owned student loan debt would achieve the same goals while avoiding the moral hazard of simply canceling all debt.

Here is how it would work. The U.S. government would retroactively cancel all interest on outstanding government-owned student loan debt. Then, all new student loans would carry 0% interest rate terms.

This would reward existing borrowers who have made payments for years by applying the full amount of all prior payments to the original principal balance. The benefit would be limited to the amount that would reduce the principal balance to zero. In other words, borrowers who have already paid an amount equal to or greater than their original principal would have their loans effectively canceled since they will have already paid off their principal balance after considering the interest cancellation. Those who have paid less than their original principal balance will have their original balance reduced by the total amount of their payments but retain the responsibility for paying off their loans in full at 0% interest under new 40 year terms.

The immediate economic impact of this would be tremendous. Billions of dollars would now flow through the economy instead of being sucked up by student loan payments. Borrowers who have already paid more than their principal will no longer have student loan payments. Borrowers with outstanding loans will have very generous 0% interest rate loans recast over longer terms. Borrowers with loans in default would have the opportunity to get back on track with reasonable terms.

Finally, new students would enter college with truly affordable loan options. Under this program, a student who borrowed 200,000 for college would make payments of a little more than $400/Month.

Perhaps the most crucial aspect of this plan is that it would be free of the moral hazard of debt cancellation. Every borrower retains the responsibility of paying off their loans in full.