Former FDIC Chair Sheila Bair has a novel idea about how the government can address the student loan crisis: End debt financing, which now totals $1.3 trillion, and replace student loans with an income payment plan.
In a recent New York Times op-ed, Bair, now president of Washington College in Chesterton, Maryland, explained that under this repayment plan, students would pay a fixed percentage of their future income over an extended period of time. The government would no longer be a creditor but an equity investor in those graduates.
Higher earners would pay back more than lower earners (up to a limit), although all will have an affordable payment that will also include protection against life events such as a health crisis or caring for an elderly parent that reduce their income.
“With a student loan, there is a fixed obligation to repay the loan amount with interest, but with income share, there is only a contractual obligation for the student to return to taxpayers a certain percentage of his or her future income,” Bair writes.
She proposes that this single repayment plan replace the current “complex web” of multiple student loan repayment programs.
Such a plan would not only “provide immediate relief for millions of young people” but also guarantee “a steady source of revenue to taxpayer coffers, particularly if payments were built into the tax withholding system,” writes Baird.
She also proposes a requirement that colleges spend at least 5% of their endowments on helping students reduce their debt burdens and earmark a certain amount to finance scholarships.
“We bemoan consolidation and ‘bigness’ among banks and corporate America, yet the same thing has been happening in higher education, where 1% of four-year institutions hold more than half of all endowment wealth,” writes Bair.
She has adopted some of these ideas at Washington College, which she has headed since August 2015. Under Bair, the college has created a “Dam the Debt” program that directs all unrestricted donations to fund student scholarships.
It has also introduced the Savers’ Scholarship, which reduces tuition costs by up to $2,500 for families who have saved for their children’s education via tax-advantaged 529 college savings plans. And it has launched the FixedFor4 program, which freezes tuition costs for four years at the cost for an entering freshman.
Bair notes that the problem of student loan debt is much bigger than the struggles of individual students and their families. “Excessive student debt is putting the same kind of drag on our prosperity” as the housing crisis did on many mortgage holders.
“A growing body of research has concluded that as young people cope with high monthly student debt payments, they forgo things like buying a car or a house … Escalating defaults among student borrowers impair their credit scores, making it even more difficult to borrow for large purchases.”
Bair ends her op-ed by noting that President-elect Donald Trump, who received far fewer votes from young people and from college graduates than Hillary Clinton did, should adopt her proposals because they would be “well received by young people… Student debt relief is smart economics and smart politics for the new administration.”
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