A BETTER WAY TO PAY FOR HIGHER ED? "Smart Loans"

A BETTER WAY TO PAY FOR HIGHER ED?

Former Governor, current Washington, D.C. real estate speculator Eliot Spitzer writes up a good idea for his column this week. It's a different way of paying college bills:

Marketed under the decidedly unappealing name of "income-contingent loans"—how about we call them "smart loans" instead?—the concept is simple: Instead of paying upfront or taking loans with repayment schedules unrelated to income, students would accept an obligation to pay a fixed percentage of their income for a specified period of time, regardless of the income level achieved. Suppose a university charged $40,000 a year in annual tuition. A standard 20-year loan in the amount of $160,000 (40,000 times four) would produce an immediate postgraduate debt obligation of $1,228.50 per month, or $14,742 per year, not sustainable at a salary of $25,000 or anything close to it. Under a smart loan program, the student could pay about 11 percent of his income, with an initial payback of $243 per month, or $2,916 per year, which is feasible at a job paying $25,000. If, after five years, the student's salary jumped to $100,000, payments would jump accordingly and move up over time as income increases. After 20 years, assuming ordinary income increase, the loan would be paid off.
Spitzer further notes that the program could be administered by the IRS and be adjusted in various ways to subsidize the under-privileged, or make payments graduated on a progressive scale. It would also allow for the continued public-private mix of higher ed options in the U.S. -- the government is already heavily involved with the student loan process, so don't sing me a song about increasing government power -- while removing crushing financial burdens from both parents and students. Maybe the best part is that it already in use in Australia (tell that to conservatives) and in Europe (tell that to the liberals).

One thing that Spitzer doesn't mention: A little googling reveals this is already an option in the United States. If you participate in the Federal Direct Lending program -- which could soon be the central government-run student loan program -- you can apparently choose an income contingent repayment plan. But currently FDL makes up a small percentage of overall student loans, and apparently ICR is limited even within that sphere. Expanding it looks to be a smart idea to help students and their families, and I'd be interested to hear what policy critiques exist of this plan. I can already guess the political critiques exist. Hint: most of them come from the federally subsidized student lending industry.

-- Tim Fernholz

Posted by Tim Fernholz on March 6, 2009 8:50 AM |