My new Chronicle of Higher Education column makes the case for converting the entire federal student loan system to income-contingent repayment, administered by the IRS. To illustrate why this is a good idea, consider the recent Vanity Fair article (now an e-book) about the Chad Harbach’s debut novel, The Art of Fielding.
In a nutshell, Harbach borrowed money to get an expensive Ivy League education and then a master’s degree. Instead of cashing in by developing world-destroying financial instruments, he spent the next decade doing culturally valuable but financially non-remunerative things like co-founding and editing N+1 and slaving away on his first book. In addition to the stress of working hard and having no money, he had loan collectors constantly hounding him for repayment. Then he finished his book, got a big advance, and landed on the best-seller list. After which he promptly wrote the student loan people a big check and now they’re not hounding him anymore.
Under an income-contingent loan system, loan payments are automatically deducted from your paycheck as a fixed percentage of your salary, just like income tax withholding. If your make more, you pay off your loan faster; if you make less, you pay off your loan more slowly. If your income drops below a certain threshold, you pay nothing. After a long time (say 25 years) any remaining balance is forgiven.
In other words, Chad Harbach’s pattern of repayments under an income-contingent loan system would have been pretty much the same as it was under the current system, except without the loan collectors constantly hounding him for repayment. When he had no money, he would have paid nothing. When he had a little, he would have paid a little. And when the fruits of his labor finally paid off, he would have paid a lot. Same transactions, but no psychic toll or middleman in between.
It’s important to remember that concepts like student loan “delinquency” and “default” are just that: concepts. They exist if we want them to exist and disappear if we want them to disappear. Under an income-contingent loan system, nobody ever defaults on a federal loan. The word “default” has no meaning in that context. No ruined credit, no debt collectors buying bad loans for pennies on the dollar, no punitive fines and penalties. And no additional cost to the taxpayer for forgiveness, since the government is already eating the cost of defaulted loans.
I note that in comments at the column a few people are already countering that federal income-based payment plans exist. Sure they do. And the fact that so many people are continuing to fall into delinquency and default tells you what you need to know about how well those programs are working. There’s a huge difference between a complex, eligibility-limited program you have to re-apply for every year and a simple program in which students are automatically enrolled. It’s the difference between a program that works and one that doesn’t.
A longer Education Sector policy paper explaining exactly how all of this would work will be published soon.