Fixing Student-Loan Repayment

Kevin James

Fall 2015

In his 2010 State of the Union address, President Obama proposed allowing federal student-loan borrowers to cap their monthly payments at 10% of their discretionary income. Any borrower still paying under these terms after 20 years (ten years for anyone working in the public sector) could have the remaining balance of his loan forgiven at that point. In advocating these changes, President Obama argued that, "in the United States of America, no one should go broke because they chose to go to college."

When President Obama gave that speech, the federal Cohort Default Rate — the fraction of federal student-loan borrowers who default on their loans — was in the middle of a steady climb. The 2008 rate was relatively low — 8.4% of student borrowers defaulted on their loans within three years of leaving school. But the rate would increase from there, peaking in 2013 at 14.7%. The default rate receded slightly to 13.7% in 2014 with improvements in the economy, but it is still only slightly below its peak.

Concern about the number of borrowers who are struggling with student debt has grown with the rapid rise in loan defaults. For example, researchers at the New York Federal Reserve Bank recently looked at loan defaults over a longer window and found that 26% of borrowers leaving school in 2009 defaulted on a student loan (federal or private) at some point. The same group of researchers found that, beyond defaults, 37% of student-loan borrowers had experienced delinquency while repaying their loans. Scholars are also increasingly looking at the broader impact of student debt on the rest of the economy, including its effect on the ability of young Americans to purchase a home. For a sense of scale, a recent New America Foundation study noted that the number of federal student-loan program participants — 40 million — is roughly equivalent to the number of people over age 65 receiving Social Security benefits. The Department of Education estimates that, for those who borrow for their undergraduate educations, roughly one out of every five dollars in loans will go into default at some point.

In Congress, anxieties about this problem have manifested most visibly in continual fights over student-loan interest rates. In the summer of 2012, as low 3.4% rates were set to double on subsidized Stafford loans, Republicans agreed to a one-year, $6 billion extension of those rates after presidential candidate Mitt Romney came out in support of the idea. In the summer of 2013, coverage in the media reached a fever pitch as Congress missed the July 1 deadline, allowing rates to double. Fortunately, a group of bipartisan lawmakers in Congress was able to work out a deal tying student-loan interest rates to the market.

But the deal only bought Republicans a one-year reprieve: In the summer of 2014, Democrats made interest rates a national issue again by bringing Senator Elizabeth Warren's student-loan refinancing legislation to the forefront in the Senate — a move blocked by Republican filibuster. Now, in the summer of 2015 and with the 2016 presidential election rapidly approaching, Democrats have upped the ante again with proposals to make college tuition free or, under some proposals, "debt free."

As one might expect, conservatives have been critical of the notion that the federal government should simply counter rising student debt with various new subsidies — an approach many on the right suspect will only further accelerate the rise in tuition levels that got us here in the first place. They have typically argued that we must focus on the underlying dysfunctions in the higher-education system that are driving the student-debt problem. As conservative writer Reihan Salam noted in a 2012 article in Slate:

Cutting debt payments for cash-strapped borrowers is a nice gesture....But there is a much larger problem that the president's feel-good proposal fails to address, which is the fact that people who take on federal student loan debt aren't earning enough to pay it back. America's higher education institutions aren't offering value for money. And that's a problem that tinkering with the federal student loan program won't solve.

Salam is right about the importance of addressing growing costs and lapses in quality in this sector. Any long-term solution to the nation's student-debt woes therefore must include reforms to better align the interests of institutions with those of their students. There is a lively debate about ways to do this; proposals range from requiring institutions to pay a portion of their students' defaulted loans, to providing students and parents with better information about how a program's alumni have fared, to reducing barriers for low-cost, innovative providers of higher education. Conservatives have also suggested that replacing some of the federal student-loan market with private-sector alternatives would allow the market to enforce some discipline.

