Income contingent student loans is undeniably an attractive alternative for repayment of student loans. The concept, currently used in both Australia and Britain, allows the student to repay their student loan based on a percentage of their annual income. If you think about it, a student will likely earn less in their years following their graduation and their income should rise as the years goes by. It also allows students that cannot find a job immediately following college because of the overall weakness of the economy, to not have to start paying on their loans immediately. Little or no income would mean no payments required. With an income-contingent loan, if payments were required the payments would be automatically withdrawn from their paycheck and as their income rises, their payment would rise.
Currently, students are required to pay back the loans on a loan amortized over 10 years with a fixed payment. Students are struggling to pay those fixed payments due to lower starting salaries, inability to find jobs and high payment requirements due to high debt levels. Loan defaults are quickly and sharply on the rise. The US Department of Education reported that "borrowers whose first loan repayments came due between Oct. 1, 2008, and Sept. 30, 2009, and of those borrowers, defaulted before Sept. 30, 2010 was more than 320,000. Those borrowers who defaulted after the two-year period are not counted as defaulters in this data set." This is a staggering statistic especially considering this is not even counting the 2nd year default rates.
The down falls of this system for the student has a single negative point. Longer loan periods, mean additional interest is paid over the life of the loan. However, additional interest is much preferable to having to default on the student loan and having issues with their credit for the long term. In the current system, student loans are almost never discharged in bankruptcy but under the income contingent loan systems, loans not paid in a period of 20 or 30 years are discharged.
56% of American borrowers struggle to repay loans after the first five years as compared to the fact the 98% of the British borrowers meeting their loan obligations. This is a significant difference. Also, since the federal government is now handling the all of the federal loans (no banks handle federal student loans), the system should be somewhat simple since the income reporting from the IRS will only have to be reported to one entity, the US Department of Education. This should be a relatively easy.
With the decrease of defaults, with the cost of hiring collection agencies, with less former students suffering from ruined credit and a system that seems fair and reasonable, I am hoping for a change to the system very soon. I believe the income contingent loans is a definite improvement over the current loan programs!
Thank you, Cindy, for your enlightened post on the contingency student loan repayment potential option. As a student facing astronomical student loan debt upon graduation in the spring, I am more than a little concerned about my ability to make the payments on my current salary. I have been making payments all along on my loan debt but it really has not made much of a dent.
ReplyDeleteThe only alternative to amassing such a large debt possibly unmanageable payment size would have been for me to pursue a degree in an area other than higher education with better income opportunities. However, at this stage of my life I was unwilling to pursue a degree based on earning potential rather than personal reward. An income based repayment plan as described in the article would be a financially feasible plan I could manage.
One drawback mentioned briefly in the article was that the burden of partially forgiven loans to would fall to taxpayers. It did not explain how bearing that burden would affect taxpayers specifically and I would like to know more about it.
Does anybody have any further information on the specifics of the effect of contingency student loan repayment on taxpayers??????
Hi Cindy and Janet. As a former financial services professional myself, I agree there are many benefits (as Cindy summarizes so well) associated with income-contingent lending.
ReplyDeleteI tried to find some dissenting opinions for the sake of balance. One I found ( http://marginalrevolution.com/marginalrevolution/2010/03/markets-in-everything-invest-in-people.html ) reminisced about a small program instituted at Yale in the 1970s, that apparently only pooled and aggregated the earnings of a small sample of Yale grads. The program allegedly fell apart due to supposed inequities in the system -eventual high earners balked and then reneged on their payments when realizing that they were contributing far more payment to the pool over time than lower income earners and deadbeats.
Of course, in a much larger and federally-guaranteed program, problems of scale like the Yale program could be avoided. In considering Janet's question, I haven't yet found specific studies exploring how much taxpayers might be impacted by subsidizing income-contingent loans, including defaults. The thing is, taxpayers have always been on the hook with respect to subsidizing Government-guaranteed student loans, and I am not sure how much more (or less) taxpayers would be on the hook under this newly proposed system. But with the Obama Administration recently taking the for-profit middlemen banks out of the equation, prospects for more efficient lending beckon.
One way in which more program management costs might be added into this income-contingent lending program as compared to the direct student loan concept, is the need to better track and validate career changes (with concomitant income changes) over time. Folks change jobs more often than they used to, and current historically high levels of unemployment (especially among college grads) may or may not level out in the years to come as our national/global economy continues to transform. And with the combined national student loan debt currently now exceeding a rather frightening total of 1 trillion dollars, would stretching out such large current and future debt loads over longer average terms become a net negative drag on national and regional economies compared to the current student loan system? All important questions to research from a (hopefully) bipartisan standpoint.
I am in complete agreement with you, Janet! As a new grad student (this is my second semester), the cost of grad school is more than daunting. Due to my work schedule, as well as other life obligations, I am currently only taking one class a semester, which means that I do not qualify for financial aid. I am attempting to squeeze more out of my paycheck to put toward my education, but life happenings like home and auto repairs continue to eat into that fund. I am left paying for my education on a credit card, with a balance that will only continue to rise.
ReplyDeleteI'm hoping that this plan, which Obama will talk about on the Auraria campus tomorrow, will help provide solutions for many students, including myself.