5 Ways The Right Can Start Fixing The Student Loan Crisis

As another school year begins and the number of Americans defaulting on paying back money borrowed for college approaches 10 million, it’s clear that student loan debt has become a crisis that threatens the realization of the American dream. One side argues students need to “be smarter when they borrow,” and the other side says, “Let’s cancel the debt.” To be clear, if you borrow money, you should have to pay it back or face consequences; that said, the solution has to lie somewhere in between these extremes.

First, some background. It is a fact that college costs have risen at unjustifiable levels. The average cost of a college degree has increased about 42 percent faster than inflation. The big reasons for this appear to be, in no particular order: a general drop in state funding levels, administration bloat, easy credit, and “amenity wars.” One could make an argument for each of these as a leading factor, but easy access to credit stands out as significant.

According to the Department of Education, there is about $1.72 trillion in federal student loan debt outstanding, with 42.6 million borrowers. The average federal student loan balance is roughly $40,000, and the average total balance may be as high as $43,000 when private debt is included. In 2007, the average federal balance was about $18,000. On a 10-year term, the monthly payment on a new loan at the prevailing rate of 6.52% is nearly $500 a month.

The average starting salary for a graduate in 2026 is $49,500. According to TurboTax, the average blended tax rate at this income is 22 percent, making net pay slightly more than $3,200 a month. This means the average graduate is paying nearly 15 percent of his net pay to cover student loans. A “good” debt-to-income ratio is 36 percent. If you have a car payment, mortgages are pretty much off the table, and you are living paycheck to paycheck.

More than one million borrowers have loan balances higher than $200,000. Thirty-three percent of all physicians are in this category. In fact the top 7 percent of borrowers account for a third of all student loan debt. Post Covid, a fifth of student loans are in default.

Making matters worse, it is extraordinarily difficult to have student loans discharged in bankruptcy. Brunner v. New York State Higher Education Services Corporation established a three-part test that maintains that it is impossible to maintain a “‘minimal’ standard of living,” that this would persist for a “significant” part of the repayment period, and that “good-faith” attempts have been made to pay the debt back. Over time, this standard has been narrowed, and to even begin the process, one must complete a 15-page affidavit.

When the enormity of this hits a graduate, it drives him toward anyone who proposes any solution whatsoever — including people who are actively trying to dismantle our system of government. Because, without relief, students know they will essentially be debt slaves for years, if not decades. This reason, expressly, should compel us to look at different ways to solve for a restructuring of this process. Whether we like to admit it or not, debt is an authentic threat to democracy.

You cannot simply “cancel” a debt, however; someone will be on the hook. Whether it’s banks, taxpayers, or investors, when someone doesn’t honor a debt obligation, the lender or its proxy is out not only the loan amount, but the interest payments that the loan requires. Certain politicians rush to this as a possible solution because they are numb to the idea of raiding taxpayers, but it isn’t the right thing to do.

A serious solution spreads the responsibility around to all the parties associated with the loan, and seeks to mitigate, to whatever degree possible, new problems. I would like to propose some ideas (knowing that not all of them will be popular):

First, we need to consider capping loan rates at levels that naturally lend themselves to repayment. While I find this morally repugnant, the metastatic nature of this crisis requires something that will encourage people to start paying their loans again. There is a proposal leaving rates at 2 percent, and I think that’s probably the right number.

With regard to existing loans, allow them to be easily discharged in bankruptcy, but if they are discharged, also rescind the degree associated with them. If you rob a bank, you don’t get to keep the money. If you default on a car loan, the vehicle is repossessed. If you default on a mortgage, the property is foreclosed on. You could even go so far as to remove all credit hours of study that were financed by the discharged debt, making the borrower essentially repeat his education if he wants the accreditation again. This should be the minimum consequence, because in a student loan, the collateral is a degree. If you don’t pay for it, you shouldn’t be allowed to use it.

Next, allow lenders to seek reimbursement from college endowments for the forgone loans. Colleges have financial aid advisers and guidance counselors who have institutionalized borrowing without truly instilling an understanding of the future obligation, so they need to shoulder the blame as much as anyone. It is absurd to absolve educational institutions of guilt in creating this mess, largely through failing to educate borrowers about the long-term ramifications of their financial aid packages.

Nearly 160 universities in the United States have endowments of more than $1 billion dollars. The median worth of an endowment in the United States is around $48 million dollars. In total there are $944 billion in assets in endowments, so to solve this problem completely would consume about a third of all endowment assets, with larger schools in terms of both population and endowment faring the worst. I think that’s a reasonable settlement. If endowments don’t want the hit, they can always offer to buy the loan from the creditor at a discount and either forgive it or try to work it out on their own; but they need to have some exposure.

Additionally, bar banks who have underwritten loans with abnormally high default rates. Initiate a 10-year clawback on underwriting fees and make it a matter of public disclosure. It won’t take too long before banks start looking a little closer at the credit quality of a borrower. It needs to be OK to say no to an unqualified borrower.

Finally, to establish quality control, initiate guidelines on how much debt a degree can support. This will vary by vocation. It is a simple fact that the earnings of a graduate with a degree in women’s studies ($50,000) and a physician ($300,000) should be considered in the underwriting process. No banker would approve a $400,000 loan for a Toyota Camry, but you might for a Lamborghini. Why? Because the collateral supports the note. It has to be the same here. It would also be prudent to limit the amount you can borrow for 100- and 200-level classes because they can be done cheaply at local and community colleges and it’s the same coursework.

Suggesting that colleges find ways to cut costs would also help.

There are certainly other ideas that can add to or replace those proposed here, but the point here is that we need an outcome that appropriates responsibility and consequence fairly, and seeks to mitigate the conditions that created the issue in the first place. We need to do something to bridge the gap back to the American dream for college grads, and it starts here.

Mark Mazman is a 1991 graduate of North Central College. He is an over 30-year veteran in the financial services industry, experienced in dealing with public and private business, as well as private clients.