But these reforms would do nothing to address the dysfunctional repayment process confronting borrowers with federal loans. The current system does not adequately protect struggling borrowers, many of whom unnecessarily end up in default and financial ruin. Current borrower protections are wasteful and poorly targeted, often disproportionately benefiting better-off graduates who don't need the help. Generous loan-forgiveness policies diminish students' incentives to borrow responsibly, fueling tuition inflation and making it likely that taxpayers will be on the hook for large unpaid debts years down the road. And because Congress has patched the loan programs so many times over the years, the system has become so bewilderingly complex that even policy wonks have trouble keeping up; student borrowers trying to navigate the system for the first time don't stand a chance.

The left's solutions to these problems are attractive politically but expensive and ultimately counterproductive. Some of these ideas, such as reduced interest rates and loan refinancing, are wasteful, poorly targeted, and ineffective, but don't change the fundamentals of the debate. More recent free-college proposals, however, which would shift the industry toward a more centralized, public-monopoly model, are far more threatening to conservatives' longer-term goal of creating a higher-education system that is dynamic, competitive, and high quality.

It would be a mistake, then, for conservatives to ignore what happens on the back end of the federal loan process in their efforts to fix the front end. There are good reasons to provide borrowers with federal student loans some baseline level of protection against default. Borrowing for education is risky, because it is based on a bet about one's future earnings and it is not secured with collateral, so there is little recourse if students can't afford their obligations. Policymakers should therefore provide these borrowers with avenues for relief, and there are ways to do so without undermining important principles of personal and fiscal responsibility, which must undergird any federally subsidized student-loan program.


Before addressing actual policies, it's helpful to take a step back and look more closely at the unique characteristics of student loans. After all, while one is tempted to look at student loans through the same lens as other consumer loans, there are actually a number of ways in which they are fundamentally different. In turn, these distinct characteristics should lead us to think differently about the proper structure of student loans relative to other types of financial products available to consumers.

First, when students borrow, they are doing so based on their future income — not their current income as with car loans, mortgages, and other loans. In making their calculations, however, students often have little information about the educational quality of different schools, forcing them to rely on questionable indicators like a school's prestige or campus amenities or, in the case of some trade schools, flashy advertising. Furthermore, the full array of educational options that student loans can fund must be taken into account; they go not just to young adults deciding between majors, but also to those pursuing a workforce-oriented certificate or degree. The fact that most students are making these decisions at a relatively young age only compounds the likelihood that they will make unwise choices.

Second, even when students choose a worthwhile program at a good school, the payoff from education can occur over a very long time horizon, maybe even a student's entire career. Graduates are also likely to encounter periods of highs and lows, particularly in their first few years out of school. As a result, while a typical loan requires a borrower to make payments in fixed increments over the life of the repayment term, students do not typically earn their payoff from education in this way — they usually earn less initially and more over time, with some bumps along the way. Macroeconomic conditions can also exacerbate these challenges, as many college graduates discovered during the recent recession and the slow recovery as they struggled (and continue to struggle) to find jobs.

Third, education is expensive. The issue of student debt would be far less significant if the actual cost of post-secondary education were lower, at least compared to income. The costs aren't small, however: The average graduate from a public or private non-profit institution currently leaves school with approximately $35,000 in debt. While a manageable number for most college graduates, a debt this size can quickly become unmanageable for students who drop out without a credential or who struggle to find a well-paying job. This is particularly true for students from disadvantaged backgrounds whose families don't have the resources to help them if they run into trouble affording their payments.

Fourth, and finally, student loans are unsecured. For many borrowers, investing in an education may be the second-largest financial investment they ever make, second only to purchasing a house. But unlike buying a home, if an educational investment doesn't pay off, the borrower can't simply sell his education to repay the debt. More pointedly, a student borrower has little recourse if he can't repay his debt — a situation that is aggravated by the fact that student-loan debt is extremely difficult to discharge in bankruptcy. In short, it's possible for individuals to be stuck with a debt that they have little hope of repaying, based on a decision made in some cases at a very young age.

