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EricN Publications by Eric Niewoehner
EricNPublications by Eric Niewoehner

The Solution to Paying Off Student Debt

May 16, 2022


It is interesting to note how in the real world loans work. According to the Fed, non-performing loans in the real world rest at about 1%! Yet student loans are at 23%! It is clear that the student loan market is highly distorted. The objective is to re-introduce reality into the student loan marketplace.


Posited in a previous article, the problem of student debt has a solution that involves the student, the college, and the government. I also explored the primary cause of student debt – the colleges. So how do we begin to resolve this problem? I will drop a suggestion: matched payments.


The target: Non-performing loans.


As noted in a previous article, the non-performing loans are many, but not pervasive. Focusing on non-performing loans reduces the scope of student debt by 77%. It is obvious that non-performing loans are caused by a gross mismatch of investment in education with actual skills and abilities needed in the private sector. Students can misjudge their abilities. The college experience itself can be a warped reality, and the real world not what a student expected. There can be fraud. Whatever the cause, the result is a non-performing loan, often of staggering levels.


The solution is not blanket forgiveness. It is accountability. The student, the colleges they attended, and the government all have a role in solving this problem.

The Government


Student loans are generally government-backed. This backing is necessary because in the real world an 18 year-old would never get a $120,000 loan unless they were trust-kiddies. Government-backing diffuses the risk and this enables students of less means to obtain the funding necessary to attend college. But for the government to step in and simply write off 23% of the loans is totally unacceptable.


How can the government help this situation?


Means-tested financing – I alluded to this when discussing the value of reputation. Simply put, a student is lent financial support only to the level of average college costs. If they want to attend Columbia University and dish out $60,000 a year, then they can borrow money but only to what a similar experience would cost on average throughout the country. If that was $30,000, then they would be provided $30,000 in government-backed financial aid.


Employability Indexing – I previously noted some sad example of a student obtaining a degree in acting, only to discover that getting a job in acting was extremely low and the pay miserable. Now this person was stuck with a $100,000 loan! The solution to this problem is indexing loan rewards based on employability and income potential after they graduate. Engineering, for example, is almost 100%. Basket Weaving is probably around 5%. The math is quite simple. If the declared major is engineering, the student will be provided 100% financing. If they want to obtain a degree in Basket Weaving, they will be covered for 5% of the cost. This may sound unfair, but it is quite fair to the student. It’s tough love, but will save substantial disappointment in the years to come.


Finance Intentional Education – This is addressed to students who spend four years “finding themselves,” or attend colleges that have ridiculous course tracks like “General Studies.” Once a student completes their sophomore year, they need to declare a major. No declaration, no financing. Simple as that. Most colleges require or strongly recommend the same. But I have heard of too many cases were a student drifted through four years and had nothing to show for it. Again, why should the government back such loans?


Flexible Financing for Part-Time Students – While I worked at UAS and later had daughters attending college, it always baffled me why financing was only available for students taking twelve hours or more. Students who reduce their debt requirement and work to pay for their living costs are typically a better risk. The twelve hour minimum puts pressure on students to finance living costs which are, economically speaking, almost impossible to recover. Low income students will typically need to work while attending college. Pressing them to reduce or drop work to attend college places them at the mercy of near-100% financing of education to cover living costs. That’s ludicrous.


Charge-Back to Local School Districts – How this done is problematic, but I have heard the suggestion more than once. Why should the student bear the risk of a non-performing secondary education? Remedial education, financed by student debt, is an admission that the previous thirteen years of investment was a failure. Indebtedness does not solve that deficit. Hard work, evening and summer courses, and pay-as-you-go solves that problem. Why should government-backed loans be issued when the party that is actually responsible is the high school that allowed the student to graduate.


Of all the suggestions that follow, these changes will have the most profound impact on the student debt problem. Fewer loans, fewer subsidized degrees and courses. And all with a higher prospect of success for the student.


