Four Intriguing Proposals to Fix Student Loans

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For many in education policy, the current tortuous debate in Congress over interest rates on students loans is important—but also a bit of a sideshow. “Interest rates are just one piece of the student loan puzzle, and student loans are just one piece of the college affordability puzzle,” says Lauren Asher, president of the Institute for College Access & Success. With student debt growing ever larger, researchers and policy groups are questioning whether there might be a better way for Americans to pay for college. Here are four proposals to overhaul student loans.

Tie payments to income

Over the past several years, the Obama administration has rolled out four programs that allow struggling graduates to repay their loans based on a set percentage of their income. Under all but one of these Income-Based Repayment (IBR) programs, the remaining principal amount owed after 10 or 25 years is forgiven, depending on the plan. Student advocates and think tanks almost universally praise IBR for its focus on affordability, but the programs can be improved. They’re underenrolled because they haven’t been well publicized and require a lot of documentation, and until recently, the government didn’t give enough incentive for companies who collect student loan payments to implement them. The plans also provide disproportionally large benefits to graduate students. There are growing calls to clean up and simplify the IBR options,and then automatically enroll all students in one.

Oregon is pursing a plan that similarly ties payments to income—but without taking out loans in the first place. Under the “Pay It Forward” plan, students wouldn’t pay tuition up front when they enroll in school but instead pledge to pay a share of their income for 25 years after they graduate. The concept of not having to lay out any money immediately is appealing—although it was mischaracterized as “free tuition” in many headlines—but there are big questions about how the program would work and whether it would truly help the students most in need.

Tie loan limits to courses of study

Australia provides a model for a proposal (pdf) made by two professors at the University of Illinois at Urbana-Champaign and George Washington University. They say current IBR options focus too much on the “back end” of student debt—helping students after they have taken on heavy debt. They say federal policy could instead take into account the likely future income of a student when determining how much he or she can borrow in the first place. Australia does this by dividing academic programs into four different “bands” that have different loan limits based on the expected income of graduates and the importance of the studies to national priorities.

Flip the equation around

Several professors at the University of Wisconsin-Madison recently proposed (pdf) that all federal financial-aid funding should be given directly to colleges, rather than to students, based on the need of their student body. The professors argue this would let schools dramatically reduce, if not eliminate, tuition. And, importantly, it would give the government leverage to force performance requirements on the schools, such as keeping costs down and meeting specified graduation rates.

Beef up Pell Grants

When the Bill & Melinda Gates Foundation asked 15 organizations to “rethink” financial aid, 10 (pdf) came back saying the government should shore up and expand the Pell Grants given to needy students. Colleges increasingly use their own money on merit-based scholarships to attract wealthy students rather than those most in need. There’s evidence (pdf) that colleges do this in part by having Pell grants supplant aid they otherwise have given poor students. To combat this, the New America Foundation has proposed requiring colleges match the Pell Grants if their aid packages require low-income families to pay more than $10,000 a year. Colleges that don’t match the Pell Grants wouldn’t be eligible for any federal financial aid, including student loans.

The current Higher Education Act, which sets out financial aid policy, expires at the end of this year, which means Congress is about to embark on reauthorizing the bill. Congress took five years to reauthorize the last one, but even such a period may be too short for some of these more dramatic proposals. That doesn’t mean researchers wouldn’t love the new bill to include pilot programs to test some of these theoretical fixes.

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