The time is right to restructure student debt

The time is right to restructure student debt. Since last year all debt repayments have been suspended. The government should take advantage of this pause to carry out comprehensive reform. The alternative of restarting payments could lead to a general collapse with defaults sky rocketing.

A debt restructuring must be a compromise between debtors and creditors requiring a broad agreement. This is especially true because a restructuring always involves large financial loss. In the case of student debt this means both the students and the taxpayers must be satisfied. If the students are not satisfied, they will not pay. If the taxpayers are not satisfied, they will not lend. There are many cases of successful restructurings. The private sector frequently carries them out in bankruptcy courts whenever the continued existence of a company is sought.

The dual goal of restructurings is to relieve the burdens of past debt while building consensus around future finance. Calls for free college, as an example, do not meet this test because they exclude millions of private college students, while ignoring the majority of Americans who oppose the idea.

It’s odd that student debt restructuring has not already occurred since half the borrowers had stopped paying even before the suspension. Only about half (52 percent) of direct federal loan debt was in repayment. Deferments, delinquencies, forbearance and outright forgiveness slapped together in a hodgepodge of policies over 50 years have gutted much of student debt. A restructuring is needed simply to clean up the mess.

But a restructuring is especially urgent because the burden on students is manifestly too high. The median Student Debt to Income Ratio is 56 percent and this ratio is 98 percent for the lowest income decile of America. Agreeing the amount students can reasonably be expected to pay would be a critical first step in a restructuring. Negotiators then would have to use the tools at their disposal to lower repayments accordingly.

• Debt Forgiveness: This is a common element in all debt restructurings. There is no alternative to wiping away a large component of a debt once there is not enough money to pay it.
• Lengthening repayments: Spreading a fixed payment over a longer time period reduces the monthly burden.
• Lowering interest charges: Restructurings run the gambit from reducing interest to delaying it to forgiving it.

The thorniest problem would be how to tame the cost of college in order to create a stable financial future for higher education. It is a protected industry, heavily subsidized by the government. Whether or not to ascribe the rise in tuition mainly to this subsidy or to unrelated increases in expenditure must be resolved to find solutions. Complicating this is the fact that the present structure of higher education does not fit what Americans want or the economy needs. This suggests that a restructuring should have flexibility to allow higher education to grow to fit all the different types of education America needs.

The government has little choice but to address these matters through a comprehensive restructuring. If it does not, the current payment suspension cannot be ended without substantially threatening higher education.

Robert Hildreth is a former International Monetary Fund economist whose professional work involved restructuring South American debt and marketing sovereign debt loans. He founded the Hildreth Institute dedicated to restoring the promise of higher education.