Paul L. Caron
Dean


Friday, June 1, 2018

Weekly SSRN Tax Article Review And Roundup: Stevenson Reviews Brooks' The Case For Increasing Student Loan Debt

This week, Ariel Jurow Stevenson (NYU; moving to San Diego) reviews a new work by John R. Brooks (Georgetown), The Case for More Debt: Expanding College Affordability by Expanding Income-Driven Repayment, 2018 Utah L. Rev. ___:

StevensonCommentators routinely excoriate student debt for a litany of social ills, such as worsening financial instability and inequality and causing debtors to delay important activities such as marriage, having children, and saving for retirement.  Given such damning accusations, constructing a humane, pro-student argument for expanding student debt may seem a daunting task.  However, John Brooks artfully manages to do just that in his recent essay, The Case for More Debt.  In it he provides a winning argument that more debt, not less, would improve education outcomes and offer needed support to low- and middle-income students.

Brooks focuses on federally-financed student loans that are eligible for income-driven repayment (IDR) programs.  To lay the foundation for his argument, he deftly summarizes the various IDR program structures—each with its own acronym and set of complex lending terms.  Although each program is slightly different, they share several essential features, including that 1) the borrower need only repay a fixed percentage of discretionary income, and 2) after a certain number of years the unpaid portion is fully forgiven.  Taken together, Brooks reasons, these attributes of IDR transform such borrowing from true debt into something more akin to a tax. 

As Brooks explains, true debt exhibits several specific characteristics, including the borrower’s promise to fully repay a fixed principal amount, regular interest payments, and legal recourse for the lender in the event of default.  In contrast to true debt, a federal student loan borrower under an IDR program does not guarantee that she will repay the full loan principle.  Further, the government lender cannot enforce the full value of the debt against her.  Instead, the borrower promises to pay a set percentage of her discretionary income for a certain period of time.  Lacking essential debt features, these payments more closely resemble a tax. 

Reconceptualizing IDR as a tax rather than debt frees the borrower, and society more broadly, from the restraints of debt-aversion.  Unlike true debt, a borrower needn’t fear that IDR-eligible debt will drive her to financial ruin.  Instead, taking out greater debt is merely a matter of agreeing to a higher tax rate in the future, or payment of such a tax for a greater number of years.

Freed from many of the negative consequences of debt, Brooks argues that the federal government should increase the amount of undergraduate loans eligible for IDR treatment.  As he explains, federal student loans for undergraduate borrowers are currently capped well below the cost of attendance—at $27,000 total for four years of college.  Undergraduates who are unable to fund their education through relatively safe and low-interest federal loans must find other ways to finance their education, typically via family savings, work, or private loans.  At the extreme, the dearth of affordable lending drives some students to leave school altogether.  Such outcomes are undesirable.  Instead, Brooks argues that the federal government should offer loans sufficient to cover the average cost to attend a public four-year university, which he puts at $15,000 per year or $60,000 over four years. 

Brooks concludes with several caveats, including that students might fail to take full advantage of expanded lending because they continue to view the borrowing as true debt.  While this psychological barrier may exist for some, it should not affect those students who currently borrow private loans in addition to the maximum federal loans.  Thus, even if debt-aversion lingers for some, Brooks’ proposal to raise the cap on IDR-eligible debt would still help a substantial number of student borrowers.

I found the comparison of IDR programs to a tax to be compelling and thought provoking.  In particular, I wondered whether other categories of government payments could offer additional apt comparison.  For example, IDR program payments also bear striking resemblance to a user fee.  Unlike a tax, a user fee is undertaken voluntarily, in exchange for a benefit provided exclusively to the payer, for a price that in some way relates to the benefit provided.  The income-based structure of IDR repayment brings to mind income-based fees such as Medicare Part D or civil court fees (which are reduced or waived via in forma pauperis petitions).  Considering alternative conceptual labels, although perhaps somewhat semantic, could offer a benefit in the form of marketing appeal.  That is, some might prefer a future fee to a future tax.  Of course, such a response is pure tax-label aversion, as the end result is the same.

In all, Brooks offers a lucid, persuasive argument to address a crucially important social problem. In the essay, he does not (and need not) address other reform possibilities such as increasing grant aid or government funding of public universities, or reducing the cost of college attendance. Rather, he takes education costs as they are and offers a realistic, cost-conscious, and bipartisan solution with a genuine chance of improving people’s lives.

Here’s the rest of this week’s SSRN Tax Roundup:

https://taxprof.typepad.com/taxprof_blog/2018/06/weekly-ssrn-tax-article-review-and-roundup-stevenson-reviews-brooks-the-case-for-increasing-student-.html

Ariel Stevenson, Scholarship, Tax, Weekly SSRN Roundup | Permalink

Comments

I don’t know what it the most remarkable:

1) That neither professor acknowledges the extraordinary tax hit that comes with loan forgiveness, a figure that I conservatively estimate will atop $125,000 for the 44% of Brooks’ Georgetown Law students who pay sticker. That’s literally more than the sticker tuition to attend GULC ten years ago (2005 to 2008).

2) That the article and its review are oblivious that at this very moment the GOP has a plan to reduce graduate federal student loans to $28,500 per year and remove loan forgiveness from new IBR / PAYE enrollees so it effectively becomes a life tax (that is, aside from the four-figure monthly repayment on the private loans they will need to bridge the delta between the $28,500 annual lending limit and the $85,500 annual cost of attendance at GULC in the absence of GradPLUS). Even if it doesn't pass in current form, it sends a very loud signal to 0Ls that the terms and conditions of their loans and loan repayments can change in a heartbeat. And then there's

3) That basic figures in her review are wrong. “As he explains, federal student loans for undergraduate borrowers are currently capped well below the cost of attendance—at $27,000 total for four years of college?” Uh, no. The limits are $31k for dependent undergrads and $57,500 for independent undergrads, and this has been the case since the Ensuring Continued Access to Student Loans Act of 2008, so it ain’t exactly late-breaking news. But if neither the article nor the reviewer can even get the basic numbers right…


Posted by: Unemployed Northeastern | Jun 1, 2018 5:08:30 PM

Since students don't need to worry about debt, universities don't need to worry about raising tuition, university heads don't need to worry about increasing their million dollar salaries and hiring more staff, and society is better off because we are expanding the public good of knowledge. Win-Win-Win-Win!

Posted by: Brian Tamanaha | Jun 1, 2018 11:56:41 PM

Expanding knowledge is a good thing, and it does require money.

Basically everyone at a university makes much less money than their counterparts in the private sector. Top executives at universities with "million dollar salaries" are underpaid compared to top corporate executives at similarly sized firms, who typically make 5 to 10 times as much.

Similarly, professors in computer science, engineering, mathematics, finance, accounting, economics, law, and medicine are paid a small fraction of what their counterparts in the private sector make.

Philosophers might make more than people at Starbucks, but most people in the academy make less.

And expanding knowledge is a good thing. The returns are high and we should be investing more as a society.

Posted by: Tamanaha why so sarcastic | Jun 3, 2018 2:33:44 AM

Yes, good luck with the "The taxpayer should give me more money because I am so awesome" argument. You'll go far with in the court of public opinion with it.

Posted by: Unemployed Northeastern | Jun 4, 2018 9:45:58 AM

Actually, one could even posit "Tamanaha why so sarcastic's" comment as "law students should borrow more nondischargeable debt so that I can get paid more." You should definitely include it in your law school's marketing materials.

Posted by: Unemployed Northeastern | Jun 4, 2018 1:37:26 PM