Right now, students pay back their loans on a fixed repayment schedule. Students who are recent graduates or stopping their education for whatever reason usually make less money in the first few years. Almost 56% of US students struggle with loan repayment. (Kirszner & Mandell 2017) Income based repayment would pay a fixed percentage of their income toward their loans. Graduates who make more would pay the balance off sooner but if a struggling graduate falls below a certain income level; they are will pay a smaller percentage of their income or nothing at all. In 20-30 years, if full payment has not been received then the remaining loan would be forgiven but right now, tax would have to be paid on that forgiven amount.
Keywords: Student Loans, Repayment, Default, Income-based
It is Time to Talk About Student Loan Repayment
Student loans have become the elephant in the room of conversations. Many students attend college for an education that will allow them to pursue a career path to become financially independent. Unfortunately, student loans have become an albatross that hangs around the neck of many graduating students. Taxpayers do not want to be responsible for defaulted loans. Students do not want to have their credit damaged, more often than not for a long time, with a student loan default. It has become a never-ending balancing act.
Barely Keeping Head Above Water
The current student loan payback plan is structured on an inflexible fixed schedule regardless of employment or ability to pay student loans back. Recent graduates with “some college or an Associate degree, the unemployment rate was 3.8 percent in January 2017”. (BLS.gov 2017) In a recent study, many more students are underemployed (employed in a career that does not require a college degree). According to Burning Glass Technologies and Strada Institute for the Future of Work, “43 percent of workers are underemployed in their first job”. In addition, “College graduates who are underemployed in their first job are likely to still be underemployed up to 10 years later, and women are more likely to be caught in this trap than men”. The report also states that “the financial costs of underemployment are substantial: Underemployed recent graduates, on average, earn $10,000 less annually than graduates working in college-level jobs.” (Bittle, 2018)
Defaults Are On The Rise.
In September of 2017, The Washington Post reported, “People not making payments on their federal student loans within three years of leaving college has risen, reversing five years of reported declines in new defaults.” (Douglas-Gabriel, 2017) Currently, according to Forbes Magazine, the “2017 default rate for students graduating from public colleges is 11.5%”. (Friedman 2017)
Follow Their Lead?
In the 1950s, Nobel Prize winning economist, Milton Freidman proposed a similar idea of income-based repayment for US students. He wasn’t successful in seeing a program implemented in the US, but in other countries like Great Britain and Australia, income-based repayment has been implemented and is successful. “In Great Britain, 98% of students are meeting their student loan obligations by paying a fixed percentage of their paychecks toward their student loans.” (Kirszner ; Mandell 2017 In Australia, “When it comes time to repay the bill, the monthly amount has nothing to do with the sum borrowed. Instead, debtors earning more than AU$54,000 ($38,000) pay between 4 and 8 percent of their income, depending on how much they take home annually. Unemployment or illness? Payments temporarily cease, with no interest or penalties accruing to the borrower.” (Olen, 2015)
A Lifetime of Consequences.
There are long term consequences to student loan defaults. Student loans are not dischargeable in bankruptcy and only in certain situations are these loans forgiven. The detriments of a defaulted student loan can stay with a student for their lifetime. With their credit in crisis, students with defaulted loans can have difficulty buying a car, getting a mortgage to buy a house, and possibly limit their employment possibilities because of bad credit. Since defaults do not go away, “theoretically, there are senior citizens that could have garnishments taken from their (Social Security) checks”. (Kirszner ; Mandell 2017) Not only are there detriments to the student but also the economy as well. The study done by Burning Glass also “shows how vital the transition from education to employment is for graduates, with real, long-term consequences in lost individual career potential and income as well as national economic growth”. (Bittle, 2017)
In The Details.
There is a valid concern about the “additional interest costs of income-based repayment plan because the student is paying over a longer period of time”. (Kirszner ; Mandell 2017) Indeed, there will be additional interest paid on loans since it will take longer for payoff but the mounting costs of penalties and fines to rehabilitate and reconcile defaulted loans is much greater. Income based repayment should lead to the elimination defaulted loans.Like most great ideas, many people may wonder, “if this is such a great idea, why hasn’t it been implemented already?” (Kirszner ; Mandell 2017) Before the passing of Health Care and Education Reconciliation Act in 2010, the IRS and US Department of Education were dealing with a variety of private banks and loan companies and implementing such a program would be a logistical nightmare. “With this legislation, they were able to make the primary lender the US Department of Education, simplifying the enforcement of payment.” (Kirszner ; Mandell 2017) Things that are too good to be true often bring cause to credible skepticism. If student loans become less of a burden for graduating students, the problem of escalating college prices is solved as well? Unfortunately, no. The income contingent repayment plan will not solve escalating college prices but it is a fairer, efficient, and simpler way to handle student loan repayment. (Kirszner ; Mandell 2017)
Hope for the Overwhelmed.
Income contingent repayment plans are the most feasible solution to the problem of crushing student debt. It gives a graduate the chance to find employment that will make repaying their loan obligations much easier. It allows borrowers to have a reasonable, fair and ethical way to pay back what they have borrowed. The chance of a student repaying their loan will be greater if the burden was lighter. There will be less chance of a student to decide to intentionally default if efforts are made to work with them on their repayment. Most students want relief. Students struggling to repay their loans would be more apt to repay their obligations and not be a deadbeat, if they knew their repayment was based on their income. It would be relief that the amount repaid is for the money they borrowed for school plus reasonable interest without all the penalties, fees and extra interest added on. The implementation of this program is easier and ethically makes sense. Yes, the government needs to work harder to bring relief to students crushed by student loan debt.