The Other Debt Crisis
Published: Friday, September 21, 2012
Updated: Friday, September 21, 2012 01:09
This past May, the U.S. Senate staged yet another showdown on the issue of how to pay for student loans. At issue was the question of how to pay for the subsidized interest rates on federally backed loans, and the Democrats and Republicans ended up doing what they usually do: they came up with a temporary fix that will soon expire and fail to address the underlying issue.
Post-secondary, graduate and professional education in America is unaffordable for too many, and those who do get loans end up saddled with debt the moment they graduate. The market for student loans is more than $1 trillion, making it second only to the home mortgage market. Two-thirds of all graduates begin their careers wondering how to pay off an average $25,000 of debt, which handicaps their financial stability right out of life’s gate. Given how critical a college degree is to obtaining a high-paying job in today’s labor market, there must be a better way. Some fresh thinking on how the government approaches student loans offers just that. We need to treat education as an investment and create the right incentives for making this critical investment within reach for more people.
After World War II, far-sighted policymakers envisioned the challenges that would confront returning soldiers who had put off their educations and careers to carry arms for America overseas.They created the G.I. Bill, offering recent veterans a path to a college degree. Its effect was profound, not only on the composition of America’s new workforce in the 1950s, but also on universities themselves, which blossomed under the newly available funding. While we no longer enjoy the same kind of peace dividend today that we did then, we can still be creative in making the legacy of the G.I. Bill — the proliferation of colleges and universities that has become the envy of the world — more accessible to ordinary Americans.
Here’s how: Instead of spending billions to artificially suppress interest rates on student loans, we can make that interest, and the overall debt, tax deductible. In the same way that the government incentivizes homeownership by making mortgage interest tax deductible, this would make investment in a post-secondary education more attractive.
This incentive would also provide student debt an additional value to another kind of investor in education: future employers. During the Internet bubble of the 1990s, when employers were practically tripping over one another to attract the most talented new employees, there was a brief practice of some paying off student debt at the time of hiring. Tough economic times have put that practice on ice for the most part, but as tax loopholes are disappearing in these revenue-scarce days, employers would be more inclined toward making the kind of long-term hires they’ve held off committing to during this ephemeral “recovery” if it came with the promise of tax deduction.
Naturally there will be costs to this plan, especially for a revenue-strapped federal government. Tax incentives are not immune to zero-sum mathematics. During the student loan debate last spring, one side held tax write-offs for small- and medium-sized businesses hostage in exchange for continued subsidies on Stafford loans, while the other side took the less politically popular route of threatening the loans themselves. Though the federally backed loan program was spared for the moment, there is no guarantee this debate will not return before the next election. It’s time to start looking farther down the field, as previous generations showed was possible 75 years ago.
If my proposal for a tax deduction on student debt can be implemented, which I believe it can be, its effect on education and labor markets will be significant. New competition for borrowing and lending will lead to lower rates. It will also force us to think seriously about the enormous market for student loans — in stark contrast to murky packaging of “toxic” mortgages that went into high gear just before the 2008 financial meltdown. The market, like the loans themselves, must be securitized soundly, and by making the kind of long-term investment this tax incentive would amount to, we would be doing just that.
The dividends from such an approach will not be realized in a single election cycle, which is precisely why today’s politicians on both sides are not terribly interested in it. But the effect of more affordable post-secondary education will profoundly and positively shape our economy as America renews and improves its skilled labor force. While our colleges and universities may be the envy of the world, it is incumbent on real leaders to make sure Americans are still able to attend them. Given the short-term challenges of today’s economy and the even shorter vision of today’s political establishment, it’s high time for some bold new approaches to get our country where we want it to be.
Rob Sobhani (SFS ’81, GRD ’89) was an adjunct professor in the government department from 1989 to 2005. He is an independent candidate for the U.S. Senate in Maryland.