by Mitch Kokai
Senior Political Analyst, John Locke Foundation
The notion of student-loan cancellations has been capturing the attention of politicians and those in the realm of higher-education policy for well over a year now. Despite the popularity of this hugely regressive idea, it’s a terrible one. Thankfully, there’s a better, more moderate way to address federal student debt. And it’s hiding in plain sight.
Income-driven repayment (IDR), an existing set of programs that function somewhat poorly, can be improved to ensure that not a single borrower will ever have to make an unaffordable payment on federal student loans. Under IDR, monthly payments are tied to a borrower’s income and unaffordable balances are ultimately forgiven. IDR accomplishes this in a way that minimizes moral hazard and delivers benefits in a true progressive manner — with more benefits going to people who invested in a college degree, and took on debt to do so, but didn’t see the return they were promised in the form of a high-paying job. IDR also makes college more accessible to children in low-income families, in effect enabling higher education to function as a mechanism for social mobility.
The monthly payments of traditional loans are determined at the outset, with repayment of the principal and interest spread over a definite time period. In contrast, IDR allows borrowers to make monthly payments that are equal to a fixed percentage of their current disposable income. When income is high, they pay the full amount due, and when income is low, they can make a reduced payment without penalty. This ensures that monthly payments are affordable. The balance is forgiven once a borrower has made a requisite number of IDR payments. This takes between ten and 25 years depending on the student’s eligibility and choice of IDR program.