Over the past year, President Biden has enacted numerous policies to help student loan borrowers.
Biden altered policy to help thousands of borrowers qualify for PSLF. He has extended the student loan interest freeze multiple times. The Department of Education is now updating IDR payment counts to get thousands closer to forgiveness.
Unfortuantely, these steps don’t help the borrowers struggling under the weight of massive private student loan debt. The student loan crisis arguably hits these borrowers the hardest, yet they’ve received the least help.
What could President Biden do to help private loan borrowers?
Limited Options to Help Private Borrowers
Many solutions that help federal borrowers are not available to private loan borrowers.
Private loans are governed by contracts between the borrower and the lender. While the government could enact some consumer protection measures, immediate relief for existing borrowers is complicated.
The federal government can’t realistically lower interest rates on private student loans. Likewise, the government can’t force private lenders to offer Income-Driven Repayment plans or student loan forgiveness. Government intervention in existing private contracts is a complex legal area. For this discussion, all we need to know is that President Biden can’t force lenders to lower interest rates or forgive $10,000 of debt for each borrower.
However, there are steps Biden could take to help borrowers.
Tax Incentives for Borrowers and Employers
One of the more realistic options to help private loan borrowers is to provide tax breaks.
The current student loan interest deduction is laughably small.
Biden could call on Congress to increase the deduction. He could take it a step further and push for student loan payments to be tax deductible.
Alternatively, the government could make it more appealing for employers to help their employees repay their debts. Right now, there is a temporary provision in place allowing employers to make tax-free payments toward employee student loans. The yearly contribution is capped at $5,250, and the policy expires after 2025. Making things permanent could encourage more employers to participate.
The problem with tax incentives is that they don’t help the private loan borrowers who need the most help. If you have a $1,500 per month private student loan bill and earn $2,000 per month, a tax incentive doesn’t make a difference.
Restoring Bankruptcy Protections to Private Student Loans
Student loan lenders get special protections in bankruptcy that other lenders don’t receive.
Credit card debt, personal loans, and mortgages are much easier to discharge in bankruptcy. Dealing with student loans is possible but extremely difficult.
Under the current rules, lenders are not worried about the possibility of the borrower declaring bankruptcy. They know that in the vast majority of cases, the borrower has no choice but to repay the debt in full.
If private student loans were treated like other debts in a bankruptcy proceeding, the revised rules would incentivize lenders to keep payments affordable and manageable. Right now, lenders are ruthless with many borrowers because they have almost no incentive to cut borrowers slack.
Federal Refinance of Private Student Loans
However, the government could offer to refinance existing private student loans. This move would give private loan borrowers access to federal repayment plans and loan forgiveness options.
The problem with this approach is that the government would take on large amounts of bad debt. The program could cost taxpayers large sums of money.
Likewise, some might see the program as a handout to private lenders. Collecting full value from borrowers unlikely and unable to pay would greatly benefit private lenders.
A Real Fix for Private Loan Borrowers
Ultimately, the real problem is the price of college.
Many schools charge tuition that doesn’t reflect the value of a degree. Because lenders don’t fear bankruptcy, they offer riskier private loans to students.
If the cost of college reflected the value of the education, fewer students would face a private loan nightmare.
Biden and Congress likely cannot fix this issue with one piece of legislation or one new policy. Sadly, elected officials from both political parties are guilty of letting the price of college spiral out of control.
Fixing the unreasonably high prices of college won’t help the existing private loan borrowers. However, it will ensure that we see fewer private loan nightmares in the future.