EASING THE BURDEN OF STUDENT LOAN REPAYMENT
College students face rising costs in two ways: first, tuition has risen as states have cut back on their support of higher education. Second, the number and frequency of course offerings have been reduced, increasing the time to graduation, which further adds to the student's total cost of education. In response, many students take out large loans and/or work long hours at low wages in the hope of building an educational asset of incalculable value that will last a lifetime. Various relief measures have been proposed, including “free college tuition” and student loan debt forgiveness.
Here's a plan targeted to the two trends that have imposed the greater repayment burden: the government/taxpayer share of higher education costs as well as the student loan repayment schedules.
Part I: Government/taxpayer Share
Taxes are already high; we cannot expect the taxpayer share of college tuition costs to be returned to 80% -- last seen in the 1970s -- let alone 100%, or “free college.” Since college graduates will, on average, eventually earn more than today’s average taxpayer, a free college education would involve a transfer from the average working person to those who will eventually be financially better off. Still, society at large does benefit from an educated populace, so the first part of the plan is a compromise taxpayer share of 50%.
Part II: Reformed Loan Repayment Schedule
To reduce the loan repayment burden, student loans should be spread over the earning years, a term of 30 to 40 years. As with other long-lived assets, such as houses and commercial buildings, the student loan term would reflect the life of the asset.
In addition, the annual dollar amount of the repayment should be capped at some low percentage of the graduate’s annual income -- e.g., 5%. With such a cap, the dollar amount would rise and fall with income until the debt is repaid in full, including interest. Because the years just after graduation are often low-income years (especially for students graduating during a recession or a slow national job-market recovery), the loan repayment burden is most pronounced during those years. A fixed percentage rather than a fixed monthly dollar amount would bring the pattern of repayment in line with the graduate’s pattern of earned income.
To see how this would work, consider a recent college graduate whose first job pays $36,000 per year. The student loan repayment would be capped at 5%, or $1800 per year, $150 per month. If after a time the student's income would rise to, say, $50,000, the cap would rise to $2500 per year or $208 per month. Of course, different percentage caps could be agreed-upon: if the cap were 3% of annual income, the yearly payment based on $36,000 per year income would be $1080, or, $90 per month. With such a fixed percentage cap formula in place, the repayment would fall automatically for the graduate who suffers a period of lower pay or even unemployment.
To assure a high repayment compliance, the loan should be collected by the federal internal revenue service; repayment would simply become part of paying taxes, which are not dischargeable in bankruptcy.
A properly designed loan system would enable college students to focus on maximizing the value of their educational asset, studying more hours per week, taking more rigorous courses and majors, and graduating sooner with higher grades. Their capacity to repay the loan would be increased by an enhanced learning experience and earlier entry into their chosen career path. College is a long-lived asset; both society and the students gain when we treat it that way.