By John Carroll

The student loan debt crisis seems intractable. Students can’t make payments and it’s likely the $1.5T balance will never be repaid. The debt is simply too big. To solve the problem, researchers at the Levy Economics Institute of Bard College proposed a one-time student loan forgiveness program. The Education Department could simply write-off the loans as bad debt. The net effect is borrowers don’t have to pay, the national debt grows by about 7%, and everybody moves on. Rather than offering amnesty for student loans, consider a debt reduction plan modeled after credit card points programs.

Some credit cards offer 3x, 4x, or 5x the points on purchases like hotel stays, car rentals, and airline tickets. The points can be used for upgrades, purchases, or to payoff balances. The Education Department could create a points program where making student loan payments earns points, and those points are used to accelerate paying-off one’s loans.

Consider a program where student loan payments earn between one and five points per dollar paid. Each point equals one dollar that can be used only toward paying-down principle on student loans. The number of points earned could depend on a variety of criteria.

For example, borrowers who pay on-time earn 1x the payment in points. A $100 payment earns 100 points. Those points reduce the loan’s principle by an additional $100.  Students who go to work for non-profits, or in the public sector, earn 2x the points, and if they pay on-time, they get $300 taken off of the loan’s principle (100 points for paying on time plus 200 points for their career field). Professionals, like physicians who typically have six figure student loan balances, can earn 4x the points for working in rural, or underserved communities. Add the points for paying on-time and their debt plummets.

Points are not like full amnesty. They accelerate debt reduction by giving incentives for borrowers to make payments. Also, points avoid entanglements with federal tax authorities.

Blanket student loan forgiveness solves one problem, but it creates another. The loans are eliminated, but they are replaced by large tax bills because the IRS counts the erased debt as personal income. If students can’t make monthly student loan payments, it’s doubtful they’ll be able to pay lump sum taxes either.

Worse, student loan forgiveness effectively transfers debt collection from the Education Department to the IRS. Not a good deal for borrowers. Using points should eliminate the tax burden because, technically, points are payments, and shouldn’t be taxable as income.

Any student loan forgiveness plan is likely to anger those who’ve already paid back their loans. Also, the practice of forgiving federal loans sets a bad precedent. Students will be encouraged to borrow too much, and delay repayment until the government writes off the balance once again. The message is don’t pay, and get free stuff from the government. Yet, despite these flaws, it may be worse than not providing debt relief at all. Left alone, the $1.5T will continue to grow, virtually ensuring the debt will not be repaid. A points program creates much needed debt relief, allows the federal government to continue collecting revenue, and it provides incentives for borrowers to make payments. Points are a workable compromise between total student loan amnesty and no debt relief at all.