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Expert Review of the Pete Buttigieg Student Loan Plan

Michael Lux Blog, Opinion 0 Comments

Throughout the 2020 Democratic primary process, Mayor Pete Buttigieg has positioned himself as the moderate of the field. The Buttigieg plan for student loans is no exception. Unlike candidates Elizabeth Warren and Bernie Sanders, who are promising massive student loan forgiveness, Buttigieg’s approach is to make life with student debt more manageable.

Mayor Pete’s plan isn’t blazing new ground or offering a unique solution, but it incorporates many ideas that have been previously proposed to help borrowers. Collectively, these ideas would help many borrowers without incurring the cost of the more expensive debt cancellation plans.

Canceling Predatory Debt

Buttigieg’s student loan plan calls for canceling debt for borrowers who “attended unaffordable for-profit programs.”

It is hard to give Mayor Buttigieg too much credit for this idea because there are already many laws on the books that protect borrowers who attended misleading for-profit schools.

Even though these laws are on the books, Betsy DeVos, Donald Trump’s Secretary of Education, has chosen not to enforce them. She recently was fined $100,000 for attempting to collect from defrauded borrowers.

Following existing law is hardly a new or noteworthy idea, but in this case, it would be an improvement.

Automatic Enrollment in Income-Driven Repayment Plans

Switching the standard repayment plan to an income-driven repayment (IDR) plan would be very inexpensive and help many borrowers.

Though all federal borrowers have access to income-driven repayment plans, enrollment can be confusing and challenging. Making IDR the starting point would save many borrowers a significant amount of time. At present, borrowers need to certify their income yearly with their student loan servicer. Most use a recent tax return, but things can become complicated if there are changes in income, and missing a deadline can cause payments to jump dramatically.

Additionally, changing to an IDR bases system would almost certainly cause default rates on federal student loans to drop. The first bill that most recent graduates receive would be for a smaller and more affordable amount. At present, the first bill on the 10-year plan is often so high that many falsely assume there is no hope for repayment. These borrowers could be working towards forgiveness and maintaining their credit score. Instead, the intimidating bill causes missed payments, defaults, and a devastating credit history. The IDR switch won’t save all borrowers, but it would be a huge improvement.

The downside to this approach is that many borrowers may be tempted to only make minimum payments on their loans. Borrowers making only minimum payments can end up spending more over the life of the loan. In some circumstances, the standard ten-year plan may be better. That being said, there has to be a “default” plan for student debt, and making an income-driven plan the standard option will certainly help more borrowers than what it hurts.

Eliminating Taxes on Forgiven Debt

One of the great perks of federal student loans is that all borrowers have a path to student loan forgiveness, regardless of how much they earn or how much they owe.

Unfortunately, the term forgiveness can be a little misleading. Many forms of federal student loan forgiveness leave borrowers with a huge tax bill.

Borrowers struggling to deal with their student debt may see their student loan problem transformed into an IRS problem. While taxing canceled debt might make sense in certain circumstances, it doesn’t make sense with student loans.

Many of the repayment plans that offer forgiveness after 20 or 25 years are not yet 20 years old. Therefore, the “tax bomb” issue falls into the category of a future problem rather than a present problem for most borrowers. Addressing this problem before more borrowers are impacted would be ideal.

Fixing Public Service Loan Forgiveness

The Public Service Loan Forgiveness (PSLF) program was created to enable borrowers to pursue government and non-profit jobs. Without PSLF, many of these borrowers might be forced to take higher-paying private-sector jobs.

Unfortunately, the PSLF program has been plagued with issues. Borrowers must navigate a maze of fine print and red tape. Approximately 99% of the first wave of PSLF applicants were denied.

Buttigieg is calling for improved management of the PSLF program and holding loan servicers accountable if they fall short.

Additionally, Buttigieg would provide earlier forgiveness to PSLF borrowers. For each of the first three years of public service, 5% of the existing debt would be canceled. For the next four years, 10% would be canceled. During the final three years of PSLF, borrowers would see 15% of their debt canceled.

By gradually canceling the debt each year, Buttigieg would fix the “all or nothing” issue with PSLF. Borrowers would be much better served if they found out in year one that there was an issue with their PSLF eligibility rather than having to wait ten years to find out a mistake.

The Proposal Buttigieg Can’t Make: Massive Debt Cancellation 

Of all the Democratic candidates for President, Buttigieg is perhaps best positioned to speak from experience on life with student debt because he and his husband have a combined $130,000 in student loan debt.

Unfortunately, the six-figures of student debt would be a considerable obstacle for Buttigieg politically if he were to advocate for debt forgiveness or cancellation. Any candidate taking a position that would put an extra $130,000 in their pocket will have a tough sell. As a President supporting debt forgiveness, Buttigieg would instantly become the face of debt forgiveness, and many taxpayers would take issue with being asked to help pay for the President’s Harvard education.

Candidates like Warren and Sanders don’t have student debt and would not have to deal with this particular optics issue.

Room for Improvement

One area where a moderate such as Buttigieg could help student loan borrowers would be to fix the bankruptcy code.

In the past, student debt was treated like mortgage debt, credit card debt, and other forms of consumer debt. Gradually, laws were changed to protect student loan lenders. Today, eliminating student debt via bankruptcy is still technically possible, but it is extremely difficult.

Because student loans are so difficult to discharge in a bankruptcy proceeding, lenders have very little incentive to lend money responsibly. They know that borrowers will have to pay it back in almost every circumstance. This can mean a lifetime of late fees, collection fees, and interest. Irresponsible borrowing is also a factor in the skyrocketing cost of college. If lenders didn’t approve loans to overpriced schools, the schools would have either make their prices more reasonable or offer better value for the price.

Final Thoughts on the Buttigieg Student Loan Plan

Ultimately, Mayor Pete’s approach is very similar to the plan proposed by the other moderate front-runner, Joe Biden.

While these moderate proposals are not nearly as exciting as mass student debt cancellation, they still could help many borrowers. They also come with the added benefit of being far more likely to become a reality. Many of Buttigieg’s ideas could take effect via executive order. The forgiveness for everyone plans would face a very tough path through Congress.

The Buttigieg plan isn’t as flashy as the Warren or Sanders plan, but it would be a pragmatic step in the right direction.