We should scrap the debt model and use income share: Former FDIC Chair on student debt
Sheila Bair, Volcker Alliance Director and Former FDIC Chair joins the On the Move panel to discuss the latest on student debt relief and where President Trump and Joe Biden stand as we get closer to the election.
JULIE HYMAN: I want to move on, or I should say back, to Sheila Bair, who is with us now on the phone. She is the Volcker Alliance Director, and she's also, of course, the Former Chair of the FDIC. So Sheila, let's talk student debt. As I mentioned, both of the candidates have some level of debt forgiveness built into their plans, but it's different for each. Joe Biden has a little bit more broad parameters for that debt forgiveness. But if we're looking at reform of the student debt system what do you think is the bare minimum that needs to be done to fix it?
SHEILA BAIR: Right. Well there there's so much to do, right? It is a bit overwhelming. I do think, as I've argued before, I think we should just scrap this whole debt model and use income share, but in terms of more incremental steps, I do think we need to look, specifically, at very distressed student borrowers and the collection efforts of government and some of the abuses that occur there. I've written an op-ed that talks about this and some of the things the government does that really you would not see in private sector regulated lending. One is there's no statute of limitations on debt collection. So the government really does pursue people to their grave. They can garnish wages, they can garnish social security, which the private sector doesn't do. Most states do have-- statute of limitations on debt collection efforts, there's really none, even for the very distressed borrowers, for the government.
The government also uses something called negative amortization. So they actually let your loan balance get bigger and bigger if you're not paying down your interest, and they also charge really exorbitant fees for collections when wages are garnished. So just tackling those two. Having, you know, a self-imposed statute of limitations-- at some point, just realizing people are not going to be able to pay the debt-- and some cap on how much debt they can accumulate through unpaid interest and fees would be huge, but very much more consistent with how the private sector approaches this.
ADAM SHAPIRO: Sheila, you make the case, almost, that we've got kind of a debtor's prison situation for the worst in every-- with college loans. And I don't disagree with you--
SHEILA BAIR: It's very true.
ADAM SHAPIRO: --but I'm curious, because when we hear the different candidates talking about their different proposals-- We made the point in the last segment that if you're in debt under water-- even if you're to say go from 30 feet under water to 15 feet, you're still under water. So could we financially afford to do what you're proposing? Because that really seems to be-- even if they do incremental now-- where we're headed.
SHEILA BAIR: Well, what I'm suggesting really wouldn't cost anything, because this debt's uncollectable. It's called extend and pretend, and that's why we don't allow banks to do it. I mean, at some point, when somebody hasn't been able to pay their loan for three or four years, chances are they're just never going to be able to pay it.
And similarly, letting borrowers who-- and these are mainly low-income, minority borrowers, who are making very small payments or no payments-- allowing their debt balances to keep getting bigger and bigger by adding on interest and fees, is just-- it's wrong. But it's also, it's phony accounting. We're never going to collect that money. So just cancel it now. You know, let these borrowers-- finally give them some relief. They clearly can't pay. And stop this negative amortization.
There are ways to-- if after 20 years, if you're in a repayment plan-- there's tricks and traps on this-- you can get debt forgiven, but that's a long, perilous path. And your balances keep getting bigger and bigger, and then you've got to pay debt tax on any debt that's forgiven at the end of that 20 years. So just being realistic and honest about a lot of these kids just aren't going to be able to pay. And write it off, and move on. That's not going to cost anything. They're never going to pay anyway.
- Sheila, is there anything that can be done to, kind of, change the terms of some of the loans that are currently in circulation, or going into circulation, where students graduate-- You know, you're 18, 17, 18-years-old. You don't really understand what you're signing up for, and then you graduate-- this happened to me-- You get a graduated loan payment where you start out, you're not making the most money when you start, and then two years later, boom, you start getting hit with these way higher payments, and trying to do that-- pay a car, pay for rent. Is there a way to try to get companies to renegotiate some of these loans for some student borrowers?
SHEILA BAIR: Well, you know, again, this is for the federal student loan program-- In private loans, there are problems there, as well. I don't want to suggest that there aren't --but this is why-- all of this-- you get rid of all of this with an income share. Because with income share payments, there's no principal, there's no interest, there's no fixed loan obligation. It is completely reliant on how much you're making and paying some affordable percentage of what you're making. And so you get rid all of these problems with income share.
And the government's been [INAUDIBLE] on this. So they have income-based repayments or income-driven repayment plans, but they retain all the bad features of debt, including negative amortization. So if you have very low income, you're making very low payments. You're not going to be covering your interest, and your debt balance is going to keep getting bigger and bigger. So you're right. These kids are-- there's not good loan disclosures to begin with in terms of what their post-graduate repayment obligations are going to be. They get hit, they get shocked, it constrains other forms of spending and being able to borrow, like for a car or home. And you eliminate all of these problems with income share, which is right-- Ultimately, I think this is the way we should go. But so far-- A lot of people have advocated this, but so far, we've been unsuccessful convincing the government that that's what they should do.
ADAM SHAPIRO: Sheila, we keep hearing the argument that if we were to offer some kind of relief, that money would help economic growth. But if these people are already severely in default and not attempting to make payments on their loans, wouldn't that money already be in the economy? What guarantees do we have that this would help.
SHEILA BAIR: Yeah. Adam, that's a very good point. And this piece that I wrote, I should have said, was an argument for using executive authority. So there is substantial executive authority. So the president can do this without congressional authorization, to give relief to these very distressed borrowers.
Yes, I'm very sympathetic to broader proposals to cancel debt. There are Senators-- Senators Warren and Schumer have a resolution, actually, encouraging Mr. Biden, if he's elected, to use this executive authority to do that. I think, fine. I think that's a bit of a push in legal authority. I wish Congress would do it.
But yeah, at least forgiving $10,000 of debt would be hugely beneficial to the economy, but then you're really hitting the lower and lower-middle income borrower who tends to spend most of their income, right? So that $10,000 forgiveness would give you-- at least for them, it's a boost in spending. So that is absolutely a valid point. On the debt collection practices, this is really confined to more limited things that the president himself could do through executive authority without congressional authorization.
JULIE HYMAN: Sheila, thanks so much. Sheila Blair is-- Sheila Bair, excuse me, is Volcker Alliance Director and Former Chair of the FDIC. Appreciate it, Sheila.