Paul L. Caron
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Tuesday, March 24, 2020

Brooks Presents Redesigning Education Finance: How Student Loans Outgrew the 'Debt' Paradigm Online Today At Georgetown

John Brooks (Georgetown) presents Redesigning Education Finance: How Student Loans Outgrew the "Debt" Paradigm, 109 Geo. L.J. ___ (2019) (with Adam J. Levitin (Georgetown)), online at Georgetown today as part of its Tax Law and Public Finance Workshop Series:

Brooks (John)Federal student loans are fundamentally different from any other type of credit product: they do not require the full repayment of all principal and accrued interest. Instead, borrowers have the contractual right to satisfy their obligations by paying only a percentage of their income for a fixed period of time. In other words, debt forgiveness is contractually baked into the student loan product.

This and other unusual features of federal student loans reveal that the economic structure of student loans has evolved to resemble a federal grant program coupled with a progressive income-based tax on recipients, rather than a true debt product. The education finance system, however, still relies on the legal, financial, and institutional apparatus of “debt” that developed under the pre-2010 structure of the education finance system, which was based on private loans backed by federal government guarantees, rather than today’s direct federal lending program. These legal, financial, and institutional structures are a mismatch with the current program’s economic realities and policy goals.

This Article argues that nearly all of the problems in education finance, including high levels of default, abusive servicing, and even the very idea of a student debt crisis arise from the frictions between the legal and institutional apparatus of “debt” and the economic reality of subsidized finance and progressive, income-based repayment and debt forgiveness.

Accordingly, this Article argues for calling federal student loans what they really are—a tuition grant plus an income surtax on students.

To this end, it proposes a set of targeted reforms: automatic income-based payments using a graduated rate schedule; collection through the tax withholding and return filing system; and replacement of interest accrual with an inflation adjustment. Moving to a grant-and-tax framework would facilitate substantial reforms to the financing of higher education and help ensure that federal financing fulfills its beneficial purpose of facilitating affordable higher education, rather than being a debt trap.

https://taxprof.typepad.com/taxprof_blog/2020/03/brooks-presents-redesigning-education-finance-how-student-loans-outgrew-the-debt-paradigm-online-tod.html

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Comments

"Federal student loans are fundamentally different from any other type of credit product: they do not require the full repayment of all principal and accrued interest. Instead, borrowers have the contractual right to satisfy their obligations by paying only a percentage of their income for a fixed period of time. In other words, debt forgiveness is contractually baked into the student loan product."

Only so long as income-based repayment plans stay extant. PSLF has been in the political crosshairs for years, and absolutely nothing stops a future Congress from eliminating one or all of the IBR plans (indeed the Federal Register notes admit as much).

And of course the entire argument in this article relies on law school grads never making enough to disqualify for remaining in IBR/PAYE/REPAYE, which rather cuts against the grain of the whole $1,000,000 wage premium nonsense. Oh, and hey - all that interest and negative amortization built during the lower-earning years while in those income-based repayment plans? They get capitalized if your income level gets you ineligible to remain in said IBR plan. So much for not having to pay the full balance and accrued interest!

That being said, I will admit that for the hapless souls paying $100k/year or more - and yes, there are about a half-dozen law schools with annual COAs in the six figures now (and pluralities to majorities of their students get no discounting),* the threshold to no longer qualify for REPAYE is like $400,000/year.

And the realized income tax bomb is going to ruin a lot of middle-aged lawyers just squeaking by like everyone else.

*Including one that is so tuition-lopsided that even with that insane annual cost of attendance it expects you to be able to live, eat, and pay utitliites in Manhattan on about $1500/month in the year 2020.

Posted by: Unemployed Northeastern | Mar 29, 2020 12:13:40 PM

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