Washington — This post, prepared with the help of AI, outlines a structural, bipartisan solution to the "zombie debt" trap currently stalling the 2026 housing market, not to mention the incredible unfairness that created it. By amending S.3761 (The Student Loan Bond Expansion Act), we can authorize a deficit-neutral transfer of federal student loans to state entities for immediate, principal-based discharge.
The "Taxpayers' Choice Student Loan Solution"
The current federal student loan portfolio is haunted by "zombie debt"—accounts that are either non-performing or trapped in "permanent debt" cycles due to decades of compounding interest and servicer misconduct. Under the 2026 Repayment Assistance Plan (RAP), these loans face a 30-year collection tail that creates a massive administrative drag on the Treasury.
The solution isn't another executive order destined for the Supreme Court. It is a statutory asset sale that empowers state authorities across the country—from Vermont (VSAC), Massachusetts (MEFA), and Rhode Island (RISLA) to Texas (Trellis), Georgia (GSFC), and Iowa (Iowa Student Loan)—to buy this debt and clear it for their residents.
The Amendment: S.3761 "Portfolio Optimization"
The solution isn't another executive order destined for the Supreme Court. It is a statutory asset sale that empowers state authorities across the country—from Vermont (VSAC), Massachusetts (MEFA), and Rhode Island (RISLA) to Texas (Trellis), Georgia (GSFC), and Iowa (Iowa Student Loan)—to buy this debt and clear it for their residents.
The Amendment: S.3761 "Portfolio Optimization"
The proposed bipartisan amendment to S.3761 creates a high-integrity bridge between federal fiscal needs and state economic growth. Here are the core pillars:
1. The "No-Cost" FCRA Math
1. The "No-Cost" FCRA Math
To satisfy fiscal hawks, the sale is scored under the Federal Credit Reform Act (FCRA).
The Efficiency Gain: The federal government currently pays private contractors $3.00–$4.00 per month to service "zombie" accounts.
The Bid: States buy these loans at their Book Value minus these administrative savings. By using low-cost, tax-exempt bonds, states can buy "zombie" federal loans at their actual discounted value and stop the drain of expensive government servicing fees. Because the state’s borrowing cost is so much lower than federal student and parent loan interest rates, they can use that "interest spread" to cancel the remaining balances for borrowers at zero net cost to the taxpayer.
The Result: The Treasury receives immediate cash equal to the "expected recovery," while the "discretionary" cost of servicing is wiped off the federal books. It is a net win for the deficit.
2. Restitution via the "Principal-First" Audit
The Bid: States buy these loans at their Book Value minus these administrative savings. By using low-cost, tax-exempt bonds, states can buy "zombie" federal loans at their actual discounted value and stop the drain of expensive government servicing fees. Because the state’s borrowing cost is so much lower than federal student and parent loan interest rates, they can use that "interest spread" to cancel the remaining balances for borrowers at zero net cost to the taxpayer.
The Result: The Treasury receives immediate cash equal to the "expected recovery," while the "discretionary" cost of servicing is wiped off the federal books. It is a net win for the deficit.
2. Restitution via the "Principal-First" Audit
This is the heart of the proposal. It addresses the moral hazard question while providing justice to those victimized by past servicing failures.
The Rule: Any borrower who has already paid back 100% of their original principal receives an immediate discharge of their remaining interest-inflated balance.
The Justification: This recognizes that interest-heavy structures and "forbearance steering" have artificially ballooned balances. If you returned the "taxpayer seed money," your moral and financial obligation is fulfilled.
3. Federal Integrity Standards
The Justification: This recognizes that interest-heavy structures and "forbearance steering" have artificially ballooned balances. If you returned the "taxpayer seed money," your moral and financial obligation is fulfilled.
3. Federal Integrity Standards
To prevent the errors of the past, only "Certified" state entities with clean regulatory records can participate.
The Oversight: If a state entity fails to provide the "Paid in Full" status within 90 days of purchase, Federal Integrity Standards trigger a mandatory reversion: the loans return to federal control, the state is fined, and the borrower is held harmless.
