Revamped Repayment Plan and Cost Estimators Are Among New Aid Proposals

October 21, 2013

For all the concern about student loans, the country is facing not a debt crisis but a repayment crisis, two researchers argue in a new policy proposal.

That might sound like splitting hairs, but the scholars—Susan M. Dynarski, a professor of public policy, education, and economics at the University of Michigan at Ann Arbor, and Daniel Kreisman, a postdoctoral research fellow there—think that correctly defining the problem is key to devising a solution.

Their paper is one of three being released on Monday by the Brookings Institution's Hamilton Project. Each suggests changes in a big component of the financial-aid system: student-loan repayment, the federal Pell Grant program, and consumer information. The proposals, all written by university-based scholars, are to be discussed here on Monday at a forum hosted by the Hamilton Project.

Ideas for fixing the student-loan system have been in ample supply lately, and plenty of them simply aren't based on the facts, Ms. Dynarski said in an interview.

Some of those facts: College has a strong payoff, the average borrower has moderate debt, and those who default tend to be young, with typical (not extreme) debt levels. That all suggests that the problem is less about how much students borrow or what for, and more about the reality of owing money when they have "the least capacity to pay," the authors write.

Amending 'Pay It Forward'

In their paper, they sketch out a new repayment system, called Loans for Educational Opportunity, that would operate like Social Security. Payments would be deducted automatically from workers' paychecks, and the amount would rise and fall, also automatically, with their income. That's a departure from existing income-based repayment options, which adjust payments down for borrowers with lower incomes but don't raise them for high earners.

The proposed repayment period would be 25 years, rather than today's standard of 10. But most borrowers, the scholars expect, would still pay off their loans in about a decade. A longer repayment timeline does make sense, though, the authors write, as borrowers benefit from their education over their whole working lives. And if after 25 years their loans were not paid off, the balance would be forgiven.

While the proposal covers loans only for undergraduate study—because graduate borrowers do not, on average, run into the same problems with repayment—the authors are open to considering graduate borrowers. Their more varied debt and income levels, however, do present challenges to program design, Ms. Dynarski said.

If adopted, the plan would make borrowers' payments more affordable, the researchers write, and would save the government money. It would achieve the latter by reducing loan defaults, lowering the cost of loan servicing, and eliminating policies under which the government covers the interest on some loans while the borrowers are students and lets borrowers take tax deductions for interest they pay.

In some ways, the proposal is similar to a "Pay It Forward" plan being considered in Oregon. But there is an important difference: According to this plan, borrowers would have to repay only what they had borrowed, with interest. Under the Oregon proposal, they would have to pay a percentage of their income over a set number of years, like a tax. "We think of our proposal as a friendly amendment to the Oregon initiative," the authors write.

In addition to the repayment plan, they recommend several other reforms: allowing private student loans to be discharged in bankruptcy, prohibiting any loan product that requires a credit check or co-signer from being marketed as a student loan, and requiring borrowers to exhaust their federal-loan eligibility before turning to private loans. Those changes, the researchers argue, would protect the small minority of students who overborrow.

'Latent Demand'

A second proposal—to create two tracks in the Pell Grant program—may sound familiar. Its two authors, Sandy Baum, a research professor at George Washington University's School of Education and Human Development, and Judith Scott-Clayton, an assistant professor of economics and education at Columbia University's Teachers College, were both involved in a College Board project to redesign the Pell Grant that released similar recommendations last spring.

That project suggested breaking Pell recipients into two groups based on age, to meet the specific needs of different student populations. Incorporating feedback on that proposal, the new one recommends separating independent and dependent students according to an existing distinction in financial aid based in part on age.

The thinking is that the Pell program was designed for traditional-age students, but grants now go to many adult learners. Under the new proposal, students in both tracks would have to apply for Pell Grants only once and would receive advising before and during college.

The third proposal comes from Phillip B. Levine, an economics professor at Wellesley College who designed an expected-family-contribution estimator there this year. He suggests that other colleges create similar tools and proposes that the College Board, which owns the system some colleges use to allocate their own aid, help them do it.

The estimator at Wellesley is a work in progress, Mr. Levine said in an interview. Early feedback has suggested that the tool should show families what they would be expected to borrow as well as pay out of pocket—and in languages other than English. "Can we improve it?" he said. "Absolutely."

Since Wellesley started advertising its tool last month, it has generated nearly 15,000 estimates. By comparison, the college's more complicated net-price calculator was used 3,200 times in the past year, said Mr. Levine.

There's no way everyone using the new tool is interested in Wellesley, he said. Rather, they want to know how aid works at similar colleges. There is "very large latent demand," he said, "for a tool like this."