In general, the economic returns to a college education have proved to be high. But for individual college graduates, the financial benefits are both variable and unpredictable. One important role of government is to provide some protection against those risks so that qualified citizens, regardless of wealth, can and will advance their education. Toward that end, well-designed student loan repayment policies should aim to ensure that borrowers with low post-college earnings do not face unmanageable payment expectations, and that those who are responsible and make manageable payments are not burdened with indefinite repayment obligations.
Such policies would help limit the risks of student loan debt for teachers, public health workers, members of the clergy, and others in lower paying but important jobs that require higher education, as well as borrowers faced with family medical crises and other unanticipated circumstances that contribute to unmanageable repayment burdens. However, the protections should not be so generous that they give borrowers an incentive to work less, earn less, or avoid repaying their loans.
The purpose of this white paper is to promote discussion among analysts, higher education and loan industry leaders, and policy makers from across the ideological spectrum about how to achieve a more rational and effective balance of borrower obligations and protections within our student loan system. This paper identifies some possible changes to current U.S. policies as a way of prompting constructive critiques and the development of additional ideas for practical reforms.
Attention to loan repayment burdens is important at this juncture for three reasons. First, more students are borrowing more for college than ever before. About two-thirds of baccalaureate recipients now graduate with debt, and their average debt has increased by more than 50 percent over the past decade after accounting for inflation. Even if tuition levels rise more slowly than they have in recent years, borrowing will continue to expand.
Second, interest rates are rising, adding significantly to borrower payment levels. The federal consolidation loans available in 2004-05, at rates below 3 percent for some, provided a welcome reprieve for many borrowers who were struggling with their payments (as well as a windfall for many who were not struggling). Those low, fixed rates are no longer available. A 6.8 percent interest rate on federal student loans, scheduled to take effect this coming July, will result in payments on a 10-year loan that are 20 percent higher than at last year’s low interest rate, more than doubling the total interest paid. In addition, some students are bumping up against aggregate loan limits in the federal loan programs. This causes them to turn to private loans, which generally carry much higher interest rates.
Finally, with these two trends come increasing concerns about the ability of students from low-income families to afford college. While grant aid is a more effective way of providing access to higher education, most low-income students find that they do need to borrow to get their degrees (88 percent of graduating Pell grant recipients carry student loan debt). In order to maintain and increase low-income enrollment in higher education, potential students – and those who advise them – need to have some confidence that borrowing for college will not drive them or their families to financial ruin.
The United States does provide relief to some borrowers in some circumstances. However, these policies are inconsistent, inadequate, and often difficult to understand. At the same time, this paper finds that significant improvements in consistency and effectiveness can be achieved without a radical overhaul of the current system. Building on the foundation of current borrower protections, options discussed include:
- Expanding upon current “economic hardship” protections for Stafford borrowers so they cover more borrowers and provide a sliding scale of interest subsidies based on need.
- Converting the current tax deduction for student loan interest into a refundable tax credit that provides relief to borrowers with high repayment burdens.
- Making income-contingent repayment more accessible to all borrowers, and adjusting the terms so they are simpler and more helpful to those who have high repayment burdens over long periods.
Section I of this paper examines the major components of student loan repayment policy: protected income, payment amount, subsidy, and scope. Examples from the United States and other countries illustrate how each of these components can affect repayment burdens.
Section II focuses on current U.S. repayment programs and policies, their strengths and weaknesses, and how they could be improved. These programs include: economic hardship; income contingent repayment; student loan interest tax deduction; extended, graduated and income sensitive repayment; loan forgiveness; and bankruptcy protections.
Section III offers questions that can guide further consideration of reforms. Appendices provide additional background information:
- Appendix A provides data on salaries of Americans with different levels of educational backgrounds, ethnicity, gender, and occupations. These data provide the reader with a sense of the likelihood that borrowers could end up with particular repayment burdens.
- Appendix B offers tables that show repayment burdens under the various current policies. They are compared against the benchmarks for manageable loan repayment developed by Sandy Baum and Saul Schwartz in a recent paper for the Project on Student Debt and the College Board.
- Appendix C provides a listing of sources and resources on the topics in this paper.
Contents
1 Executive Summary
4 Introduction
6 Section I: The Components of Student Loan Repayment Policy
12 Section II: Current U.S. Policies and How They Could Be Improved
23 Section III: Issues for Consideration
Appendices
25 A: The Tyranny of Averages: Education and Earnings
32 B: Repayment Burden
46 C: Resources by Topic
