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.