Affordable at Last: A New Student Loan System

Reports & Briefs | October 28, 2011
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Last year, the United States reached a troubling new milestone in higher education: for the first time, total student loan debt in the United States exceeded total credit card debt. It’s a development that should have come as no surprise. Over the past 15 years, the amount that students borrow to finance their postsecondary education has grown by every available measure: between 1993 and 2008, the percentage of bachelor’s degree recipients who borrowed for their educations jumped from 49 percent to 66 percent, with average total debt at graduation increasing over 50 percent, from $15,149 to $24,700. Borrowing money to go to college, like borrowing money to buy houses and cars, is fast becoming a fact of American life—and so, it is turning out, is the struggle to pay it back.

As with home mortgages, student loans are often billed as “good debt”—the sort of borrowing that, in the case of education, will ultimately pay off in the form of higher future earnings, better career options, and more stable employment. Happily for many students, debt does bring all of these dividends. But for others, school debt can be as toxic, or even more toxic, than the loan burdens from an overused MasterCard or Visa. Recent research shows that 56 percent of student borrowers had trouble making loan payments within five years of leaving school. Among those who left school without a degree, just 26 percent were making on-time payments. That means that more than half of student borrowers were in deferment, forbearance, delinquency, or default. The consequences of such circumstances are severe: students who default face everything from ballooning repayments and wage garnishment to ruined credit ratings and revocation of professional licenses. Meanwhile, because most student loans are guaranteed by the federal government, taxpayers must pick up the tab.

It doesn’t have to be this way. Recent federal reforms, which cut private loan companies out of the federal student loan program, have brought a rare opportunity for the government to abandon this rigid and punitive system in favor of one that is more flexible and forgiving—one that allows students to pay back loans on terms they can actually afford. Such a system would adopt the financing instrument known as the income-contingent loan, which allows borrowers to repay their debts based on their incomes. Economist Milton Friedman proposed this system as far back as 1955, and other countries have successfully used it as their primary repayment method for at least a decade. If the United States ever hopes to clean up the wasteful, complex, burdensome mess that is the student loan system today, it should adopt the income-contingent loan as its sole method for repaying debt.

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