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Our Path Forward: Ease the Burden of Student Loan Debt

Wisconsin must reduce student loan debt by addressing its principle causes: lenders that take advantage of government subsidies and the growing cost of higher education. To make student loans fair and affordable, we should establish a Wisconsin Student Loan Authority refinance, and retire debt; to ensure tuition costs are controlled and tuition dollars are spent responsibly, we should charge the UW regents with a binding fiduciary duty to act in the best interests of students and taxpayers.

What’s the Problem Addressed?
Student loan debt is among the worst problems facing Wisconsin and the nation. From 2006 through 2016, student loan debt exploded from $575 billion to $1.3 trillion (2016 dollars). 1 In Wisconsin, 67% of students graduating from 4-year institutions in 2016 had student loan debt, the 6th highest rate in the nation. On average, these students owed more than $30,000 (2016 dollars). 2 In 2014, approximately 800,000 Wisconsinites together had more than $18 billion in federal student debt. Historically, not going to college meant less life-time earning power. 3


Today, choosing to go to college can create debts that a person may never have the earning power to repay.

In 2015, more than 114,000 retirees had social security checks garnished to pay student loans.4 Rural and urban families alike are affected: in a survey, 29% of young people said they couldn’t pursue farming because of their student loan debt.5  Education debt hurts individuals and the economy as a whole: every additional $1,000 in student debt delays homeownership by 2.5 months,6 and for women, every additional $1,000 in student debt reduces the likelihood of marriage by 2% in the first four years after graduation.7

While student loans are an economic drag on students and the economy, they’re a gold mine for lenders. Unlike other types of loans, student loans generally cannot be discharged in bankruptcy and their payment is guaranteed by the US Treasury.8 Lenders get their money regardless of the borrower’s ability to repay, and lend irresponsibly because taxpayers are on the hook. Reducing student loan debt requires reigning in the cost of education. Tuition in the UW system grew 10% faster than of inflation between 2004 and 2016.9 Where does this money go? This should be an easy question, but the UW system’s accounting is hopelessly opaque, and doesn’t adequately distinguish between administrative costs and instructional costs. Even worse, the regents have actively disguised the system’s finances: in 2013, they were caught hiding a slush fund of $648 million in hundreds of separate bank accounts.10 The regents of the UW system have shown they can’t or won’t responsibly manage it. That needs to change.

How OWR’s Proposal Addresses It
Wisconsin must (1) make existing student loan debt fair and affordable, (2) ensure that new students will not be crippled by unfair loans, and (3) make the regents fiduciaries to the people of Wisconsin, making them legally liable for failing to act in the best interests of students and taxpayers. 

(1) To make existing student loan debt fair and affordable, we should establish a Wisconsin Student Loan Authority (WSLA) to refinance existing student loans at 1.5 points over prime interest rate, and to retire the debts of people over age 65 if they would have already payed off their loans at a rate of 1.5 over prime. At current market rates, this refinancing program would benefit 515,000 people.11 WSLA would service those loans directly, acting as fiduciary of the state and taxpayers, rather than contracting to debt collection firms.

(2) WSLA would also ensure that new students will not be crippled by unfair loans, by originating new loans for Wisconsin residents going to public, in-state schools at interest rates not more than 1.5 points over prime. Interest and fees on these loans not exceed 7% of gross income over the term of the loan. 

Borrowers from WSLA would be eligible for income-based repayment plan with debt forgiveness after 25 years. Borrowers working public service jobs in Wisconsin—social workers, nurses, teachers—would get debt forgiveness after 10 years of payments. 

(3) To control costs in the UW system, the board of regents must manage well and manage transparently. To make sure this happens, legislation must be introduced to formally charge the regents with fiduciary duties to act in the best interests of students and the taxpayers of Wisconsin. This would mean that if the regents failed to act in line with their fiduciary duty, say by hiding money in a slush fund or failing to control administrative spending, they would be legally liable and directly responsible to the public rather than to politicians. 

