But the almost complete forgiveness of a loan, such as up to $ 50,000, proposed by US Senator Elizabeth Warren for households with an annual income of less than $ 250,000, is like using a blunt tool when a scalpel can solve a problem.
The Brookings Institution found that the bottom 60 percent of borrowers in terms of income will receive only about a third of the benefits according to Warren’s plan. The rest will go to borrowers from the top two income quintiles. Students from higher income families keep most of the student debt. They tend to go to more expensive schools, are more likely to borrow again for graduate or vocational school, and are more likely to receive a salary that makes repaying the loan a manageable expense.
Those who struggle the most with student debt actually have less. Surprisingly, delinquency and default are most common among those who less than $ 5,000 in debt, often because they haven’t finished college. A series of targeted reforms will help them the most.
The first reform is to provide each student borrower with a refundable tax credit of $ 5,000 that will pay off the debt of most of those who find student loan debt the heaviest burden.
Then the federal Pell Grant Program, which provides up to $ 6,495 a year to the most needy students on a semester basis, should be replaced by a college savings account. Through the savings account, students will receive an advance payment of the full amount they are entitled to for the duration of their program (ie, four years for a bachelor’s degree). Accessing more grants early in their program can reduce the amount of borrowing for a degree they will not receive. Those who drop out will be required to return a portion of their savings account.
Finally, customized income-oriented repayment programs Collected over 20 years should be rationalized into a single user-friendly program whereby borrowers will pay a certain percentage of current disposable income on a monthly basis for a fixed period – say 10-25 years. In the months when their incomes are higher, borrowers will pay more; when incomes fall, they pay less. Any remaining balance will be forgiven at the end of the repayment period.
This is the essence of a truly progressive student loan policy. Those who have invested in higher education, borrowed money, but did not find a high-paying job or did not have one for most of their careers will receive more benefits.
This approach improves social mobility by making higher education more accessible to people on low incomes, but does not save the rich, who are more than capable of paying off their student loans.
The targeted approach is also preferable to the more general loan forgiveness for another important reason. A less targeted program is likely to encourage prospective students to borrow more than they would otherwise have and attend more expensive schools. Then, the surge in demand will force colleges and universities to raise prices, exacerbating the already uncontrolled inflation in the higher education sector.
Targeted reforms will focus on helping families and individuals who are truly struggling with student loan debt and improving social mobility. This would achieve these goals at less cost to American taxpayers than debt relief, and without creating incentives that would exacerbate the serious problem of inflation in higher education.
Beth Akers is a senior fellow at the American Enterprise Institute. Charles Chippo is a senior fellow at the Pioneer Institute, a public policy think tank in Boston.