| 来源类型 | Report |
| 规范类型 | 报告 |
| Balancing risk and responsibility: Reforming student loan repayment | |
| Kevin J. James; Andrew P. Kelly | |
| 发表日期 | 2015-11-19 |
| 出版年 | 2015 |
| 语种 | 英语 |
| 摘要 | Key Points Higher education is a risky investment, and federal student loan programs should safeguard borrowers from risk while avoiding perverse incentives. Well-designed income-driven repayment (IDR) plans can ensure borrowers have manageable payments and target aid to those who need it most. However, existing IDR plans come up short in several ways: generous loan forgiveness creates significant moral hazard; low-income borrowers may experience negative amortization; and the plans impose significant administrative burden on borrowers, which depresses enrollment. Reform-minded policymakers should consider changes to IDR plans, including conditioning loan forgiveness on the amount borrowed, basing the percentage of income borrowers must pay on the amount borrowed, replacing interest rates with a one-time loan surcharge, and capping the amount of interest that can accrue on a loan. Executive Summary As federal student loan debt has grown, policymakers have put forward a number of ideas designed to help struggling borrowers keep up with their monthly payments. Many certainly need the help; nearly a quarter of federal loan borrowers will default over the life of their loan, and estimates suggest that five-year default rates among the latest cohort of students reached almost 30 percent. However, the urgency to do something has led policymakers to put forward shortsighted and ill-conceived reforms that are appealing on the surface but fail to effectively address these challenges. The goal of this paper is therefore to step back from the overheated rhetoric and more clearly articulate potential solutions to the problems many student borrowers face. We argue that because higher education is an expensive and risky investment that lacks collateral, federal loan programs should feature common-sense protections that safeguard borrowers from downside risk. Unfortunately, the existing array of protections and repayment plans comes up short. Borrowers in need of assistance face a number of complicated options and bureaucratic hurdles, and many continue to fall through the cracks. Furthermore, poorly designed loan forgiveness and interest-subsidy policies provide (or would provide) significant benefits to the borrowers with the largest debts, many of whom are not at risk of default. Recent proposals to help student borrowers might actually encourage tuition inflation, thereby ensuring that more borrowers need help in the future. The paper goes on to argue that properly designed income-driven repayment (IDR) plans offer a better path forward because they ensure borrowers have manageable payments while targeting aid to those who need it. However, existing federal IDR plans have several shortcomings that limit their effectiveness: generous loan forgiveness creates significant moral hazard; low-income borrowers may experience negative amortization; and the plans impose significant administrative burden on borrowers, which likely deters many from using them. Income-driven plans could be improved, however. In the paper, we consider a number of ideas that have not received sufficient attention: Conditioning loan forgiveness on the amount borrowed—that is, making high-debt borrowers pay for longer—would alleviate some of the concerns associated with moral hazard. Basing the percentage of income that borrowers must pay on how much they borrow could have a similar effect. Replacing interest rates with a one-time loan surcharge would make repayment more predictable and could address policymakers’ concerns about both interest accrual and forgiveness. Capping the amount of interest that can accrue on a loan is another option policymakers should include in their toolbox. Fundamentally, income-driven plans offer the most promise in terms of aiding borrowers at risk of default, but we must learn from the flaws in the current system. The current options fall short not because they are income driven but because they are poorly designed. It is possible to design such plans so as to protect borrowers while avoiding perverse incentives for borrowers and institutions. The reforms discussed here represent one set of tools policymakers can consider in creating a repayment system that is effective and fiscally responsible. Introduction The media is awash with stories about student loan borrowers struggling to repay their debts. A CNN Money article from March 2015 tells the story of Rhea, who at 26 years old had $54,000 in student loan debt from her undergraduate degree—an obligation that consumes half of her paycheck as a production assistant at a television studio.[1] In May 2012, a “Degrees of Debt” series in the New York Times profiled Kelsey Griffith, a recent graduate of Ohio Northern University with $120,000 in student loans.