A Simpler Way on Student Loans

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Yesterday some reports on Twitter indicated that the moratorium on student loan payments would be extended for another few months. Robert Kelchen responded that the next Republican administration is likely just to eliminate the federal student loan program; by making repayment unlikely, Democrats may have inadvertently doomed the program altogether.

I could see the logic of that position, even though I’d hate to see it happen.

It reminded me, though, that there’s a better way. It’s more consistent with American political culture and our general notions of fairness. It would prevent people from getting buried under compounding interest but wouldn’t let them off the hook for what they borrowed. It’s even easy mathematically and administratively.

Cancel the interest. Require people to pay back every penny they borrowed, but no more than that.

Below is the piece I wrote in November of 2020 outlining the idea. I offer it again as a politically and economically sustainable middle-ground compromise that would do some real good. It’s certainly far saner than a series of very short extensions, followed by programmatic collapse.

It holds up pretty well, if I do say so myself …


I’ve been thinking about Congress. For normal people, that’s not a good sign, but I’ll plead “recovering political scientist” on this one.

The House is still Democratic, but barely, and the coalition includes some folks from conservative districts who are wary of anything too progressive. The Senate is likely to remain Republican, but even if the Democrats win both Georgia runoffs and Vice President Harris gets to cast tie-breaking votes, the coalition will still have to carry folks like Senator Manchin, from West Virginia, whose voting record is less than solidly blue. And if historical patterns hold, the party of the incumbent president usually loses seats in the first midterm election, so even a very tenuous majority is likely to be fleeting.

Yes, I’d love to see all student loans canceled. But I just don’t see that happening, and if it does, the victory would likely be Pyrrhic. The idea of wiping away obligations for one set of people runs so counter to American political culture that even if it got through, it would likely feed a backlash that would do far more damage than the reform would do good.

But here’s where I part company from the usual compromise proposals. I don’t think that capping the relief at any given dollar figure makes it any better. The layperson’s objection to debt relief isn’t the cost, really; it’s the concept. Capping the cost is exactly wrong; it leaves the concept (and therefore the opposition) intact, and waters down the positive impact. And the usual playbook of “only for people earning under x dollars per year” isn’t better. That leads to all sorts of paperwork nightmares, delays, requests for exceptions and financial shenanigans. (As a resident of a wildly expensive state, I can also attest that income thresholds that might seem reasonable in, say, Kansas are manifestly unreasonable here.) Both the cap on the amount forgiven, and the cap on earnings by those whose loans are forgiven, miss the point. They water down the positive impact without doing anything to reduce political opposition. In the language of Twitter, they’re self-owns.

Instead, I propose a measure that would strike most people as fair, would stand a chance of gaining and maintaining political support, would reduce administrative costs, and would actually do some good on the ground.

Cancel the interest. Remove interest from student loans. Every dollar paid back counts against principal.

For people who take a decade or more to pay back their loans, the interest can become a major part of what they eventually pay. That’s especially true for folks with older loans, when the rates were higher. Students who owe $50,000 or more can easily wind up paying five figures in interest. Worse, if they fall behind, the interest compounds. But zeros don’t compound.

Zero interest would be easy to administer. You wouldn’t need income caps or verification, so the usual shenanigans—and the cost of trying to police those shenanigans—would fade away. Overhead costs would drop, and systems would be much simpler to run.

The political appeal is clear: people have to pay back what they borrowed. They’re responsible for their decisions. But in recognition that things got out of hand in the last couple of decades—public disinvestment in public higher education, most notably—we could stop trying to turn a profit on the debt. Pay back all that you borrowed, but only what you borrowed. No more, no less.

There’s a simplicity and fairness to that proposal that could make it politically achievable and sustainable.

Over time, of course, a much better solution involves both sustained and robust operating support for public colleges and universities and basic income support for students. Even free tuition doesn’t address the opportunity cost of education; when you’re struggling to get enough food, opportunity cost alone can be prohibitive. This is miles away from anything resembling a panacea. But I think we’re miles away from a political environment in which a panacea could pass.

Combine zero interest with free community college tuition, and you’re starting to make a real difference. (For a fallback option to completely free community college—one that seems more in line with American political culture—see my “Buy One Year, Get One Free” proposal here.) These moves don’t prevent more dramatic steps in the future, but they offer immediate and tangible relief to some people who very much need it.

Some economists might object that zero nominal interest amounts to negative real interest, given inflation. But that’s a feature, not a bug. Young people who are trying to start families and careers—or working parents already in the thick of it—could use some relief. If that relief comes in a subtle way that doesn’t strike anybody as a handout, then everybody wins.

Let every dollar paid back count against principal. People have to repay every penny that they borrowed, but no more than that. Nobody gets a freebie, and nobody gets buried under compounding interest. Fair is fair. That might get enough support to survive the midterms.



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