Why This Works: Bipartisan Economic Velocity
Why This Works: Bipartisan Economic Velocity
The Taxpayers' Choice Student Loan Solution avoids political gridlock by focusing on market efficiency and localized stimulus:
For the Housing Market: Clearing these balances immediately fixes Debt-to-Income (DTI) ratios. It turns thousands of "debt-constrained" renters into qualified homebuyers overnight, specifically helping those most impacted by interest compounding.
For the States: It reverses "brain drain." States can use their bond-market spread (the difference between their 3.85% tax-exempt rate and the 7% federal rate) to offer residency-based credits, keeping essential workers in-state.
For Federal Taxpayers: It stops the bleed of federal funds to private collection agencies and cleans up a $1.7 trillion balance sheet that has become unmanageable.
Legal and Structural Integrity
For the States: It reverses "brain drain." States can use their bond-market spread (the difference between their 3.85% tax-exempt rate and the 7% federal rate) to offer residency-based credits, keeping essential workers in-state.
For Federal Taxpayers: It stops the bleed of federal funds to private collection agencies and cleans up a $1.7 trillion balance sheet that has become unmanageable.
Legal and Structural Integrity
Constitutional Durability: This approach does not run afoul of the Supreme Court's "Major Questions Doctrine." Unlike previous attempts at mass cancellation via executive interpretation, this model relies on explicit Congressional authorization through the amendment of a statute. By providing a "clear statement" from the legislative branch, it fulfills the Court's requirement that major policy shifts be enacted by the people’s representatives, not administrative agencies.
Eliminating Private-Sector Profit: Crucially, this solution involves no part of the for-profit student loan industry. The transfer is strictly from the federal government to state-affiliated nonprofit authorities. By utilizing tax-exempt municipal bonds rather than private equity or commercial banks, the financial benefit of the low interest rates is passed directly to the borrower in the form of debt discharge, rather than being captured as corporate profit.
National Reciprocity: No State Left Behind
Eliminating Private-Sector Profit: Crucially, this solution involves no part of the for-profit student loan industry. The transfer is strictly from the federal government to state-affiliated nonprofit authorities. By utilizing tax-exempt municipal bonds rather than private equity or commercial banks, the financial benefit of the low interest rates is passed directly to the borrower in the form of debt discharge, rather than being captured as corporate profit.
National Reciprocity: No State Left Behind
What about states without a high-capacity agency? The amendment includes a Reciprocity Clause. If a state doesn't have an eligible entity, a high-performing agency from a reciprocating state can "adopt" those residents. Whether you are in Mississippi, Ohio, Maryland, or Utah, your path to a "Fresh Start" isn't dictated by a geographic lottery.
A Remarkable Economic Engine
A Remarkable Economic Engine
The scale of this solution is unprecedented. Projections suggest this "Principal-First" audit could impact nearly 10 million borrowers who have spent a decade or more in the system, returning 100% of their original principal but remaining "debt-trapped" by interest. This model is targeted at the demographics most harmed by the "interest ballooning" of the last 20 years. Because Black and Latino borrowers statistically face higher interest accrual due to lower family wealth and longer repayment timelines, this "Principal-First" solution provides restitution where it is needed most. The economic impact is profound: clearing these interest-heavy balances would inject an estimated $80 billion to $100 billion in immediate purchasing power into the national economy. By resetting credit scores and fixing Debt-to-Income (DTI) ratios, we effectively unlock a "frozen" generation of homebuyers, sparking a localized housing boom that generates new property tax revenue and stimulates billions in secondary spending on construction, retail, and local services.
The "No-Loss" Guarantee for Borrowers
As a matter of federal law under this proposal, any state entity acquiring a federal loan is contractually and legally obligated to honor all existing Title IV borrower protections, including Public Service Loan Forgiveness (PSLF) accrual, Income-Driven Repayment (IDR) pathways, restitution for servicer misconduct, and discharge rights for disability or school misconduct. This ensures that the move to a state-managed "Principal-First" audit is an additive benefit: borrowers retain every federal protection they currently have while gaining a faster, interest-free path to a "Paid in Full" status funded by the state's bond-market efficiency.
The Bottom Line
This approach recognizes that when a debt has been fulfilled, the borrower—and the economy—should be set free. By aligning the statutory authority to sell with the state capacity to buy, we can restore the American social contract and strengthen the housing market, one "Paid in Full" letter at a time.