Who Else Is Doing This?
Many countries provide university education at little or no cost,12  and few developed countries have similar student loan debt problems. Canada discharges student loans after 15 years, and offers plans that can reduce loan balances by $26,000. Sweden limits student indebtedness by spending $3.5 billion annually to assist with living expenses. In Germany, a semester of higher education costs about $250, including books and transportation. Australian caps student loan repayment at 4% of annual income, and repayment does not start until students are making more than $39,000 a year.13

Why Not Wisconsin?
Legislators in Wisconsin’s House and Senate have repeatedly put forward student loan legislation similar to that proposed by OWR—Sen. Dave Hansen and Rep. Cory Mason introduced bills creating a state authority to refinance student loans in 2013, 2015, and 2016—and these measures have received bipartisan public support. However, the Walker administration and Republican legislature have blocked relief from becoming reality.14 But we should take these defeats as signs of hope: the plan proposed here is politically and fiscally if we can take back our state from Scott Walker and other beholden to corporate interests. 

In any case, we must continue to promote and propose this policy, and the State of Wisconsin should enact legislation implementing OWR’s proposed remedies in the next legislative session.

NOTES

  1.  Federal Reserve Bank of New York Report-Consumer Credit Panel Student Loan Debt; Data and Demographics: SL-update-2018(1)xlsx Available: https://www.newyorkfed.org/microeconomics/topics/student-debt
  2. The Institute for College Access and Success. 2017. “Wisconsin.” The Institute for College Access and Success. Available:  https://ticas.org/posd/map-state-data#overlay=posd/state_data/2017/wi
  3.  “Taking Action: Higher Education and Student Debt.” (2014). The White House. Available: https://obamawhitehouse.archives.gov/sites/default/files/docs/student_debt_report_final.pdf
  4. Government Accountability Office (GAO) Report December, 2016
  5. National Young Farmers Coalition Report: “Farming is a Public Service” p.6 Table 1.
  6. Mezza, A. A., Sommer, K., & Sherlund, S. M. (2014). Student loans and homeownership trends(No. 2014-10-15).  Board of Governors of the Federal Reserve System (US).
  7. Bozick, R., & Estacion, A. (2014). Do student loans delay marriage? Debt repayment and family formation in young adulthood. Demographic Research, 30, 1865-1891.
  8.  U.S. Department of Education, Department of Federal Aid, Types of Forgiveness, Cancellation or Discharge: click on “Bankruptcy Discharge (In Rare Cases). Htpps://studentaid ed.gov/repay-loans/forgiveness-cancellation
  9. Hillman, N. (2017). “State Funding Trends for the UW System.” Available: https://web.education.wisc.edu/nwhillman/index.php/2017/02/09/state-funding-trends-for-the-uw-system/
  10. Herzog, K., and Marely, P.(2013). “Outrage grows as University of Wisconsin System admits it ‘did not draw attention’ to cash.” Milwaukee Journal Sentinel. Available: http://archive.jsonline.com/news/education/outrage-grows-as-uw-admits-it-did-not-draw-attention-to-cash-r59lh2e-204159081.html/
  11.  Ross, Scott. Executive Director of One Wisconsin Now. Verbal communication.
  12. Martin, E. (2017). “Here’s how much it costs to go to college in 25 countries around the world.” CNBC. Available: https://www.cnbc.com/2017/10/13/cost-of-college-tuition-around-the-world.html  Denmark, Brazil, Germany, Finland, Greece, Iceland, Mexico, Norway and Poland have free tuition; France, Columbia, Austria, and Switzerland, charge $1000 US or less; and  Italy, Netherlands, China, Israel, New Zealand and Australia are under $5000 US. 
  13. Abrams, N. &C. Hounanian. (2016). “5 Countries That Know How to Handle Student Debt.” The Nation. Available: https://www.thenation.com/article/five-countries-that-know-how-to-handle-student-debt/
  14. One Wisconsin Now. (2017). “Higher Ed, Lower Debt Act Introduced, Common Sense Reform to Student Loan Borrowers.” Available https://onewisconsinnow.org/press/higher-ed-lower-debt-act-introduced-common-sense-reform-to-help-student-loan-borrowers/
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