These characteristics make education a financially risky investment, one that can quickly leave even a responsible young person mired in tens of thousands of dollars of debt he can't afford to repay. Yet, despite these risks, some education after high school is an investment we want students to undertake in many cases, and one whose importance seems only to be growing in the modern economy. Sarah Turner, an economist at the University of Virginia, and Harvard's Christopher Avery wrote in a recent paper that enrolling in college is similar to "signing up for a lottery with large expected gains" — a good payoff generally, but one with a high degree of uncertainty. Given that debt is likely to remain an integral part of paying for school, policymakers ought to consider how to handle the fact that some borrowers — even those who made reasonable decisions up front — may not be able to repay their loans fully.

One option is to offer little to no relief to these struggling borrowers. Pursuing this course, however, would make borrowing for education even riskier — again, particularly for students from middle- and lower-income backgrounds who don't have robust family support to fall back on. Some might argue that this is not a bad thing. As George Leef, director of research for the John William Pope Center for Higher Education Policy, noted in September 2014 when arguing against "gentle" repayment options, "[i]n ordinary lending, where there are serious consequences for failure to repay in full, borrowers are cautious. They responsibly calculate the likely benefits against the costs, and if the costs seem to be greater, they don't borrow."

It's important to note, however, that while this policy would prevent some bad investments, it would also mean that many students who should go to school — students who are qualified and motivated — might not go. In other cases, those students might choose a cheaper but lower-quality option to avoid taking on debt when a higher-quality school would have served them better. Worse, these effects would be concentrated among lower- and middle-income students who are both more dependent on debt and also less able to take on the risk that debt without adequate protections would entail. And while some might argue that these students should instead work part-time to pay for school, evidence suggests that doing so significantly raises the odds that they will simply never finish their degree, further hurting their chances for economic advancement. In short, making it prohibitively risky for students from disadvantaged backgrounds to use debt — a critical tool for climbing the economic ladder — would have the effect of reinforcing differences in opportunity based on one's family circumstances.


Rather than offer no protections at all, there is another way to think about this issue. In other areas of life where we face risks, we often have tools available — insurance policies — to help us manage those risks. Health insurance, car insurance, life insurance, and other insurance products transfer some risk from individuals to a larger pool, making everyone in the group better off. These risk management tools don't represent a failure of personal responsibility — they are simply devices to help limit exposure to the inevitable uncertainty and risk associated with certain activities. In that same vein, paying for higher education is risky, and students need tools that enable them to finance their studies in ways that help manage that risk.

The right way forward is to restructure the federal-loan repayment process in a way that provides some protection from the financial risks of making a large, uncertain, and unsecured investment. This does not mean the process should not hold students accountable for their decisions; uncertainties aside, students obviously have a lot of control over how much their education truly ends up costing them, particularly in terms of how they choose to live while in school. But there are ways to protect borrowers from risk while still maintaining an overall foundation of personal responsibility and fairness.

These arguments are not new; in fact, they have traditionally come from conservative sources. In his 1955 essay "The Role of Government in Education," Milton Friedman pointed out that an investment in education "necessarily involves much risk. The average expected return may be high, but there is wide variation about the average." This, he said, makes investing in human capital different in key ways from investing in other types of physical capital.

For these and other reasons, the traditional method for financing higher education has been, as Friedman called it, "outright government subsidy." Under this model, the government simply provides free or highly subsidized education to eligible students. While problematic in several ways, Friedman focuses on the idea that this structure is simply unfair, using himself as an example at one point:

I might not have gone to college if I had not received a partial tuition scholarship from the state of New Jersey....As soon as I was graduated, I left the state and have never lived in New Jersey since. The scholarship enabled me to have a higher income than I otherwise would have been able to attain....[I]s there any reason why I should not have been required to repay New Jersey taxpayers?