For those who are presently burdened by a non-performing loan, the government will write-off one third of it as matched payments. While critics may object that taxpayers pay anything for this, there are two additional things to consider. First, we are talking about loans where you are getting nothing as it is. My proposal provides for 2/3rds recovery at best.


The second proviso is a bit interesting. The government write-offs are taken out of the operational budget of the Department of Education. In other words, no funny money. It is a government mistake, so it needs to be the government paying for it by not funding another program. Pure and simple. I realize how the government budgets, so what I am proposing is a political policy recommendation. If you want to have truck drivers and plumbers cover the cost, tell them who else in Washington is going to pay.

The Colleges


The first element is recognizing that colleges are responsible to some degree. They encourage students to generate enormous debt in degree programs with no meaningful potential for employment or income. For every non-performing loan, the college becomes culpable. For every payment made by a student, it is matched by the college.


Colleges need to recognize that degrees are often leveraged over time and over variable risk factors. A student pursuing a two-year associate degree in accounting is likely to go through the experience working part time and not needing to borrow a lot of money. A student going through medical school will have almost three years of their lives totally devoted to study, so their cost of living will need to be calculated into the risk. Employment potential will also need to be considered, which adds to the risk. If a college wishes to have a department of theater, they need to understand that 75% of their graduates will not be working in theater as careers, so there is certainly no logical reason to be encouraging students to rack up the same level of debt as an engineer.


Means-tested financing and employability indexing will quickly assist colleges in determining how much of student’s education will be provided by government-backed student loans.


To reduce their risk, colleges need to be more strongly committed to student success.


  • Apprenticeships and internships need to be a part of the degree experience. My wife frequently shares that if she only knew how hard it was to teach, she would not have obtained a degree in home economics with the idea of teaching high school students. She would not learn that until her final semester in college. Students need field experience sooner than that. In fact, some exposure to their field at the outset is preferred. Sending a kid to conduct a survey is about the best way to determine if engineering is to be their career. It will teach them what they need to know about topography, instruments, mapping, and basic geometry. The one field I observed this first hand were the farm kids who attended Ag School at the University of Missouri. They knew what farming entailed and appreciated the value of the education they received.

  • Flexible graduation periods. Colleges are now recognizing that cost and time are more important to students these days. With the elimination of liberal arts requirements and non-essential courses, a student can graduate with a degree in three years. With reform in student loan provisions, colleges will need to explore solutions that extend for more than four years for those students who will need to work part or full time to cover their cost of living.

  • Corporate sponsorships. Amazon is most generally known to provide educational opportunities, but the State of Alaska and the US military have been providing advanced education for people. In most cases, these sponsorships compliment their field work and are designed to advance their careers. Many of my students have been older adults who are expanding their knowledge through the help of their employers. Highly encouraged. No loans required! But anyone who works with corporate sponsors knows that colleges will need to be flexible regarding the time it takes for a student to complete their education.


When colleges are on the hook for non-performing loans, they will look more carefully at how to reduce the costs.


  • Sustainable college experience – colleges need to appreciate how the cost of living is a huge factor about whether a student will ever attend college, much less succeed. Course loads are important to consider. The cost of living may determine whether a student completes a degree program in three or six years. Sensible planning can avoid situations where students are needlessly borrowing money to cover their cost of living. Removing cost-of-living as part of the loan equation should help solve that problem.

  • Toss the textbooks – I say that in jest. But negotiate with the publishers. Consider revisions every 5 to 7 years. Target classes that require new textbooks every year.

  • Remedial courses – offer them, but don’t lend money. At some point, a student must decide if college is for them. They can take evening courses. As noted above, lobby for the right to send the bill to local school districts.

  • Acknowledge transfers more liberally.


The other element is scoring colleges on sustainable college education. Simply scoring. If a college is evidently not addressing the cost of education, then they need to be downgraded. This will not eliminate loans, but it will affect what is government-backed. The nice thing about scoring is that it does not have to be a government sanctioned score. Any private group can provide these scores.



