A Painkiller for Student Debt
The U.S. system of student loans is nobody's idea of a successful program. Default rates are near a two-decade high, burdening borrowers, the government and the economy as a whole. Yet programs intended to help prevent these personal fiascos -- by tying debtors' payments to a portion of their income -- don't reach the people who need them most.
Legislation introduced today by Republican Senator Marco Rubio of Florida and Democratic Senator Mark Warner of Virginia would help to change that. The bill would expand the income-based repayment plans already available, by automatically enrolling each new borrower in such a program. Borrowers would pay 10 percent of their annual income toward their debts, with the option to pay faster.
Automatic enrollment corrects the perverse incentives of the current system, in which those with the highest debts -- usually graduate students -- have the greatest reason to enroll. And it means the program is no longer limited to those who know enough to take advantage of it.
The proposal includes a second important feature: automatically deducting payments from borrowers' paychecks, unless they choose to opt out. That system, already in place in other countries, all but eliminates the risk of defaulting on loans. Borrowers would be paying a percentage of their income toward their debt, but when they are out of a job or earning less than $10,000 a year, their required payments would be zero.
Why won't this just encourage people not to work and stick the taxpayer with the bill? The legislation is designed not to impose enormous new costs by tightening the standards for loan forgiveness.
Under the current system, loans are forgiven after 20 years. The Rubio-Warner bill would retain that for students who borrow up to $57,500, but impose a longer forgiveness time -- 30 years -- for those who borrow more. That reduces the cost to the government, while, one hopes, creating a disincentive for students for spending more than they need to.
These changes won't fix what ails the financing of U.S. higher education. But they offer a sensible, practical and affordable way to clean up a mess this system created.
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