Proposal For A Major Overhaul Of Student Loans

Erin Dillon, Education Sector, Washington, D.C.

Last year, the U.S. reached a troubling new milestone in higher education: for the first time, total
student loan debt in the country exceeded total credit card debt. Today, 56
percent of students have to borrow money to attend college, and the average
graduate leaves school $22,000 in debt.

That increasing debt load has placed major burdens on recent graduates and their
families. A growing number of students are unable to repay their loans. Last
year, the number of students who defaulted on their loans (and thus faced
consequences ranging from ruined credit ratings to revocation of professional
licenses) increased by 22 percent.

It doesn’t have to be this way. In a new Education Sector report, Affordable
At Last: A New Student Loan System, author Erin Dillon proposes a new system (income-contingent loans)

which would allow students to pay back loans on terms they can actually afford.

Economist Milton Friedman proposed the system as far back as 1955. Congressman Tom Petri (R-Wisc.)

continues to support income-contingent loans as the best way to simplify the student loan repayment
system, while also virtually eliminating defaults. Today, a number of countries
have adopted the income-contingent loan plan. Their experience is that
repayment rates go up and default rates are virtually eliminated—in the United
Kingdom, for example, more than 98 percent of loans are repaid.

The Obama Administration clearly recognizes the need to address the problem of student loans.

These changes include a plan to reduce borrowers’ monthly payments to 10 percent of their discretionary
income, with debt forgiveness after 20 years of repayment. A less generous
version of this proposal, known as Income Based Repayment or IBR, is already
available to those with federal student loan debt. But the program is currently
used by only 450,000 borrowers—out of a potential total of more than 36 million.
“Income-based repayment is a great option for struggling borrowers under the
existing loan system,” Dillon says. “But the existing system needs to change—borrowers need more than another
repayment option.”

As Dillon suggests, an income-contingent loan repayment program could be put

in place using the IRS. Students would all be offered loans at a single interest rate.

After graduation, the government would
collect payments on their loans through their employer, with adjustments made
automatically depending on the borrower’s income.

The exploding growth in student loan debt, along
with what Dillon calls a “relentless shifting of college expenses from the
public to students and parents,” demands a rethinking of how we finance higher
education. Affordable At Last offers one effective way to
increase the numbers of students who repay their student loans—while virtually
eliminating the prospect of student loan default.

Read Affordable At Last here.