Can An Automatic Income-Based Repayment Plan ‘Clean Up the Student Loan Mess’?
By Bahar Akman Imboden
In a recent NYT article, Prof. Dynarski argues that the student loan mess can be solved if borrowers falling behind on their payments were automatically enrolled into an income-based repayment (IBR) plan. I agree that the increased lack of oversight of the private loan servicing industry, the arbitrary ways in which borrowers are placed in repayment plans, and the complexity of the repayment options are all unacceptable and mostly hurting the disadvantaged borrowers. But let’s face reality: no repayment plan of any kind will absorb the skyrocketing price of higher education or clean up the resulting student debt mess.
First, the mess is not limited to the Federal Loan program. Tuition rates have been rising faster than inflation and much faster than personal earnings; students are borrowing larger amounts and maxing their federal loan eligibility. Students and their parents are left with few options but to borrow private loans, or Parent Plus loans, which have higher interest rates and are not eligible for IBR plans or any kind of forgiveness clauses, even in case of bankruptcy.
Second, taxpayers and policymakers are already anxious about the ballooning cost of the current IBRs and forgiveness programs, which are estimated to cost$161 billion in the next 10 years. We need to be mindful of the cost and implications of streamlining enrollment to such plan.
Finally, generous repayment plans, while helpful to struggling borrowers, do not put any pressure on colleges to hold their tuitions down. As repayment become easier, the system suffers from moral hazard, borrowing large amounts is normalized further, and the only way to get out of debt will be mass forgiveness. Going back to the cost on taxpayers, how will this affect political support for the federal loan program? Will we see the government restricting lending? This will be demise of our higher education system, in which access and diversity will suffer the most.
Prof. Dynarski starts her article with:“student loans are central to financing college educations”. As a society, we must dare to think bigger and question whether a loan is the right financial aid tool. There is mounting evidence that student loans perpetuate, if not aggravate, existing inequalities. The solution is clear — the price of higher education must come down while grants must replace loans especially for students coming from disadvantageous backgrounds.