Supplementary Materials

Assist students who pursue lower-paying careers in important fields by making it easier to repay their college loans.

The Problem

The prospect of heavy debt burdens dissuades many college students from choosing careers in often low-paying-but-important fields like teaching, journalism, and social work. And students' worries are well-founded: a recent study of 1993 college graduates predictably found much higher loan-default rates among students with higher debt levels and lower incomes.

The federal government tries to help students who have taken low-paying jobs through the Income Contingent Repayment option (ICR). Created as part of the 1993 Direct Loans program, ICR helps students in low-paying careers maintain manageable monthly loan payments and it offers loan-forgiveness after 25 years of payments. But the program's effectiveness is limited by a lack of knowledge about the program among students and campus financial-aid officers and an ill-conceived tax levied on program participants.

As a result, the current program limits the potential of income-contingent repayment. Low participation rates are the primary problem. Many students who might otherwise benefit are deterred by a lack of information about the program and by its 25-year repayment schedule. For many, the repayment term overlaps with the need to fund their own children's education.

ICR should be redesigned to reduce students' anxiety about large debts, to encourage them to invest in their education, and to reward those who spend their careers in public service.

The Plan

The federal government should create a Career Opportunity College Loan Program (COC) that subsidizes education costs for students who spend careers in low-paying jobs.

COC loans would encourage more people to go to college, reduce financial-aid defaults rates, and give students a way to manage debt responsibly. Like the current ICR program, monthly payment amounts would be tied to a borrower's income level and loan forgiveness would only be offered to borrowers who spend careers in lower-paying fields.

But COC loans would differ from Income Contingent Repayment in three key ways:

1. The repayment term would be 15 years, after which the remaining loan amount would be forgiven. To have their loan balance wiped out, students would have to demonstrate 15 years of consistent employment and regular loan payments.

2. A tax on the portion of an ICR loan that is forgiven would be eliminated.

3. The U.S. Department of Education would actively promote the program with financial aid officers and increase awareness and understanding among students. Students repaying federal loans would get a yearly notice summarizing their loan debt and outlining the monthly payments and total cost of loans under several different repayment options, including Career Opportunity College Loans.

Under a 15-year repayment term, assuming a $15 minimum payment and a 6.8 percent interest rate, a dependent student graduating with the maximum amount of federal undergraduate student loans, $23,000, would receive some loan forgiveness with a starting salary of $31,000 or less.If that student's salary increased more than 4 percent a year, or if they experienced a sudden increase in salary, they would likely not receive any loan forgiveness.

A student with the maximum amount of dependent undergraduate and graduate loans, $65,500, would receive loan forgiveness with a starting salary of $38,000 or less.

Based on past debt and salary levels, and on participation patterns in alternative repayment programs, the program would cost about $250 million to $300 million a year.

According to the Congressional Budget Office, increased participation in the Federal Direct Lending Program, which COC Loans would be part of, would save the government money. The savings from the increased participation in FDLP that COC Loans would generate would offset some of the program's expense. With these savings, the program's net cost would be about $200 million annually.

By ensuring that students' monthly payments will never exceed a specified percentage of their income, Career Opportunity College Loans would assure students that they will not face overwhelming debt burdens from their student loans and can choose careers based more on a desire to do good than to do well. At the same time, Career Opportunity College Loans would not be a free ride. Students would still be responsible for paying back their loans over 15 years, and only those who truly need assistance would qualify for loan forgiveness.

The Politics

These new loans would carry real costs for some stakeholders in the student-lending game. In particular, private lenders would dislike this idea because it would give their biggest competitor, the Federal Direct Lending Program, a competitive advantage. Competition, however, might spur private lenders to provide repayment options that are more responsive to students' career choices. On the other side are parents and students who value public service but are anxious about increasing college costs and student debt. And there are far more parents and students than lenders.

Idea Eight: Help Students Who Help Others (43K) [download]

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