By Hansen Clarke
The financial tidal wave of 2008 left millions of American homeowners underwater, owing more on their homes than their properties are worth. This has decimated consumer demand and destroyed countless dreams.
Yet homeowners are not the only group of Americans who find themselves "underwater." After decades of skyrocketing tuition and stagnant wages, American students and graduates now often owe significantly more on their student loans than their degrees are, in dollar terms, worth.
Over the past several months, President Barack Obama has announced a series of plans to address this problem, including an accelerated income-based repayment program and new incentives for states to contain costs. These are steps in the right direction. Yet we need more decisive action to get America's "underwater" students and graduates back on dry land.
The growing cost of getting a degree is at the heart of the problem. Public institutions, where a majority of students are educated, have steadily increased tuition as public financing has declined. Amid unprecedented state budget cutting, average public tuition increased by an astounding 8.3% in 2010 alone.
With many of their parents facing pay cuts or unemployment, students have had to take out more loans to cope with these quickly rising costs. The average borrower graduating from a public or private institution owed an unprecedented $25,250. Americans' outstanding student loan debt obligations are slated to soon exceed $1 trillion.
The problem is not just the immensity of the debt. It's the scarcity of opportunity for borrowers. While the unemployment rate for new college graduates stood at 9.1% in late 2011, a recent Rutgers University study found that only 53% of a random sample of recent graduates of U.S. four-year universities were holding full-time jobs. Even fewer were making use of their university-level skills.
That explains why delinquency and default rates for student loans are rising sharply -- even with income-based repayment programs in place.
Graduates are finding that their degrees, like homes at the height of the real estate bubble, were vastly mispriced assets that are now hard to finance. Yet, unlike the debt from a home bought in the boom years, it is impossible to walk away from the debt incurred by getting a degree. Student borrowers cannot discharge or even refinance their debts in bankruptcy, regardless of how desperate their situations become. We must set these students free.
I have proposed the Student Loan Forgiveness Act of 2012, which would eliminate many of the awful consequences of educational indebtedness. In doing so, it would give Americans greater purchasing power, helping to jump-start our economy and create jobs.
The bill provides full loan forgiveness for current borrowers who have paid the equivalent of 10% of their discretionary income for 10 years or who are able to do so over the coming years. It limits interest rates on federal student loans and enables existing borrowers to break free from crushing fees by converting many private loans into federal loans.
Crucially, Americans who are behind on their payments due to a setback such as unemployment or illness would be eligible to enroll in the new program.
To control costs and create prudent incentives for both students and institutions going forward, the bill allows future enrollees in the program to receive forgiveness up to a limit of $45,520 after paying up to 10% of discretionary income for 10 years.
For at least a century, this country has run on an implied social contract that says: "If you study hard and work hard, you'll have a steady middle-class income and a stable career." Let's reinstate that contract and put student borrowers back on higher ground.