With summer campaign season underway, the Democrats are looking to rouse young voters by offering them a break on their student debt. At the moment, liberal favorite Elizabeth Warren is championing a bill that would let borrowers save money by refinancing their old education loans at today’s low interest rates. By funding it with a tax hike on millionaires, however, the Massachusetts senator has all but guaranteed that the legislation will die should it ever reach the Republican-controlled House.
In other words, the bill is a glorified talking point. As President Obama put it when he backed the proposal this weekend, Warren’s bill will force the GOP to decide whether it wants to “protect young people from crushing debt, or protect tax breaks for millionaires.” In the meantime, the only real action is coming from the White House, which announced on Monday a series of modest but useful executive actions to help borrowers.
There’s a bit of irony here. While Democrats are busy turning America’s student debt crisis into campaign fodder, a Republican may actually have the single best plan for fixing it. His solution lacks the populist punch of Warren’s bill. But the idea could save millions of future borrowers from financial ruin without costing taxpayers a dime—which means that, if it could get enough attention, it might also stand a small chance of becoming law.
Since 1983, Tom Petri, a low-key House GOP congressman from Wisconsin, has advocated an idea that education wonks sometimes call “universal income-based repayment.” It would completely scrap the convoluted system that former students currently rely on to repay their loans. Instead, college debt would work like just tax withholding. A borrower would simply pay a set percentage of her monthly earnings to the government, deducted straight from her paycheck.
Countries including Britain, Australia, and New Zealand already take a similar approach. And, as many education experts have agreed, bringing it stateside would likely cure some of the worst symptoms of America’s student loan binge. It would ensure that every single borrower’s payments stayed manageable and virtually eliminate the risk of delinquencies and defaults.
Think of it as the financial equivalent of putting up gutter rails in a bowling alley—it’s a foolproof plan to stop borrowers from veering into trouble.
For example, let’s say a student borrowed $26,000 for college, at an average interest rate of about 4.7 percent. On a standard 10-year plan, she would owe $272 per month, every month. It might be affordable. It might not. On an income-based plan, however, she might owe 15 percent of her disposable earnings instead. With an adjusted gross income of $25,000, her bill might come to about $94 per month; at $38,000, it would be closer to $250. And if her earnings fell below a certain threshold, she’d pay nothing at all until her income rebounded.
The Department of Education does, in fact, already offer two income-based repayment options to hard-pressed borrowers. Unfortunately, they’re underpublicized and mired in red tape, so too few former students take advantage of their protections. Petri’s plan, or something similar, would solve that issue by making income-based repayment the automatic plan for all.
To understand why it would be such a sea change to make income-based repayment the default option, we need to talk about the complicated reasons why the U.S. is facing a student debt crisis to begin with. The first cause is obvious: Students are borrowing more than ever for school. Costs have whirled out of control across higher education, while unscrupulous for-profit schools in particular have made a killing overcharging millions of working-class students for possibly worthless degrees.
But the sheer scale of the student debt crisis is more mysterious than it may look at first. Neither the amount of debt that students pack on nor the shoddy job market of the past few years can fully explain why so many Americans are falling behind on their government loans. Of those borrowers who began repaying in 2010, almost 15 percent defaulted within three years, meaning they went at least nine months without paying. Last August the Consumer Financial Protection Bureau estimated that 6.5 million borrowers total were in default on their federal education loans—roughly equal to the populations of Los Angeles and Chicago combined.
This is both depressing and a bit odd. Given that student loans generally can’t be discharged in bankruptcy, defaulting on them doesn’t make much financial sense. The government will take you to court, garnish your wages, and demolish your credit rating long before it ever lets you off the hook on your college debt.