Friedman is not entirely against subsidies for higher education: As he points out, there is some justification for subsidy when society benefits as a whole from someone's getting an education. But in general, what students need is the financial capital to make an investment — not to have that investment handed to them for free by taxpayers.

The traditional source of financial capital for an investment is a loan. Because borrowing for higher education is risky, however, Friedman argued that, instead of using "fixed money loans," students should repay their loans as a percentage of their after-school income, an idea known as "income-contingent financing." In this case, a borrower's payments adjust with his income over time, dropping during periods of low-income — such as at the beginning of his career or during bouts of unemployment — and rising during periods of high income. Ultimately, successful students repay their obligation in full; however, those whose educational investment does not pay off have built-in protection against a lifetime of debt servitude, such as forgiveness after several decades. Income-contingent financing, Friedman argued, is a far more efficient and equitable way to get students the financial capital they need while also providing some protections from risk.

Policymakers took notice of these arguments. In 1986, President Reagan proposed income-contingent repayment for one federal loan program, now known as the Perkins Loan program, as a substitute for an expensive and wasteful policy of forgiving borrowers' interest while they are in school. Interest subsidies like these are susceptible to Friedman's criticism of subsidies for higher education in general: They offer students a (partly) free education when many will go on to be quite successful and could easily repay their loans in full without the subsidy. At the same time, interest subsidies offer poor protections against financial risk: They offer all students a modest reduction in payments, without ensuring — as income-contingent payments would — that struggling borrowers with low incomes can actually afford their payments. Writing about this proposal in a 1987 New York Times op-ed, then-education secretary William Bennett argued:

One particular Administration proposal, Income Contingent Loans, represents the most serious attempt to improve student aid in 15 years. The loans would permit repayment schedules to be tailored to a student's income....[T]he American people have generously provided the tax dollars, grants and highly subsidized loans necessary to support higher education….[But] it is simply not fair to ask taxpayers, many of whom do not go to college, to pay more than their fair share of the tuition burden.

While Congress did not adopt President Reagan's plan, it took steps in that direction later when, in 1993, it added an income-contingent repayment (ICR) option to the Stafford Loan program. This allowed borrowers to pay a percentage of their incomes toward their federal loans and offered forgiveness to those who were still paying after 25 years. While this step may have seemed to proponents like a step forward, it more likely set U.S. policymakers down the wrong path in terms of how to implement these ideas effectively. Specifically, Congress implemented the ICR option in an extremely bureaucratic manner, not only in the design of the option itself but also in the fact that ICR was merely a new option added to the multitude that students must navigate. Furthermore, the ICR option set the precedent that policymakers in the U.S. could rely on loan forgiveness to protect borrowers persistently struggling to pay down their loans.

To fully understand other paths policymakers could have taken, consider that a number of other developed countries — Australia, New Zealand, and Great Britain — also took note of Friedman's ideas. These countries, however, adopted them on a broader scale, in a far more streamlined fashion, and, in Australia and New Zealand, without forgiveness. Specifically, in these countries all student-loan borrowers automatically pay their loans back as an affordable percentage of their income. Furthermore, while in Great Britain borrowers can have any remaining balance forgiven after 30 years, in Australia and New Zealand borrowers are not eligible for forgiveness after any set period — though interest rates are set low enough to enable almost all borrowers to make progress on their loans regardless of income. Overall, these reforms paralleled efforts in these countries to begin charging tuition to students, again, predicated on the notion that providing free college to a limited set of society's better-off students is ultimately a regressive policy.

These countries also adopted another reform advocated by Friedman, namely that "payment[s] could easily be combined with payment of income tax and so involve a minimum of additional administrative expense." More specifically, all three countries integrated student-loan payments into their employer withholding processes so that loan payments — set as a defined percentage of a student's earnings — could easily be collected alongside taxes at very low administrative cost. In comparison, U.S. borrowers using ICR must document their income so their servicer can set an appropriate monthly payment amount. As a borrower's income changes, he must re-document it in order to get the payment amount changed again. This cumbersome and bureaucratic process is akin to requiring everyone to pay his payroll taxes via monthly check. By making income-contingent repayment automatic and incorporating a streamlined repayment process that adjusts automatically to changes in borrower income, all three countries were able to implement ICR on a wide scale while avoiding the high default rates that have been prevalent with student loans in the U.S.


