How to Overhaul the Student-Loan System

November 7, 2013
Wall Street Journal  
student loan news

In-state tuition, room, and board at four-year state schools have increased 34 percent over the past decade, adjusted for inflation, while average family income has fallen. Borrowing for college is considered a good investment, but it is still risky; about 15 percent of borrowers are in default three years after graduating. One way to help reduce debt among college grads would be to tie repayment to income -- meaning that the more that borrowers earn, the faster they pay back loans.

The government allows some borrowers to do this, but less than 7 percent of federal student loan borrowers are in income-driven plans.One reason for the low participation is that the plan is complicated, offering four different programs with individual rules. Also, not all borrowers or loans are eligible, and participants must recertify their income each year.

University of Michigan economist Susan Dynarski and her colleague Daniel Kreisman are proposing "a single, simple income-based repayment system to replace the current bewildering array of repayment options." Each borrower would have monthly payments set as a percentage of income: 3 percent of earnings for the first $10,000, increasing to 10 percent for earnings above $25,000. Contributing between 6 percent and 9 percent of earnings would pay off a typical loan in 10-15 years. Borrowers who have not earned enough to pay off a loan in 25 years would have the balance forgiven. The Dynarski-Kreisman plan, commissioned by think tank the Hamilton Project, would set interest rates high enough to cover costs and defaults so that taxpayers would not be on the hook.

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