And yet, the press release announcing the bill used a somewhat strange example:
“The plan would enable two parents and a child, for example, to put over $15,000 in pre-tax funds in one year toward tuition or loan repayment if each set aside the maximum. Currently, Americans can only pay for their student loans with after-tax money, placing an unnecessary constraint on their budget.”
Maybe some families would do this. But it’s difficult to envision a scenario in which a large number of current college students are plucking $5,250 from their 401(k) plans or IRAs each year. I suppose it’s less of a reach to consider parents dipping into their pre-tax retirement accounts to help their adult child pay down loans, but that still feels like an awkward arrangement.
It all feels like a piece of legislation trying to do too much. Around this time last year, I drew the same conclusion about a bill that would tie much-needed infrastructure spending to funding pension plans. Both are noble causes, but it’s just too cumbersome to fix interest rates on 40-year bonds, market them only to pension managers, and then mandate that they hold the debt for 10 years. Tackle one crisis at a time.
The same goes for Paul’s student-loan plan. Why must the funds be funneled through a retirement account? Wouldn’t it be easier to make it so graduates can select a percentage of their pre-tax income to put toward student-loan payments, as they do now with 401(k) plans? Paul touts that many employers match 401(k) contributions, but they’re already starting to do the same with student loans, too.
And why stop at $5,250? Paul is all for lower taxes, and Moody’s Investors Service has said canceling student-loan debt, as Democratic presidential contenders Bernie Sanders and Elizabeth Warren have proposed, would “yield a tax-cut-like stimulus to economic activity.” Paying off student loans entirely with pre-tax dollars would also wind up putting more money in Americans’ pockets.
To be sure, even these tweaks would benefit high earners the most. Mark Zandi, chief economist at Moody's Analytics, said he doesn’t expect Paul’s legislation to provide “any meaningful relief to distressed student loan borrowers.” And those ranks are growing: Defaulted student loans make up 35% of the $250 billion of debt the New York Fed considers “severely derogatory,” a larger share than mortgages, credit cards or auto loans.
Something must be done to reverse this trend. Paul, to his credit, recognizes that, and this plan seems to be his attempt to steer the student-loan conversation away from “forgiveness or bust.”
Unfortunately, the proposed legislation falls short in several ways. Most notably by doing nothing about digging into the root cause of the student-debt boom: college affordability. Paul’s plan would merely chop down a few branches.
Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.