Unfortunately, instead of learning from the experiences of these countries, policymakers in the U.S. went in a different direction — prodding borrowers to use income-contingent options with increasingly generous terms, all the while making the system significantly more complex and bureaucratic. Frustrated by the ineffectiveness of the ICR option, in 2007 Congress created the income-based repayment (IBR) option. Like ICR, the IBR option offers forgiveness to borrowers after 25 years, but its terms are simpler, and it requires that borrowers pay a smaller percentage of their income — specifically, 15% of income above a generous exemption. At the same time, Congress created a new program, Public Service Loan Forgiveness (PSLF), which provides full loan forgiveness to borrowers using ICR or IBR who work in public service — defined as any position in government and most non-profits — after ten years.

Those reforms had barely been established when President Obama called on Congress to make the terms of IBR even more generous, requiring that borrowers pay only 10% of their discretionary income and offering forgiveness after 20 years instead of 25. Congress passed these changes as part of the Affordable Care Act in 2010, making these new terms available to borrowers starting in 2014. Still not satisfied, in late 2011 President Obama used his executive authority to create a new "Pay As You Earn" option, making these more generous terms available earlier than 2014. Finally, in subsequent executive actions, the president has made PAYE retroactively available to earlier borrowers who had access only to the original IBR terms.

By 2014, borrowers faced at least seven loan repayment options, four of them somehow based on income, as well as an array of ways to temporarily suspend payments through forbearance or deferments. Yet despite all the years of tinkering and patching, the Department of Education predicts that for the 2016 cohort of borrowers — who will have full access to PAYE — roughly 25% of undergraduate loan dollars will go into default at some point. And in contrast to hyperventilating media reports about borrowers with six-figure debt loads — most of whom are graduate students — the average borrower facing default with federal student loans owes roughly $14,000. While this may seem counterintuitive, many of these borrowers appear to be students who didn't complete a credential, leaving them in many ways worse off than when they started — with debt but no degree to increase their earning potential. These are the exact types of students who need effective income-contingent protections, yet the system's poor design results in many simply falling into default.

At the same time, however, these new reforms have been a windfall for other borrowers. A 2012 study published by the New America Foundation found that while PAYE was supposed to benefit borrowers with low incomes after school, the majority of the benefits will accrue to high-debt graduate students who can get substantial loan forgiveness even if they earn a high salary throughout their repayment term. A separate report by the Consumer Financial Protection Bureau estimated that as much as 25% of the workforce qualified for the "public service" designation under Congress's exceptionally broad definition, making them eligible for forgiveness under PSLF. Some borrowers have clearly taken notice: Tucked away in its budget released in early 2015, the Obama administration acknowledged that it now expects loans made to prior cohorts of students to bring in $21.8 billion less than previously estimated — an amount that, as was reported at the time, is larger than the annual budget for NASA.

To its credit, the Obama administration has proposed scaling back some of its original PAYE changes, though for now these generous terms remain available to all new borrowers. At the same time, the bureaucratic hurdles in the current system still leave "the most vulnerable, least sophisticated borrowers to fend for themselves," as writer Jordan Weissmann noted in a 2013 piece for the Atlantic. Speaking of this unfortunate status quo, the same researchers from the New America Foundation commented in 2012:

Federal student aid is an incoherent mix of complex benefits and rules that overlap and cancel each other out in ways that virtually no one understands. For that we may thank the lawmakers (and the advocates who encourage them) who have added to, tweaked, and changed eligibility rules for these programs time and time again without even a hint of a broad plan. It's time for a wholesale redesign of federal student aid.

