Most of the recent discussions about student debt have centered on the prospect of forgiving that debt — telling borrowers they don’t have to pay back the funds the federal government provided to help them pay for college or grad school .
That fierce debates reviews of the pros and cons of such policies rarely focus on the benefits of lending to students or what debt relief today would mean for students borrowing tomorrow, next year, and for the foreseeable future.
Should President Biden cancel outstanding student debt, it would not relieve students of their dependence on borrowing in the future. When student loans are forgiven, some parents may receive cancellation notices on their student loans the same day their children sign contracts for their own loans.
Read: Here’s how Biden could move to calling in student loans
Most people coming out of high school want to go to college for good reason, and most of their parents can’t afford to cover all the expenses. Adults returning to school to improve their chances in the labor market rarely have the money to pay in advance. But while governments help with grants and subsidies for public colleges, we as a society are quite clearly unwilling to pay taxes at the rate necessary to foot the bill for people who cannot afford to pay .
Borrowing money to fund an investment with a high expected return is rational. Entrepreneurs with business plans do this every day. And like higher education today, other major investments in the history of US economic growth – railroads, chemicals, electricity – depend on federally provided loan subsidies. Just ask Elon Musk: Tesla was a big beneficiary of government subsidies in its early years.
Government-backed loans have been a core element of higher education funding in the United States since Lyndon Johnson placed federal loans at the center of his efforts to remove financial barriers to higher education through the Higher Education Act of 1965.
Recognizing the need for an ongoing government student loan system puts the design of that system at the forefront. The current system is deeply flawed. It can be strengthened so that students continue to have access to this important funding without facing undue burdens when it comes to repayment.
The following potential changes would change our student loan system so that it can improve opportunities for students from diverse backgrounds.
First, higher education has a high average return, but it doesn’t pay off for everyone. Some students leave school without a degree and never enjoy the earnings boost they hoped for. Some earn degrees that don’t pay well, either because their chosen careers pay poorly or they can’t find good jobs
A sound financing plan will reduce the proportion of borrowers whose investments fail, by holding institutions accountable for student outcomes, and by barring schools that do not serve students well from eligibility for government college aid programs. The federal government should work vigorously to implement such restrictions.
But some insurance against bad outcomes is a prerequisite for a credit system that leaves no personal crises in its wake. Because of this, income-based loans (ICLs), where monthly payments are limited to an affordable percentage of the borrower’s income, are becoming increasingly popular in both the United States and other countries. ICL programs generally provide for the waiver of any balance unpaid after a certain number of years.
In the US, we implemented piecemeal reforms that gave borrowers a bewildering array of repayment schedules to choose from—some income-based 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 adjusted immediately if borrowers lose their jobs or experience other significant changes in their income.
In the US, one-third of borrowers who have taken the steps to register with ICL are required to submit annual income verification documentation. Many fall out of the plan because of this requirement. Many are still in default on their loans — albeit at a lower percentage than those on other plans.
The automatic ICL will remove the private credit service providers that the federal government contracts with to provide advice to borrowers and process their payments. This system was widespread problems of inefficiency and corruption.
But the payment structure also needs to change. There are frequent calls for a reduction expected payments. The personal circumstances of some borrowers certainly make their payments straining, but for most current 10% incomes that exceed 150% of the poverty line are not straining.
That means raising the threshold for starting payments 200% of the poverty line it would be closer to evaluate only those merits that are above those of typical high school graduates.
Borrowers whose monthly payments don’t cover the interest charged see their loan balances grow, even if they have a good reputation. Limiting the accruing interest would alleviate this problem.
A disproportionate amount of loan forgiveness under ICL is projected to go to those who borrowed for grad school. Most people who seek larger public subsidies for students do not have these students in mind. While there are strict federal government limits on the amount of undergraduate student loans, this is not the case for graduate students. Imposing such restrictions would reduce costs for taxpayers and direct the system more equitably towards improving access to and success in basic education
For borrowers who don’t repay their debt in full before the balances are forgiven (typically after 20 years for undergraduate borrowers), the repayment amount depends only on their income paths, not the amount they borrowed. This is a giveaway to those with high levels of debt and unfair to those who have taken the trouble to keep their borrowing low. Tying the time to forgiveness to the amount borrowed could solve this problem.
We have more detailed guidelines to strengthen the ICL system elsewhere. In an environment where alleviating the current difficulty in paying off loans is critical, both politically and economically, we should maintain the fundamental purpose of student loans, which is to help more people get into college and thrive be. To achieve this goal, we need to better steer students away from educational opportunities that serve them ill, while ensuring that students whose education has made them prosperous pay back their loans.
Aside from dramatically reshaping our tax system and the resources available to fund higher education and meet student expenses while they are in school, eliminating government student loans would severely limit educational opportunities in the United States. Fixing the current system is the best approach to maintain and expand 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, Minn. They are the authors of “Can college level the playing field? Higher education in an unequal society.”
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https://www.marketwatch.com/story/our-student-loan-system-needs-fixing-and-this-change-would-be-smarter-than-just-forgiving-debt-11652356325?rss=1&siteid=rss Opinion: Our student loan system needs fixing – and that change would be wiser than just debt relief