A Plan for Debt

By Josh Sager

Debt, whether it originated from student loans, credit cards, healthcare or mortgage, has become a serious problem in the United States. The mortgage crisis, and by extension the housing crisis, was a debt driven catastrophe – the result of widespread inability of Americans to pay their debts in the face of predatory lending and high rates of job losses. In student loan debt alone, Americans owe over $1 trillion to lenders; when combined with the sum costs of mortgage debt, credit card debt, and personal debt incurred from medical expenses, we have a massive and rapidly growing debt problem in the USA, with no agreed upon solution. The USA is rapidly becoming, if not already, a nation of debt, where a large portion of the population is locked into a cycle of debt and repayment with no way out.

With the huge issue of debt, we encounter a debate over what should be done about this widespread problem. I would argue that there are several initiatives that could widely ameliorate the negative effects of debt in the USA: Adjustments of principle and interest rates for mortgage debt; punitive forfeiture of debt balance if the loaner has been proven to have engaged in fraud; federal assistance to students with loan debts upon graduation as well as making it possible to remove student loan debt through bankruptcy; and finally, increased regulations on interest rates in order to reduce the prevalence of predatory lending.

One effective way to mitigate mortgage debt, thus allowing people to remain in their homes, while allowing the banks to retrieve some of their money, would be to legislate a deal in which banks adjust the principle loan and interest rates to be in line with the actual value of the property. By reducing the principle loan and interest rates, more people will be able to afford to keep up with their mortgages, thus will be able to keep their homes; this will, in turn, increase the value of the surrounding houses and increase the general health of the housing market in the USA.  The federal government can compel such a deal by the banks by threatening to return the toxic mortgage assets to them, potentially swamping them, if they refuse to renegotiate mortgages.

In addition to renegotiating with banks which have not engaged in fraud, there should be consequences for any lender who engages in fraudulent activity: I support total forfeiture of both the remaining principle loan and interest in any case where the bank engages in fraud. Banks should not be allowed to benefit from illegal practices, and people should not have to bear the burden of the costs of fraud. Practices that could cause forfeiture include, but are not limited to, the intentional misleading of prospective lenders into high-risk mortgages, intentionally inflated interest rates, foreclosure despite up to date payments, and the use of robo-signing. By instituting severe monetary penalties to all fraud, it is possible to disincentivize the use of fraud, as well as to mitigate its effects on those who are defrauded.

Student loan debt is a crippling weight on many graduates today. Unless a student comes from a wealthy family or receives a scholarship, it is likely that any private university will cause thousands in loan debt – this debt is incapable of being removed through a declaration of bankruptcy, thus it is harder to get out of then other debt. In order to deal with student loan debt, I suggest several policies: First, student loan debt should be removed by bankruptcy, just like most other types of debt. Second, the federal government should create a national education fund in order to assist with the loans of all students who successfully graduate and qualify for assistance - this is similar to Pell grants, but on a much wider scale. Finally, student loan debt repayment should be capped at a percentage of annual income, so as to increase the ability of all students to afford their loans. By assisting those who desire an education and to be a productive member of society through becoming educated, we can all benefit, regardless of whether or not we receive debt assistance.

Banking institutions which give out loans must be heavily regulated in order to prevent abusive practices. Unfortunately, current laws are near-universally too lax, and require a review. Banks should not be allowed to charge extortionate interest rates, give out hidden fees, or intentionally mislead their customers for a profit. I believe that a complete review of banking laws by experts, not lobbyists, would allow our government to identify future trouble areas and prevent the continuation of our country’s debt crisis.

While there are numerous ways to deal with a debt crisis, some argue that debt forgiveness (or “debt jubilee”) would be the most effective way to deal with the issue of debt facing Americans today: These people are correct, in that the solution is immediate and direct, however, the side effects of such an action would likely be devastating. Indiscriminate debt forgiveness, legislated by the government, would certainly fix the problem of debt in the USA but it would destabilize the entire lending market to the point where future loan seekers would likely be unable to obtain loans. If those who lend money have no certainty that they will get their money returned, with a modest profit, they simply would not lend money – particularly to the poor or middle class who need loans the most.  This characteristic of the market disqualifies total debt forgiveness as a viable option to solving our country’s debt problems, for as long as we intend to maintain a lending system similar to the one we have now.

Debt is an issue that must be dealt with, and quickly if we hope to mitigate long-term damage to our country. A comprehensive plan, which prioritizes the economic health of the average person over that of the banker, is the only way which we will stabilize our debt situation in short-term, and avoid a long-term catastrophy.