Easing the crush of student loans
There has been a great deal of focus recently on student loans, and for good reason: A generation of young people is being crushed under the weight of debt accumulated in pursuit of their educations. For many, this affects their ability to get started in life, to buy a car or house and to get married. Legitimate concerns are being raised about the impact of all this debt on the broader economy.
Washington is under pressure to act. This month, the Senate rejected a proposal by Sen. Elizabeth Warren, D-Massachusetts, to allow borrowers to refinance their loans at reduced rates. President Barack Obama announced that his administration would expand eligibility for his Pay As You Earn repayment plan, which caps a borrower's payments at 10 percent of income.
These approaches have one thing in common: They spend more money — in the case of Warren's proposal, $51 billion over 10 years — without addressing the underlying issues.
The first issue is the rising cost of college. No amount of loan refinancing can keep up with costs that continue to increase faster than family incomes. Since 1978, college costs have increased by 1,120 percent. This is a critical issue that deserves more attention.
The second issue is that the payoff from higher education is not always immediate. Our loan system is primarily built around making high, fixed payments beginning early in life. However, for many recent graduates, the initial years out of school are characterized by a struggle to get a job. Even after finding a job, most young people earn less initially and build their earnings as they gain experience and qualifications.
Requiring fixed payments on student debt during these volatile years yields a predictable result: a default rate of almost 15 percent on federal student loans within three years, with the average balance of a defaulted loan being only $14,500 — far from the sky-high debt levels typically highlighted in the media.
Our repayment system needs to match the circumstances young people face. Instead of fixed payments, we should link payments to an affordable percentage of income via an easy-to-use, automatically adjusting payroll deduction. This would ensure that loan payments follow a borrower's career progress, no matter what success or setbacks they face.
Yes, we have an option that links income and payments now. But few take advantage of it because navigating the process pretty much requires a degree in government bureaucracy. Students who use this option must file paperwork every year and, to deal with any income changes during the course of the year, submit pay stubs and other documentation to change payment amounts.
The president's focus has been on creating a similar option that is more generous, but his Pay As You Earn program is just as complicated. The reality is that most struggling borrowers will not take advantage of these plans.
Warren's proposal doesn't provide needed relief either. It may lower an unemployed graduate's fixed payments. But if you're struggling, lowering a payment from $350 to $300 a month will not be enough to prevent default in many cases. Linking borrowers' payments to an affordable percentage of income is the only surefire way to allow graduates to grow in their careers, repay their loans and live their lives.
In an effort to ensure that all borrowers have the benefit of this protection, I introduced bipartisan legislation last year that would automatically tie payments for federal loans to income. These reforms would allow millions of young Americans to get started in life without the anxiety of crushing payments and without committing taxpayers to billions in new spending.
Additionally, because each individual's obligation is a simple percentage of income, my legislation uses paycheck deduction to ensure that payment amounts automatically adjust to income changes in a way that is simple and free of paperwork for both borrowers and employers. This approach would not be required, but it has been used with great success in other countries, including the United Kingdom, where the default rate on student loans is around 2 percent.
To be sure, we must be careful not to create a system that rewards overborrowing or contributes to college cost increases. For this reason, my proposal does not include forgiveness after 10, 20 or 25 years, as is available now in some cases. Instead, the total amount of interest one could pay on a loan would be capped at half the loan's initial balance. Struggling borrowers would never face spiraling interest. Importantly, students would not be the only ones to benefit from this reform; less would be spent on debt collection and fewer students would default, resulting in significant savings to taxpayers.
This reform is not meant to be a comprehensive solution to the student debt issue. We must still tackle college costs through other reforms — such as embracing greater transparency and 21st-century educational models — that can shake up the status quo.
But the problems we face are not all rooted in college costs and unmanageable debt levels. By creating a streamlined and flexible repayment system, we can give young people the space they need to get started in life and prevent many of the struggles with delinquency and default we are seeing today.
— Tom Petri, a Republican, represents Wisconsin's 6th District in the House.