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Edited by: Brady Africk and Carter Hutchinson

Happy Thursday! In today’s newsletter, we examine the need for student loan risk sharing, the state of the Democratic Party, and the potential volatility of the US bond market.

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1. Student Loan Solutions

Topline: Universities receive $90 billion annually from the federal student loan program. The 10 largest beneficiaries of the student loan program receive more than $500 million each per year. AEI’s Preston Cooper writes that colleges should join taxpayers and borrowers to bear the risk of student loan borrowing.

Student Loan State of Play: Outstanding federal student loan debt stands at $1.7 trillion, with another $1 trillion expected to accrue over the next decade. One-fourth of student loans end in default, leaving borrowers with ruined credit scores, additional fees, and seizure of their wages and tax refunds. Taxpayers only recover 65 to 75 percent of the balances that these borrowers default on. A risk-sharing system would make colleges responsible for a portion of the consequences when loans are not repaid in full.

Risk Sharing in Brazil: Cooper points to Brazil as a potential model system for the US. In 2018, Brazil adopted a risk-sharing program targeting schools with high dropout rates and student loan defaults. These schools were required to reimburse the government 10 to 25 percent of the total loans granted to their students, and the new system incentivized substantial improvement. With similarities between the two university systems, Brazil’s success could indicate that risk sharing is worth attempting in the US.

“Requiring institutions to shoulder a portion of student loan risk would realign their incentives. Rather than maximizing student loan volume in any way possible, institutions would seek to disburse student loans only when they have a reasonable expectation that the loan will be repaid.”—Preston Cooper

2. Dems' Dire State

Topline: Modern Democrats are more liberal than ever before, with 55 percent describing their political views as liberal or very liberal. AEI’s Ruy Teixeira highlights the increasing extremes in the party and the decline of competitive Democratic-held districts as major problems for the future of the party.

Redistricting, Really? As new congressional maps crop up in states like Texas, Democrats claim they will match Republicans’ redistricting plans. There are fewer opportunities for Democrats to use new maps to pick up additional seats, and they are in places more likely to face institutional obstacles. Teixeira predicts that redistricting will not be the principal downfall of Democrats in the 2026 midterms but that instead the concentration of members in ever-less-competitive districts could hamper the party's electoral success.

2026 Implications: The Democrats’ median district now has a partisan lean of +13D, meaning it is 13 points more Democratic than the entire nation. Democratic politicians are more likely to be rewarded for extreme liberalism and a lack of cooperation, further alienating the working-class voters who moved toward Donald Trump in 2020 and 2024. Breaking with the dominant ideology and positions of the party is riskier for individual elected officials than ever before.

“Even if individual Democratic politicians wish to do so, the pressures to stay within the bounds of Democratic orthodoxy are enormous. Sticking with the true faith generates adulation from activists, favorable media coverage, and gushers of donations. Breaking ranks risks unhinged attacks on social media and accusations of helping the Right and undermining “democracy.” Not too many Democratic politicians want to take that risk.”—Ruy Teixeira

3. US Debt and the One Big Beautiful Bill Act

Topline: The US ratio of debt to gross domestic product (GDP) could reach 128 percent in 2034 due to new tax cuts in the One Big Beautiful Bill Act. Even sooner, in just the next year, AEI’s Desmond Lachman warns that the US bond market could face considerable volatility.

Tax Cut Troubles: The US debt has been high since before President Trump took office, and the One Big Beautiful Bill Act includes tax cuts projected to add around $5 trillion to the budget deficit. An increase in America’s debt-to-GDP ratio from 100 percent to 128 percent in less than 10 years would be a rate closer to what has been experienced by financially troubled countries like Greece.

Foreign Investment: The US government is highly unlikely to default on its debt because it borrows on its own currency through the Federal Reserve. However, foreigners own around 30 percent of all outstanding US debt. Those foreigners will likely be unwilling to continue financing the bond yields if they suspect that the US will print the dollars needed to pay its debt.

“A combination of a slowing economy and higher long-term interest rates won’t be good for the maintenance of today’s very elevated stock market valuations. By contrast, unsustainable public finances in both the U.S. and France are likely to give legs to this year’s extraordinary gold market rally, as investors have better and better reasons to question both the dollar and the euro’s underlying fundamentals.”—Desmond Lachman

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