Third in a series.
The most immediate problem with student debt is tight cash flow, while the most enduring problem is the opportunity cost it creates. To alleviate both problems, we should let borrowers divert part of their student loan interest payments (not principal) toward investment in appreciating capital assets and then pledge those assets to secure their debt until repaid.
We call this the Higher Education Loan Payment Investment Program or HELP Invest.
The interest rate on a given loan would be reduced to the 10-year Treasury plus, say, 1 percent (to preserve some lender upside profit) on the date such loan enters HELP Invest. The entire interest savings could be diverted only toward investment in certain types of appreciating assets, such as homes, mutual funds, REITs, CDs, permanent life insurance, municipal bonds and treasuries. Each borrower would choose which assets to acquire. Mortgage lenders could create loan products to allow qualifying borrowers to buy homes.
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Whatever asset is chosen, because standard 10-year amortization schedules front-end-load interest payments, loan repayment under HELP Invest maximizes asset growth potential by correspondingly front-end loading diverted investment amounts.
Although this program could reduce lenders’ upside profit, it would also reduce their downside risk. The borrowers’ assets would collateralize the debt from which it was derived. Lenders would gain secured creditor rights. Borrowers could not liquidate or encumber the assets until the debt is discharged. But they could roll over investments made in one type of asset into another. Lenders would otherwise retain most existing rights and remedies, including wage garnishment.
This program would be voluntary for borrowers. By design, original loan terms would apply for those who do not use this program. The idea is to enable young people to invest in assets likely to appreciate in value so they can start building economic security and independence. Simply allowing borrowers to refinance at lower interest rates, as Democrats propose, may not promote this goal. This is not about freeing up discretionary income. If money is to be diverted from lenders, it should be to a responsible and mutually beneficial end.
The special nature of student debt justifies HELP Invest. Student debt is generally bankruptcy-proof, making it safer for lenders than virtually every other category of debt. The lenders’ risk would be even further reduced by collateralization of the debt with the assets generated by this program, which, based on diverted interest of over $1.3 trillion in principal, could reach hundreds of billions of dollars. The reduced lender risk justifies the reduced interest rate.
And the nature of student debt justifies this program. Student debt is inherently more compulsory than other types of debt because higher education is generally essential for higher wages. And it is usually the first major debt that young people incur, so its position as first-in-sequence naturally makes it the most proper category for subsequent adjustment. HELP Invest would restore balance to the lending risk-reward paradigm while treating all players fairly.
All players would benefit. Borrowers would have a chance to starting building wealth now, and years of directed investment would train many young people to develop good investing habits, putting millennials on “training wheels” for financial literacy. Educational institutions wouldn’t have to compromise the quality of education or plunder endowments. Governments would have reduced funding slack and additional liquidity through securities sales. Taxpayers would have a lower risk of subsidizing student debt. Mortgage lenders, fund managers and life insurance companies would get more business. The public markets and the housing markets would get a liquidity infusion.
Even lenders would benefit because it would reduce their risk, give them more rights and avoid harsher alternatives with fewer benefits: loss of bankruptcy protection, partial debt forgiveness and/or refinancing with no collateral.
HELP Invest is fair and would help current and future generations of Americans achieve our common goals of a well-educated and prosperous future, ensuring that higher education remains a path to the American dream.
Timothy R. Ferguson of Chapel Hill is an attorney and president of The Gracchi Institute. Mark R. Kurt of Chapel Hill is an associate professor of economics at Elon University. Their opinions are their own.
A four-part series examining America’s student loan crisis
Part 1: A $1.3 trillion headwind: A problem in North Carolina and beyond
Part 2: Evaluating policy proposals: Some unintended consequences
Today: Existing debt: Turning a liability into an asset
Part 4: Reducing future debt: Increasing transparency, preventing abuse