All of this is a long way from President Reagan's original proposal to implement income-contingent repayment in exchange for eliminating wasteful interest subsidies. Almost three decades later, we still have the interest subsidies he spoke about, plus a lot more: Progressives have taken ICR and turned it into a vehicle for generous loan forgiveness rather than a tool to protect the most vulnerable borrowers from financial ruin. Fortunately, there are steps policymakers can take to invert this equation, providing all borrowers with a baseline of protection while re-emphasizing the importance of personal and fiscal responsibility.


Given recent events, it's safe to say that income-based repayment is a damaged brand on the right. This is understandable: The IBR option, particularly after President Obama made it more generous, has become synonymous with loan forgiveness on a large scale. As a result, the temptation is to completely scrap IBR and any options that resemble it, and move back to a system based on traditional, mortgage-style repayment schedules.

This would certainly accomplish the goal of reforming a policy that has become perverse under President Obama's watch. But it would be a mistake to do away entirely with the notion of linking payments to income; as mentioned earlier, financial risk is a significant issue in borrowing to pay for higher education, particularly for students from middle- and low-income backgrounds. Instead of abandoning the idea, therefore, policymakers should look back at paths not taken over two decades ago. Specifically, rather than layer option upon option — creating a byzantine repayment process that even experts struggle to navigate — Congress should focus on streamlining the system so all borrowers can easily link their payments to their income. Ideally, policymakers would link borrower payments to income automatically, following the lead of the other countries mentioned earlier. But simply cutting through the complex, tangled web of options that has grown up over time would be a significant step forward.

Lawmakers in Congress have put forward several bipartisan proposals in recent years to do just this: Legislation sponsored in the Senate by Virginia Democrat Mark Warner and Florida Republican Marco Rubio, and separate House legislation sponsored by now-retired Republican Tom Petri of Wisconsin and Democrat Jared Polis of Colorado, would tie borrowers' payments to income automatically. Furthermore, borrowing from Friedman's original idea and following the successful examples in Great Britain, Australia, and New Zealand, these bills would enable students to meet their obligations through employer withholding to eliminate the need to submit documentation of income changes, a significant source of wasteful bureaucracy and headache in the current system. Other legislation, such as a bill sponsored by Senators Angus King (an independent), Richard Burr (a Republican), and others, would reduce unnecessary repayment options to a core few that students could choose from, including a single plan tying payments to income.

But simplifying the process is only half of the equation. Policymakers must also reform the terms of the options to re-establish the importance of personal and fiscal responsibility. The most obvious place to start is the generous forgiveness terms now available to borrowers as a result of the Obama administration's reforms. As Andrew Kelly of the American Enterprise Institute put it in a 2012 essay, these most recent changes could transform the program into an "albatross around the neck of tomorrow's taxpayers." As he says, "If college costs and student loan debt continue their ascent while incomes lag behind, increasing numbers will qualify for the new version of IBR. And the more people that sign up, the more money the government will likely have to forgive 20 years later."

One possible improvement would tie the terms of forgiveness to the amount a student borrows. The authors of the original New America Foundation research identifying the problems with PAYE, Jason Delisle and Alex Holt, made a recommendation to this effect in their paper. The idea was that borrowers who take out smaller amounts of debt, relatively speaking — $40,000 in their recommendation — could still be eligible for the 20-year forgiveness term currently available through PAYE; borrowers with larger debts would have only the original 25-year forgiveness option. Their plan is based on the idea that, at the lower debt levels that are typical of undergraduates, it should be difficult for any borrower to obtain forgiveness after 20 years unless he is persistently earning a low income. The Warner-Rubio and King-Burr bills would make reforms along these lines, albeit with different numbers.