The Student


Oddly enough, I have had little to say about the student. The main reason is that 3 out of 4 students are responsible. Furthermore, the student is usually someone who began this journey at the age of 18 and made a fatal mistake, a mistake that has determined their fate. They did so as an army of so-called intelligent adults looked on. This has to stop. Putting full blame on the student is certainly not the answer.


But accountability is something worth considering. The solution begins with the student. A blanket write-off does nothing but harm for the entire student loan system because it undercuts one of the fundamental principles of financing – trust. If a student could just simply refuse to pay a loan for fifteen years, it can be simply written-off. That is unacceptable.


The student is part of the solution. They must first commit themselves to pay against the principle. The solution being proposed is that they pay one third of the principle. The college(s) they attended will contribute one third, and the government one third. That reduces their problem by two-thirds.


But since they get a benefit from non-performance, there is a catch. The government portion is taxable. For people of low-income, this may be non-consequential. But for those with taxable income, it will at least offset some of what the government has provided. If you are in the 15% tax bracket, and the government contributed $3600 against your debt, then that $3600 is counted as income and you will need to add $540 to your tax bill. If that seems unfair, just consider that everybody up and down the street had to cover the other $3,060. That’s one way of looking at it. Knowing that simply riding out a loan until it is marked “non-performing” will at least carry a penalty.


And speaking about penalties, I have never seen a critical debt situation solved by paying penalties or unreasonable interest. I have seen people have great success in removing penalties and even interest from large bills by simply re-engaging trust. When a vendor sees that a customer is committed to paying the bill, they may not want to engage in new business with that person, but they will at least trust that this person will pay the debt. Penalties economically and psychologically make it almost impossible to attempt loan repayment. Removing those obstacles gives a student hope, and a steady repayment plan can help solve that problem.


It is interesting to note how in the real world loans work. According to the Fed, non-performing loans in the real world rest at about 1%! Yet student loans are at 23%! It is clear that the student loan market is highly distorted. The objective is to re-introduce reality into the student loan marketplace. This will protect present and future students. For those who have already fallen into the trap, they will need encouragement to step forward and do the right thing.


What about the students in the middle, those who are paying off their loans but at considerable substitutionary hardship, forbearing marriage, children and home purchases? There are no easy answers here. As noted above, the proposal of matched payments begins with non-performing loans. Part of the solution is for a matching payment being made by the Department of Education’s operational budget. This will be politically painful and difficult to achieve. But if this proposal is ever enacted, and found affordable, the forgiveness benefit can be rolled back to assist low-income citizens first, and work backward to the loans that are in “difficulty.” But if this evolves, it must be noted that all of this is pointless unless reforms are initiated that prevent, or vastly reduce, student loans in the first place.

The Effects of Changes


Students will get older.


Means-tested financing will pop the bubble of colleges who are charging premium prices for a so-called better quality education. While this may reduce applicants, it may pressure premium colleges to make up the difference in scholarships using their multi-billion dollar endowments.


Employability indexing will begin the steady process of culling out the meaningless degrees and courses that critics love to talk about. People like to pick on Women’s Studies, but what about a degree in archaeology? I love archaeology. I love history. But if 15% of the graduates get a job in the field, why are we backing up 85% of the student loans being generated by that degree? It is tough love, but needed. Not every school needs an archaeology degree. Alternatively, there may be potential for scholarships provided by corporate and non-profit sponsors who will help cover the costs of an archaeological degree.


Financing intentionality will reduce significantly loans to students with no clear career path after two years of college.


College will become a guided experience. If students are accruing debt, and the college is 33% liable for a non-performing loan, it is in the best interest of the college to assure that a student’s experience with the institution is a positive one, that they have a chance for success. This includes the incorporation of internships, apprenticeships and work.


