President Barack Obama announced steps today that he says will make student loans more affordable. That may be good midterm politics, but his tinkering isn’t much help for a system of college financing that's spinning out of control.
Obama will give more student borrowers access to income-based repayment plans, which cap monthly loan payments at 10 percent of a borrower's income. He also urged Congress to pass a bill, sponsored by Democratic Senator Elizabeth Warren of Massachusetts, that would reduce interest rates on student loans by letting borrowers refinance.
If the aim is simply to make student loans as cheap as possible, then these changes earn full points. But how much use is that by itself? Student loans are already affordable compared with other types of credit; making them cheaper still will fuel more borrowing and leave taxpayers on the hook for more of the tab. (Warren's bill would cost $51 billion over 10 years, paid for by increasing taxes on high earners.)
The greater concern is the share of students who default, now at 1-in-7 -- its highest level in two decades.
By that light, expanding access to income-based repayment is a good idea, as far as it goes. A more efficient idea, proposed by Republican Senator Marco Rubio of Florida earlier this year, would automatically enroll borrowers in those plans, rather than leaving students to wade through the details on their own. Otherwise, the students who most need those programs may not be the ones who know enough to sign up for them.
Another idea worth pursuing is effectively removing the possibility of default altogether, by having a borrower's employer automatically deduct those income-based repayments from borrowers' paychecks and send the money to the Internal Revenue Service. That's what Republican Representative Tom Petri of Wisconsin has proposed, modeled on systems in the U.K. and elsewhere.
Both automatic enrollment and payroll deductions would need to be approached carefully. It's important that borrowers retain the chance to pay back their loans faster without penalty (and so pay less on interest over time). And the IRS would need the necessary technology and personnel to make sure it could handle the task of calculating and processing the required payments.
Still, the spiraling mess of U.S. higher-education funding can't be addressed through cheaper money alone. The administration is right to focus on reducing default rates; it could stand to be a little more creative in how it does so. The Republicans' proposals are a good place to start.
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