America is Getting BORED with STAFFORDWhy we should look elsewhere for student loan reform.
By Ashni VermaPublished February 17, 2019
As college enrollment has increased, so has student debt, sparking a national repayment crisis that the Stafford Loan Program has been unable to address. This program, which offers direct subsidized loans to those eligible to receive federal aid for education, creates an unsustainable economic model that not only affects students, but also government bodies. In order to address the growing needs of college students and diminish federal inefficiency and waste, the U.S. Department of Education should look to the United Kingdom and Australia for alternative federal aid systems.
Current student debt is about equal to $1.3 trillion and will likely rise in the future. Student loans make up the second largest source of household debt and about 29% of all borrowers default. Although the majority of students take out moderately sized loans, borrowers are defaulting increasingly on loans of small amounts. Additionally, the crisis has had an extensive reach; the amounts that people borrow rose about 8% between 2001 and 2011, but the number of debtors increased by 16%. While the amounts by which students borrow has increased, the main issue of the debt crisis lies with the rapidly rising number of borrowers. According to one study, 40% of debtors who graduated in 2003-4 will have defaulted on their loans by 2023. The Stafford Loan Program has not only failed to make college more affordable, but it has plunged thousands into serious debt and financial turmoil.
Considering these failures, many have turned to the British and Australian idea of an income-based repayment plan as an alternative to the American system. As opposed to the mortgage-based style of the current program, in which borrowers pay a fixed amount for a certain number of years, an income-based plan mandates that borrowers must pay a fixed percentage of their income until the loan is paid off. This alternate policy has been implemented to great success in both Australia and the United Kingdom, and many experts on the American education system believe that it would be feasible in this country as well. Existing proposals for the U.S. stipulate that payments would start once a person reaches a certain level of income, so as not to impose too much of a financial burden on people just starting out in their fields.
Income-contingent loans would address the market failures that often accompany the current system. They would mitigate the effects of uninsured or risky investment in higher education. Although the government will still be investing in students without a form of collateral, borrowers will pay a percentage of their income until the loan is paid off. Before, the fixed amount that they would have to pay in the mortgage system could range in costliness for the debtor; especially during times of economic strife, this would cause many to default on their loans. With the income-contingent program, debtors do not pay until they reach a certain income threshold, and from there the monthly payments remain the same relative to their earnings. This would alleviate the stress caused by economic shocks and provide better insured loans for the lender. While there is still much research to be done on the ramifications of such a change, instituting an income-contingent loans system would help reduce loan defaults, which benefits both college students and the Department of Education.