Yesterday’s New York Times reported on a recent study showing that (surprise!) students who graduated from college in 2010 had a tough time finding a job, and those who did find a job received a lower average starting salary than students graduating a couple years ahead of them. But they did keep up with prior years of college grads in one measure – student debt. 2010 graduates had the same median debt levels as prior years ($20,000) and similar rates of borrowing.
The combination of poor job prospects and high debt leaves the ‘Great Recession’ generation of college grads in a tough spot. According to the study, median starting salary for students graduating in 2009 or 2010 was $27,000. Based on FinAid’s handy loan calculator, that’s not enough to comfortably repay the median debt load of $20,000 over 10 years.
The 2009 and 2010 graduates are fortunate that they have income-based repayment available, which allows them to repay their loans as a percent of their income. But IBR requires students to file paperwork to enroll and file more paperwork if their income situation changes. Ditto for other options available to postpone or reduce payments, like forbearance and deferment.
Having an assortment of programs, all with their own rules and paperwork, to help struggling borrowers may make sense if those borrowers are the exception. But when median starting salaries aren’t enough to comfortably cover median debt loads, we probably need to start thinking about a system that treats repayment struggles as the rule, not the exception.
It just doesn’t make much sense to place the heaviest repayment burden on borrowers when they’re first starting out in their careers. And it’s unrealistic to expect an 18 year old to accurately predict the economy four years from when they’re agreeing to take on thousands of dollars in debt–according to the study, 39 percent of 2009 and 2010 graduates were earning ‘a lot less’ than expected in their first job.
So what would a new, better repayment system look like? Well, it would look a lot like what they’re already doing in Australia, New Zealand and the UK. Those countries use income-contingent loans – all student borrowers automatically repay their debt as a percent of their income, without any arbitrary timelines for repayment. Those who earn more, pay more each month. Those who earn less pay less each month and take longer to repay the debt. Loan payments are collected through the tax system, which lowers administrative costs and allows payments to automatically adjust with changes in earnings and employment.
This really isn’t a far step from where we are now – the federal government already makes and collects (via third party vendors) all the new student loans. Now we just need to change our mindset from repaying based on arbitrary time lines to repaying based on actual ability to pay.