Here is the formal legislative text of the Taxpayers' Choice Student Loan Solution amendment. This version is ready for the Congressional Record, incorporating the "Principal-First" restitution mandate, the federal integrity safeguards, and the interstate reciprocity provisions.
AMENDMENT TO S.3761
OFFERED BY [REPRESENTATIVE/SENATOR]
In the appropriate place in the bill, insert the following:
SEC. ___. FEDERAL-STATE STUDENT LOAN PORTFOLIO OPTIMIZATION.
(a) AUTHORIZATION OF PORTFOLIO SALES.—Notwithstanding any other provision of law, the Secretary of Education (referred to in this section as the ‘Secretary’) is authorized to sell and transfer all legal title of specific federal student loan portfolios to an Eligible State Entity.
(b) ELIGIBLE STATE ENTITY DEFINED.—For the purposes of this section, an ‘Eligible State Entity’ is a state-affiliated non-profit authority or state agency that meets the following Federal Integrity Standards:
- AUDIT COMPLIANCE.—The entity has not been subject to a Final Audit Determination by the Department of Education’s Office of Inspector General (OIG) for material non-compliance in loan servicing within the preceding 36 months.
- CONSUMER PROTECTION.—The entity is not currently subject to a federal or state consent decree or settlement exceeding $1,000,000 related to unfair or deceptive student loan servicing practices.
- BOND CAPACITY.—The entity utilizes proceeds from Qualified Student Loan Bonds (QSLBs), as expanded under this Act, to fund the acquisition.
(c) STATE RECIPROCITY AND RESIDENT ACCESS.—
- AUTHORIZATION TO SERVE OUT-OF-STATE RESIDENTS.—In the event a State does not possess an Eligible State Entity, or its designated entity elects not to participate, an Eligible State Entity from another State may purchase the federal loan portfolios of residents in that State.
- INTERSTATE COMPACTS.—The Secretary shall facilitate interstate agreements to ensure that Reciprocity Entities provide the same "Principal-First" discharges and interest-rate freezes to out-of-state residents as they provide to their own residents.
(d) VALUATION AND NO-COST CERTIFICATION.—
- FCRA ACCOUNTING.—The Secretary shall certify that any sale under this section results in ‘No Net Cost’ to the Federal Government as measured by the Net Present Value of future cash flows under the Federal Credit Reform Act of 1990 (FCRA).
- ADMINISTRATIVE OFFSET.—In calculating the FCRA Book Value, the Congressional Budget Office (CBO) and the Secretary shall subtract the projected Administrative Servicing and Collection Costs (calculated at a minimum of $3.00 per account, per month) that would have been incurred by the Federal Government over the remaining life of the loans.
(e) THE BORROWER BILL OF RIGHTS AND RESTITUTION MANDATE.—As a condition of purchase, an Eligible State Entity must contractually agree to:
- PRINCIPAL-FIRST DISCHARGE.—The Entity shall conduct a Financial Fulfillment Audit. If the total lifetime payments made by a borrower (including interest and fees) equal or exceed 100 percent of the original principal disbursed, the Entity shall discharge the remaining balance in full within 90 days. This serves as restitution for documented historical servicing failures and interest-only cycles.
- INTEREST ACCRUAL FREEZE.—Upon acquisition, all interest accrual on the acquired loans shall cease permanently.
- CREDIT AMNESTY.—Any loan discharged shall be reported to national credit bureaus as ‘Paid in Full / Account Closed’ to ensure maximum Debt-to-Income (DTI) recovery for the borrower.
(f) TAX TREATMENT.—Any discharge of indebtedness under this section shall be deemed a Qualified Student Loan Discharge under Section 108(f) of the Internal Revenue Code and shall be excluded from the borrower’s gross income for federal and state tax purposes.
(g) FEDERAL OVERSIGHT AND REVERSION.—
- COMPLIANCE AUDIT.—The Secretary, in coordination with the Consumer Financial Protection Bureau (CFPB), shall conduct a compliance review 120 days after any portfolio transfer.
- MANDATORY REVERSION.—If the Secretary determines that an Eligible State Entity has failed to implement the Principal-First Discharge Mandate within the 90-day window, legal title to the affected loan portfolio shall immediately revert to the Secretary of Education, and the State Entity shall be liable for the return of all federal acquisition funds.
