Those who struggle the most are dropouts who owe a few thousand. Here’s a plan to target help to them.
The Democratic presidential primary so far has been a race to see who can present the most generous taxpayer-funded plan to fix every problem from health care to higher education. President Trump has noticed and is reportedly eager to develop a competing plan to tackle student debt. There is plenty he can do to help with the burdensome cost of college, but the solutions on the table miss the mark.
The Democrats’ general approach, full loan forgiveness for all indebted students, is a wasteful policy intended to win political favor with highly educated voters. Contrary to the popular narrative, high earners bear an outsize share of student debt as they’re much likelier to have attended an expensive college and stayed longer, sometimes borrowing again for graduate or professional school. Sen. Elizabeth Warren’s plan phases out eligibility for the highest earners but is still highly regressive overall. According to the Brookings Institution, the bottom 60% of borrowers by income would receive only about a third of the financial benefits of Ms. Warren’s plan.
Those who struggle the most to make payments tend to have only a few thousand dollars in debt. Delinquency and default are most frequent among borrowers with less than $5,000 in debt, because many of them didn’t finish college. An effective debt-relief program would focus on aiding this class of loan recipients.
A first step would be to give every student borrower a $5,000 refundable tax credit. This would be enough to wipe away the debt of the majority of those who are really struggling. It would also help borrowers with larger amounts of debt shorten their repayment terms or reduce their monthly installments. This relief would add to current provisions that allow debtors to reduce their payments when their income is low.
Another positive step would be to replace the Pell Grant program, which gives a small amount of aid to lower-income students. In its place, lawmakers should promote flexibility with a new system of federal college savings accounts, which would let students choose when and how to spend the funds. A huge share of beginning college students don’t know whether or when they’ll complete their degrees. Swapping grants for a savings account would allow them to cover most or all of their first year of study and walk away debt-free if they don’t continue. This would likely increase federal spending, but would reduce the cost associated with reliance on repayment plans that ultimately cost taxpayers. Going to college would become a much less risky proposition.
Next, the president and Congress should streamline the student-loan repayment program. Too few debtors are aware of federal provisions that allow them to postpone or restructure their payments. When they do seek these protections, they often fail to benefit because the complicated application makes it difficult to represent their income properly. The pending reauthorization of the Higher Education Act should include a simplification of the repayment process.
The final, boldest step would be to replace the myriad federal student-loan options with a single loan that recipients would repay through income withholding. Much of the student-debt problem is owing to avoidable errors by debtors, like unnecessary delinquency or setting monthly payment rates either too high or too low. A system based on income withholding would allow repayments to be set to a reasonable percentage of a person’s income, and waived automatically during low-earning months. Students would agree to pay a set fraction of their income over a fixed period. In exchange for the increased reliability of automatic payments, the government could eliminate compounding interest, which piles on difficulty for the worst-off debtors.
These ideas may not have the rhetorical flash of a loan-forgiveness jubilee, but they are better tailored to the actual problem of student debt. Mr. Trump should resist the temptation to follow in the steps of the Democrats who are promising to enact wasteful policies, on the backs of taxpayers, simply to gain political favor.
This piece originally appeared in The Wall Street Journal (paywall)
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Beth Akers is a senior fellow at the Manhattan Institute and a former Council of Economic Advisors economist. Follow her on Twitter here.
This piece originally appeared in The Wall Street Journal