Useless majors will vanish. If loans are issued based on the likelihood of employment, it will mean serious trouble for majors that have no prospects.


Don’t panic. Liberal arts courses will still be around – but directed toward complimenting degree programs. Additional courses can still be offered, but on a pay-as-you-go basis and not supported by government-backed loans. I loved my piano class. But would I borrow money to take piano? No. If enough students enjoy learning piano, they will pay for it.


The textbook businesses will go through a serious overhaul – and well they should.


The student population will be more mobile when transfer restrictions are loosened. Students are more mobile these days. Colleges just need to recognize this reality.


Greater diversity in degree programs. Colleges actually do this more often than we realize. UAS offers certificate programs and expands that to associate degrees that can be completed in two years. For an older, more mobile student base, expect students to take courses that progressively compliment their careers.


Education will become a continuum. I find it ironic that in my career the one thing I got was a continuing education in IT. I never got an advanced degree in IT, yet I taught the subject at the college level. I was joined by two other colleagues who were in the same boat. We spent 25-35 years in the field and we shared that with students. In the course of those decades of experience, we continually adapted and built our base of knowledge. Anyone who works in IT can tell you that education is a continuum. The same applies to people who work in engineering, the sciences and health care. Getting a Masters Degree is nice. But in the real world, you earn a Masters Degree every few years. These are not certificates we hang on our walls, but reside in our tribal knowledge.




To go full circle, this whole discussion began because there is a niche of the Democratic Party that is proposing blanket forgiveness, or a granted amount for all students. Neither of those proposals are wise. It is interesting to note that David Brooks did a good job of compiling the data that reveals who will most benefit from either of those approaches – the more affluent. His source is not a right-wing think tank, but none other than the Brookings Institute. Their analysis of the problem revealed that the wealthiest 20% owe 33% of the debt. The bottom 20% only 8%.


Another thing the Brookings report noted was the scale. Our eyes glaze when we see $1.5 trillion in total student debt. Even if we look at non-performing loans, we are looking at $345 billion in write-offs. To better get this in perspective, the scope of the total debt is greater than the unemployment insurance, the earned-income tax credit or food stamps that have been issued from 2000 to 2019! Thus, the importance of narrowing the scope of this problem with non-performing debt, and the critical importance of accountability.


David Brooks also pointed out the wider, sociological aspects of indebtedness. The people he mentions are essentially the high-risk, low-income students who are struggling with non-performing debt. Their situation warrants consideration. But my argument has nothing to do with “fairness” or “social justice,” but more with the practical problems of collecting debt from people with little money. Nothing will be gained by ignoring their problem. Nor will anything be gained by giving them a free ride because in the middle there are millions of students who are accountable. The solution is, in my view, matching payments from colleges and the government, along with vitally needed reform of the student loan system.


Noted below is another article from the New York Times that reminds us that some of the mountain of non-performing debt is derived from corrupt or fraudulent education enterprises. The legal system seems to be effective at identifying and prosecuting these schools, but the taxpayer is left holding the bag of about a quarter billion dollars. More aggressive application of the proposed reforms would prevent this from happening at such a scale because the amount of government-backed loans would significantly diminish.


Ideally, I am against any debt relief. But realistically there is billions in non-performing debt that can be recovered and the suggestions above are a few ways to achieve it. Targeted relief where the student is accountable, the college is accountable, and the government is accountable. We begin with the oldest non-performing debts and work our way backwards. But whatever approach is taken, nothing will be achieved through blanket forgiveness and nothing will be achieved if colleges are not held accountable for the mess students get themselves into.




"Bank Non-Performing Loans to Gross Loans for United States”, The FRED Economic Data, 2019


"We Should Cancel Student Debt, but Only for Some”, The New York Times, by David Brooks, May 5, 2022.


"Student Debt Is Crushing. Canceling It for Everyone Is Still a Bad Idea,” The New York Times, May 14, 2022

By Eric Niewoehner

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