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YVONNE ABRAHAM

Compounding the problem of student debt

Forgiving college debt will get us only so far. We have to nix interest on student loans as well.

The University of Massachusetts Amherst.Blake Nissen for the Boston Globe

Any day now, President Biden will announce his plan to forgive some of the gargantuan debt held by those who took out federal loans to fund their college educations.

Many have urged the president to go big here and nix $50,000 per borrower. But it looks like he’s prepared to cut only about $10,000 in federal debt for borrowers below certain income thresholds.

That would still be a big, transformative deal. About 48 million Americans currently owe $1.75 trillion for their educations, most of it in loans from the federal government. Forgiving $10,000 would wipe a third of those slates clean. And the argument for doing so is plain: Student debt exacerbates inequality, is a drag on the economy, and holds us all back.

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But providing relief to these debtors does little to prevent the next student loan crisis. For that, we have to change the way we do college in this country. Ideally, that would mean seeing higher education for the public good it is, having state and federal governments cover more of its costs, and funding state universities generously enough to make them real competitors to the private schools that get away with charging absolutely ridiculous prices.

Obviously, that’s not happening any time soon.

So how about this: Reduce the interest rate on federal student loans to zero.

That’s the bottom line of an analysis released last week by the Hildreth Institute, a Boston research center that seeks to get us back to the days when a college education was not a route to crushing debt, but a promise of upward mobility.

According to the report, almost one-quarter of all payments made by student loan borrowers in 2019 — $22.4 billion — were interest payments. The interest rate for new undergraduate loans taken out this year is a hair under 5 percent — higher than most people’s mortgages. For Parent PLUS loans — taken on by parents, often on top of student loans — the federal government is charging a usurious 7.5 percent interest.

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“You end up with two generations in debt by the time students finish,” said Bahar Akman Imboden, the researcher who leads the Hildreth Institute. “A third to 40 percent of low-income students do not complete college.” Their families end up with massive debt, with nothing to show for it.

And, whether they graduate or not, millions of students end up owing more than they borrowed, because the interest that accrued as they studied is added to their debt. The term for this is capitalization, and it afflicts nearly half of Black graduates, compared to 17 percent of white grads.

It is a rubbish system, but changing it would be costly, and Lord knows a lot of people don’t like costly when it comes to helping other people’s children.

So here’s the smart solution the folks at Hildreth suggest: The federal government would offer no-interest student loans, which borrowers would repay over a set period. Those principal repayments would then be invested safely, earning interest over time. When they mature, the funds would be used to cover administrative costs and issue new loans.

It’s an elegant idea that Imboden says would save the average borrower at least $10,000 and a world of anxiety. It’s also a forward-looking approach that would help keep us from landing right back here again in a few years.

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Several lawmakers in Congress have proposed zero-interest student loans, but they haven’t dealt with the cost offsets this way, and their proposals are unlikely to get far.

Because making loans less expensive would spur colleges to up their tuition rates, any zero-interest program must also contain incentives to head off that impulse, Imboden said.

Of course, the solution to this crisis has to be about more than loans. We need state schools and community colleges that truly put a great education within reach of every American. We must break the cycle of hiked-up sticker prices designed to make schools look more prestigious, and the amenities contest to justify them. It all seems impossible, but we simply cannot go on this way.

So let’s start with that ugly interest rate. Zero is such a pretty number.


Globe columnist Yvonne Abraham can be reached at yvonne.abraham@globe.com. Follow her on Twitter @GlobeAbraham.