[2] And a 2011 piece by Business Insider describes how Steve went $100,000 into debt for a game art and design program that did little to prepare him for a career in video-game design.[3] Every week, it seems, we hear a new story about a former student with crippling debt. Because the federal government holds or backs most of the $1.2 trillion in outstanding student loan debt, policymakers are scrambling to solve what many see as a student loan crisis.[4] The most prominent effort is the Obama administration’s repeated expansion of federal income-based repayment (IBR) programs, which allow qualified borrowers to tie loan repayment to their income. This patchwork collection of programs got its start in the mid-1990s and has gradually expanded, culminating in President Obama’s Pay as You Earn (PAYE) program, under which borrowers are able to cap their monthly payments at 10 percent of their discretionary income. Any debt outstanding after 20 years is then forgiven (10 years for those in public-sector jobs, including most nonprofit organizations).[5] Others have suggested that high interest rates are the problem and have called for lowering rates on all new federal loans and allowing existing borrowers to refinance at current federal loan rates. Sen. Elizabeth Warren (D-MA) has championed both ideas in Congress, and they are now a key piece of Hillary Clinton’s higher education plan. As is often the case, all these solutions have been or would be grafted on top of an existing array of repayment options and protections already available to federal borrowers.[6] Unfortunately, urgency and anecdote often lead to shortsighted policymaking, and these proposals are no exception. To be sure, data do suggest that an increasing number of borrowers are failing to repay their loans. The official, three-year cohort default rate has declined somewhat, but the Department of Education estimates that nearly seven million borrowers have not made a loan payment in 360 days.[7] A recent paper from the Brookings Institution found that the five-year default rate among borrowers who entered repayment in 2009 was 28 percent; at for-profit and two-year public colleges, it was 47 percent and 38 percent, respectively.[8] In proposing solutions, however, policymakers have not done enough to carefully articulate the goals—as well as potential costs and unintended consequences—of the various approaches to helping those who struggle to repay their loans. As a consequence, debt-relief ideas are often ill-conceived, designed in such a way that they simultaneously benefit many students who do not need help while failing to actually help those who do.[9] In addition, protections that look effective to existing borrowers may well affect the behavior of others, encouraging prospective students to borrow more than they ought to and enabling colleges to raise tuition even further. Finally, given the size of the loan program, debt-relief efforts have significant fiscal consequences, something policymakers are rightfully concerned about in an era of tight budgets. In this brief, we take a step back from the flurry of reform proposals, which seem to emerge every month, and instead flesh out some important questions and assumptions policymakers often seem to take for granted. We start by identifying the goals that policymakers are—or should be—pursuing with respect to struggling borrowers. In short, we argue that policymakers should aim to help students avoid default in a way that is fiscally responsible and minimizes perverse incentives for students and institutions. In light of these goals, we then examine current protections available to borrowers—such as forbearance, deferment, and the variety of repayment options—and conclude that, in theory, income-driven plans that link borrowers’ monthly payments to an affordable percentage of their income are the most effective mechanism to protect borrowers from downside risk. Critically, though, we also explore how existing income-driven repayment plans are poorly designed to help those who are truly struggling in a fiscally responsible way. The last section of the paper therefore focuses on reform ideas for income-driven repayment that have received far too little attention in the current debate. Read the full report. Notes |
| 主题 | Higher Education |
| 标签 | Center on Higher Education Reform ; College costs ; Higher education ; Student debt ; Student loans |
| URL | https://www.aei.org/research-products/report/balancing-risk-and-responsibility-reforming-student-loan-repayment/ |
| 来源智库 | American Enterprise Institute (United States) |
| 资源类型 | 智库出版物 |
| 条目标识符 | http://119.78.100.153/handle/2XGU8XDN/206192 |
| 推荐引用方式 GB/T 7714 | Kevin J. James,Andrew P. Kelly. Balancing risk and responsibility: Reforming student loan repayment. 2015. |
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| Balancing-risk-and-r（350KB） | 智库出版物 | 限制开放 | CC BY-NC-SA | 浏览 | ||
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