Another option is to do away with forgiveness entirely. The Reagan administration's income-contingent proposal mentioned earlier, for example, did not include forgiveness for borrowers after any time period. This would certainly restore the direct relationship between how much a student borrows and how much he repays. Eliminating forgiveness, however, is not without its challenges: Most notably, policymakers should be hesitant to put borrowers on a repayment plan that allows those who struggle with low income to face loan balances that grow without limit as interest accrues at an accelerating pace. Here again, however, other countries can provide examples of different approaches; in one of Australia's loan programs, for example, which has no forgiveness, borrowers pay a one-time fee upfront to cover the costs of the loan and then a zero real rate of interest moving forward. All borrowers then make payments linked to their income but don't face a headwind of interest accrual during periods when their income is lower. Advocating similar reforms in the U.S., Alex Holt of the New America Foundation wrote that these terms "would make the loans more transparent, cause less anxiety, and make the loan program better targeted to helping low-income borrowers." The Petri-Polis legislation proposed a modified version of this idea, eliminating forgiveness but capping the amount of interest that could ultimately accrue on a loan.

Aside from reforming or eliminating forgiveness, policymakers could tie the percentage of income students must pay to the amount borrowed. Under the current IBR option, borrowers make payments equal to 10% of their discretionary income regardless of how much they borrowed. Therefore, two graduates with different debt levels but the same income will have the same payments — one will simply pay for a longer time than the other. Instead, increasing the percentage of income a borrower will owe as he borrows more mimics how traditional loans operate. This is particularly important given that students will pay closer attention to how much they're going to pay right after leaving school. At the same time, this structure would still have all the benefits of linking payments to income.

Stepping back from loan terms, there is another aspect of federal loans that magnifies all of these current challenges. In 2006, Congress created a program, Grad PLUS, which allows graduate students to borrow up to an institution's costs annually, with no limit on the total amount. That is, graduate students are eligible for larger and larger loan amounts as the cost of graduate school increases over time. In contrast, dependent undergraduate borrowers are limited to between $5,500 and $7,500 per year with an aggregate limit of $31,000. Allowing graduate students to borrow without limit was a recipe for over-borrowing and tuition inflation even before the Obama administration's recent changes; combined with the generous forgiveness terms available through PAYE and PSLF, these policies create a toxic mix. Apart from other reforms, then, policymakers must take steps to re-impose limits on graduate borrowing.

Finally, by eliminating subsidies made obsolete by well-designed income-contingent reforms, policymakers could implement these changes in a way that is deficit neutral or possibly even saves money for taxpayers. This mirrors President Reagan's original proposal to replace a wasteful and inefficient system of interest subsidies with a more effective and efficient means of protecting student borrowers. In short, we don't need to spend more money to protect students struggling with federal student loans — we need to reform the loan system itself.


Progressives are clearly prioritizing proposals like debt-free college in the run-up to the 2016 presidential election. In response, conservatives would be right to contrast the left's proposals to shift more costs onto taxpayers with more sensible reforms that change the incentives of borrowers and, more importantly, colleges. Only through these "delivery system" reforms can we truly create a system that is both higher quality and less expensive to society as a whole.

That said, observers on the right should not forget that, whatever happens to the delivery system, students will still need effective financing tools to help pay for their education. Ideally, these tools would come increasingly from the private sector, and there are reforms policymakers can consider — all outside the scope of this essay — to help advance that cause. But at this moment, a significant fraction of American students rely on federal student loans to help pay for their education.

The federal loan-repayment process is badly broken. It manages to expose many borrowers to the possibility of default, while wasting large sums of money on poorly targeted interest subsidies and while contributing to misaligned incentives through generous loan-forgiveness programs. Absent constructive reforms, these policies will continue to leave a large wake of financial misery behind them — only strengthening progressive calls for more subsidies and free college. As a matter of both good policy and good politics, then, policymakers on the right should seize ideas that were once theirs and put them forward again constructively in order to better protect students and taxpayers.

Kevin James is a research fellow at the Center on Higher Education Reform at the American Enterprise Institute.


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