For those opposed to canceling the debt, there would be some comfort in knowing that bankruptcy comes at a price. It would be a part of a borrower’s credit report for seven or 10 years, depending on whether Chapter 7 or Chapter 13 is used. The availability of credit would be sharply diminished during those periods, eliminating the ability to obtain a mortgage and other loans.
The best part is that when incoming students wanted loans, the bank or the government would have to do some true underwriting. In many cases, parents would have to co-sign, which would limit the size of the loan to their ability to repay. Universities would have to think twice before raising tuition because loans wouldn’t necessarily cover the increase anymore. The business model of for-profit colleges might well be irreparably harmed — which would be a good thing, given that too many of them seemed like scams. The key point is that 18-year-olds with big dreams would no longer be the ones deciding whether they could repay $100,000 or more in student loans. The lender would have to be responsible as well.
To those who would argue that this plan would make it nearly impossible for working class and poor students to obtain student loans, the answer is: You’re right. But there is a solution to that problem as well.
The government has long had repayment plans based on income. The idea is that after graduating, the former student pays a percentage of income (usually 10%) for a fixed period of time (usually 10 years). The problem with these plans is that they are absurdly difficult to get into and just as difficult to stay in because they require reapplying every year. Making it simple to enroll in these programs should be a Biden administration priority.
After that, a Biden student-loan program could give students a choice: They could either agree to pay back the loans or agree to turn over a portion of their post-graduation income over 10 or 15 years to the government in lieu of full repayment. For certain kinds of public-service jobs, the percentage of income could be reduced. There are many other possible variations that would make income-based repayment plans desirable. In the worst-case scenarios for borrowers who couldn’t repay, bankruptcy would still be an option.
The original impulse of the 1965 Higher Education Act was noble — to make it possible for millions of Americans who couldn’t afford college to nonetheless get a college degree. Fifty-five years later, making it possible for students to get that degree without a crushing burden of debt is just as noble. Bankruptcy is one way to help get there.
Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. His latest project is the Bloomberg-Wondery podcast "The Shrink Next Door."