As more and more Americans face a very serious student loan burden, politicians have made student debt a key issue in the 2020 Presidential Campaign.
The most noteworthy student loan proposals have come from candidates Bernie Sanders and Elizabeth Warren. Though there are a few key differences with their plans, both would cancel out over a trillion dollars of student debt. These two plans are ambitions, and although they have some flaws, the plans would make a big difference in the lives of student loan borrowers.
If the plans from Warren and Sanders can be accused of being too ambitious and unrealistic, the policy proposal from California Senator Kamala Harris misses the mark in the opposite direction. Her plan gets credit for being very affordable, but the plan is unlikely to make much of a difference for most student loan borrowers.
Under the Harris plan, Pell Grant recipients would be eligible to have up to $20,000 of student debt forgiven if they open a small business that operates for three years in a disadvantaged community.
The Harris proposal seems uninspired and presents some major concerns…
Why Only Pell Grant Recipients?
One of the best ways to reduce the costs on student loan assistance is to narrow the beneficiaries. Targeting those most in need of financial help is a common way of accomplishing this goal.
The Harris approach to limiting those with the financial need is to only provide assistance to Pell Grant recipients. The problem with this strategy is that it confuses present day need with previous need.
A Pell Grant recipient could be somebody whose family was struggling financially when they went to college. Pell Grant recipients may have experienced significant financial success after college. Given the amount of time between college and when student loan forgiveness might happen, well off borrowers could get help while those who a truly stuggling might not get help due to the strange Pell limitation.
Put simply, the people who struggled to pay for college are not necessarily the ones who are struggling to pay back student loans years later. The Harris plan ignores this distinction.
Lots of room for confusion
One of the biggest lessons from the issues with the Public Service Loan Forgiveness (PSLF) program is that the student loan infrastructure is not equipped to handle complicated programs.
To qualify for PSLF borrowers must work for a public service employer for 10 years worth of payments and they can have their student loans forgiven. Borrowers have gotten rejected due to not having eligible loans or for being on the wrong repayment plan. Many of these borrowers received bad advice from their student loan servicers. The end result is that 99% of PSLF applicants have been rejected.
Student loan servicers have been the subject of borrower ire for years, and recently have been the target of numerous lawsuits. Loan servicer companies maximize profits by keeping expenses as low as possible. This means poorly paid employees with little spent on training.
This current student loan system isn’t equipped to handle a complicated program like the one Harris proposes. The Harris plan introduces a number of possible issues of confusion.
What is a disadvantaged community?
Is disadvantaged community defined by average income of residents? Does community refer to the neighborhood, village, block, or entire city? Who determines what communities are disadvantaged? Can a community lose its disadvantaged status? What happens if a borrower starts their business in a disadvantaged community, but the community is no longer disadvantaged by the time the borrower has completed their three years?
What does it mean for the business to operate for three years?
How are borrowers expected to document operating their business? Can the business be a sole-proprietorship or do the borrowers have to create a formal business entity within their state? Does the business need to have an office in the community or can the business owner work from home?
If the Harris plan is going to avoid the same pitfalls of other student loan plans, these questions will have to be answered in a clear and concise way so that all borrowers and loan servicers can easily understand the requirements.
Addressing the Student Loan Crisis
Most democrats seem to agree that student loans represent a major hardship for most Americans.
Solving the student loan crisis requires two important elements: 1) addressing the ever growing cost of college so that future borrowing can be reduced and 2) helping the borrowers who are currently struggling with student debt.
To Harris’s credit, she has advocated for free community college and four-year colleges debt-free. She has also alluded to expanding Income-Based Repayment. Unfortunately, the student loan plan proposed by Harris applies only to Pell Grant recipients and is a forgiveness program for disadvantaged community business owners.
In the words of one clever twitter user:
What do we want?
STUDENT LOAN FORGIVENESS FOR PELL GRANT RECIPIENTS
When do we want it?
AFTER OPERATING A BUSINESS FOR THREE YEARS IN DISADVANTAGED COMMUNITIES https://t.co/NigSLakjUW
— Ed Zitron (@edzitron) July 28, 2019
Why the Harris Plan Won’t Help
The long list of requirements and potential confusion make the program very complicated.
It would seem very dangerous for borrowers to make major financial decisions and life decisions based upon Harris’s proposal. For this reason, it is hard to believe that many businesses would be created in order to take advantage her policy.
If it were to go into effect, the people who benefit would be the ones who happen to meet the requirements already.
In short, the Harris plan wouldn’t do much to encourage business development in disadvantaged communities, and it wouldn’t make a meaningful difference for those currently struggling with student debt.
Fixing the Harris Plan
The simple improvement to the Harris plan would be to remove the Pell Grant limitation. If she wants to limit the number of borrowers who can qualify, she should do it based upon current income. Need based assistance should be based upon current financial circumstances rather than relying upon evaluations made many years ago.
The ultimate objective of this plan seems to be community development rather than student loan assistance. Rather than branding the plan as a student loan policy proposal, she could accomplish her objectives by providing grants for business development directly to the communities she wishes to target.
If Harris wants to get serious about student debt, she will need to offer more specifics on a student loan plan designed to help far more borrowers.
When the national media reports on the current Harris proposal it makes it appear as though she does not understand the magnitude or complexity of the student debt issues in the United States. Narrowly tailored, complicated solutions will only serve to add confusion to a system desperately in need of simplification.