Opinion: Our student loan system needs fixing — and that change would be smarter than just canceling debt
Much of the recent talk of student debt has focused on the possibility of canceling that debt, telling borrowers they don’t have to repay the funds the federal government has provided to help pay for their college education. or higher.
Fierce debates about the pros and cons of such a policy rarely focus on the benefits of extending student credit or what debt cancellation would mean today for students borrowing tomorrow, the next year and for the foreseeable future.
If President Biden canceled outstanding student debt, it would not absolve students from depending on borrowing in the future. Indeed, if student loans are canceled, some parents may receive cancellation notices for their student loans the same day their children sign agreements for their own loans.
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Most people who come out of high school want to go to college for a reason, and most of their parents can’t afford to cover all the costs. Adults who return to school to improve their labor market opportunities rarely have the money to pay up front. Yet while governments help with grants and subsidies to public colleges, as a society we are quite clearly reluctant to pay taxes at the level needed to foot the bills of people who cannot afford to pay.
Borrowing to finance an investment with a high expected rate of return is rational. Entrepreneurs with business plans do it every day. And as with higher education today, other major investments in the history of American economic growth—railroads, chemicals, electricity—have relied on federally subsidized loans. Just ask Elon Musk: Tesla was a major recipient of government subsidies in its early years.
Government-backed loans have been a central part of funding higher education in the United States ever since Lyndon Johnson made federal loans central to his efforts to remove financial barriers to college education through the Higher Education Act 1965.
Recognizing the need for a permanent federal student loan system brings the design of that system to the fore. The current system is deeply flawed. It can be strengthened so that students continue to have access to this essential funding without having to face excessive charges when it comes time to repay.
The following achievable changes would alter our student loan system so that it can improve opportunities for students from all backgrounds.
First, higher education has a high average rate of return, but it is not profitable for everyone. Some students leave school without a degree and never get the increased income they hoped for. Some get degrees that don’t pay well, either because the professions they choose are low paying or because they can’t find good jobs.
A strong funding plan will reduce the share of borrowers whose investments do not return by holding institutions accountable for student outcomes, excluding schools that do not serve students well from eligibility for federal student aid programs. The federal government should act forcefully to implement such restrictions.
But some insurance against poor performance is a requirement for a lending system that does not leave personal crises in its wake. For this reason, income-contingent loans (ICLs), where monthly payments are limited to an affordable share of borrowers’ income, are becoming increasingly popular in the United States and other countries. ICL programs generally provide that any outstanding balance after a certain number of years will be cancelled.
In the United States, we have made piecemeal reforms, with borrowers choosing from a confusing array of repayment plans – some based on income and others with fixed monthly payments.
In the UK and Australia, all borrowers are automatically placed in ICL. Payments are collected through the tax system and adjust immediately when borrowers lose their jobs or experience other significant changes in income.
In the United States, one-third of borrowers who have taken the steps to register with ICL must provide documents to verify their income each year. Many fall out of plan due to this requirement. Many are still defaulting on their loans, although a lower share than among those in other plans.
Making ICL automatic will cut out the private loan servicers that the federal government contracts with to advise borrowers and process their payments. This system is plagued with problems of inefficiency and corruption.
But the payout structure also needs to be changed. There are frequent calls to reduce expected payments. The personal circumstances of some borrowers certainly make their payments onerous, but for most, the 10% of current income above 150% of the poverty line is not onerous.
That said, raising the down payment threshold to 200% of the poverty line would come closer to assessing only incomes above those of typical high school graduates.
Borrowers whose monthly payments do not cover the interest charged see their loan balance increase, even when they are in good standing. Limiting the amount of interest that can accrue would alleviate this problem.
A disproportionate share of loan forgiveness under the ICL is expected to go to those who borrowed for higher education. Most people hungry for bigger government grants for students don’t think about these students. Although there are strict limits on the amount that undergraduates can borrow from the federal government, this is not the case for graduate students. Imposing such limits would reduce the cost to taxpayers and allow the system to more equitably target improving access to and success in undergraduate education.
For borrowers who do not fully repay their debts before balances are canceled (usually after 20 years for undergraduate borrowers), the amount they repay depends solely on their income trajectories, not how much they they borrowed. It is a gift for those who have large debts and unfair for those who have made the effort to limit their borrowings. Linking the repayment period to the amount borrowed could solve this problem.
We have other detailed guidelines for strengthening the ICL system elsewhere. In an environment where easing current loan repayment difficulties is politically and economically critical, we should retain the fundamental purpose of student loans, which is to help more people attend and succeed in college. To achieve this goal, we must do a better job of steering students away from educational options that will serve them poorly while ensuring that students whose education has helped them thrive repay their loans.
Unless there is a radical transformation of our tax system and the resources available to pay for higher education and cover student expenses while they are in school, the elimination of federal student loans would severely limit educational opportunities. in the USA. Fixing the current system is the best approach to preserve and increase these opportunities.
Sandy Baum is a nonresident senior fellow at the Center on Education Data and Policy at the Urban Institute and professor emeritus of economics at Skidmore College in Saratoga Springs, NY Michael McPherson is president emeritus of the Spencer Foundation and Macalester College in Saint Paul, min. They are the authors of “Can College Level the Playing Field? Higher education in an unequal society.
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