Two Conservative Ideas for Fixing Student Loans
The Democrats are in the middle of a presidential primary and the Republicans are not, so lefty ideas about how to fix student debt — i.e., throwing taxpayer money at borrowers — have gotten a lot of media coverage. Less noted have been numerous better ideas emanating from the right.
As I argued at length in a print piece earlier this month, while the “crisis” here is overblown and massive new taxpayer handouts wholly unjustified, the system does need reform. Specifically, we need to do two things: (1) provide worthy students a way to fund their education without crippling their finances, but also without dumping their costs on everyone else; and (2) give colleges incentives to control their costs and stop admitting students who won’t benefit, and who might well drop out and/or end up defaulting on their loans.
Two recent papers from the Manhattan Institute nicely illustrate conservative ways of approaching these issues. And each touts an idea with some support in Congress.
The first, written by Jason Delisle and released today, makes the case for “income-share agreements.” Under these arrangements, a lender pays for a student’s education, and in return the student pays a set percentage of his income for a set number of years. This way, students pay for their education during the years when they’re benefiting from it the most — the years when their earnings are high — and are protected against big bills when they’re struggling.
Delisle’s proposal is to take this as a model for the entire student-loan program. The rule is simple: You can borrow up to $50,000, and for every $10,000 you borrow, you owe 1 percent of your earnings for the next 25 years (unless you first hit the repayment cap of 1.75 times the amount of the loan). If you get married, you pay for your ISA based on half the household income. If you make less than $12,000 or receive the earned-income tax credit, your payments are reduced or eliminated.
Everyone is entitled to nearly twice as much money as the typical four-year student borrows today, and no one ever loses more than 5 percent of his income repaying it. Further, collections are handled through the existing income-tax system, streamlining the process.
I might be inclined to expand students’ options beyond what Delisle offers. Students should be able to pick higher payments in exchange for shorter loans so they’re not still paying in their 40s, and to reduce their obligations by making extra payments. But the proposal is elegant and simple, showing how workable ISAs could be if we could build up political support for them. One bill in Congress would start the process of doing this by cleaning up some of the legal technicalities surrounding them, while another would give students a new option that’s fairly similar to an ISA, but we need some far more aggressive ideas like Delisle’s.
ISAs put the focus on how students pay, rather than putting colleges on the hook for helping students run up debts they can’t pay off. For that we can turn to another recent Manhattan Institute paper, by Beth Akers.
Akers promotes the concept of a “money-back guarantee.” It turns out that more than 100 colleges already have arrangements in which students get help paying off their loans if they end up not making very much money. In other words, these colleges voluntarily shoulder some of the risk that a student’s degree won’t pay off.
In this case it’s Congress that has the most aggressive proposal. Senator Josh Hawley has introduced a bill requiring colleges to pay off half the loans of students who default. This is a good idea, though, as I noted last week, the bill includes an odd provision trying to stop colleges from raising prices to cover this new liability, which is both practically challenging and economically questionable. (If a college hikes tuition so it can shoulder this new liability without changing anything else, it effectively “prices in” half the risk of default for its students, which is not the worst thing in the world. Ideally most colleges should cut costs instead, but it’s folly to try to mandate this across the board.)
ISAs and money-back guarantees are two different options, but they both aim to make college affordable without spending lots of taxpayer money on a disproportionately wealthy chunk of the population. Indeed, it would be possible to combine them: Loans could be provided through ISAs, and schools could be required to pitch in when their students aren’t paying those loans back.
That makes a lot more sense than taking hundreds of billions of taxpayer dollars and handing them over to some of the country’s most fortunate individuals.
