Income-contingent loans ‘could solve US student debt crisis’

Current loan system in US puts high repayment burdens on low-earning graduates, says paper

March 14, 2017
Student loan
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The introduction of income-contingent student loans in the US could solve the country’s student financing “crisis”, academics say.

Research from four economics scholars based in the UK, the US and Australia suggests that the adoption of the loans model used in Australia and England could alleviate the difficulties that US students face in repaying university debt.

US mortgage-style loans, such as Stafford loans, have fixed monthly repayments that are made over a set period, placing high repayment burdens on low-earning graduates, according to the paper, “Getting student financing right in the US: lessons from Australia and England”, from University College London’s Centre for Global Higher Education.

This means that default rates are “at an all-time high”, it says, mainly because of the very large repayment burdens for low-earning BA graduates early in their career.

In contrast, income-contingent loans mean that the regular amount to be paid by the student borrower depends on his or her income. This protects low-earning graduates from defaulting or experiencing financial difficulty, and simultaneously ensures that taxpayer subsidies are kept low, according to the researchers.

US graduates owe $1.3 trillion (£1 trillion) in student loans, with 7 million borrowers in default and even more in arrears, the paper adds.

“The US student loan system is in crisis,” it says.

The research was conducted by Nicholas Barr, professor of public economics at the London School of Economics; Bruce Chapman, director of policy impact at the Australian National University; Lorraine Dearden, professor of economics at the UCL Institute of Education and research fellow in education at the Institute for Fiscal Studies; and Susan Dynarski, professor of public policy, education and economics at the University of Michigan.

Using data from the US’ Current Population Survey, the paper argues that a “well-designed” income-contingent loan system would overcome the financing crisis in the US in a “simple, efficient, equitable and cost-effective way”.

It suggests that such a system should be based on current earnings and written off after a certain number of years or at retirement or death. Meanwhile, graduates with “good” earnings should repay all the loan, or for high earners more than 100 per cent, so that the loan can make a loss on graduates with low lifetime earnings, it adds.

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