Eitan Arom: Student loan repayment plans should be based on income, individual ability

In the budget proposal he released earlier this month, President Barack Obama suggested the interest rates on student loans be tied to the rate at which the government borrows from private lenders.

Such a measure would afford protection to the government agencies that manage student loans. But lawmakers have yet to adopt legislation that protects student borrowers, who collectively, as of last year, held about one trillion dollars in loan debt.

In June 2012, Congress tabled the debate on student loans with a stopgap measure that froze interest rates on federal Stafford loans until July 1, 2013. With that date drawing ever nearer, prospective students and parents cannot afford to give Congress another extension.

Procrastinating on the issue of student debt is no longer an option. The Congressional Budget Office estimated that last year’s interest rate freeze cost the government $6 billion, an unwieldy sum considering the federal government’s unstable budget outlook.

Instead, some real leadership needs to emerge.

The budget’s variable interest rate proposal means that students will pay more when it costs more for the government to borrow. But just as a variable rate protects the federal stake in the student loan market, so too should students have some insurance against the prospect of unmanageable debt.

By tying interest rates to an individual student’s ability to pay, Congress could protect its own investment while improving access to higher education.

When the government offers a loan to a student at a subsidized rate, it essentially buys a stake in that student and his or her future. More education leads to higher lifetime wages, so when that investment begins to pay off, it makes sense for the government to take a share.

For example, imagine that I take out a Stafford loan and graduate from UCLA with a degree in business economics. Allow, further, that I use my degree to land a six-figure salary as an investment banker.

Had I not gone to college, I would likely be making much less; that discrepancy was made possible by the taxpayer money used to subsidize my college loan.

So instead of setting a fixed interest rate for each student who takes out subsidized loans, the taxpayer should lay claim to a certain percentage of that student’s future income. This repayment model has a myriad of benefits to students, who only pay as much as they are able, and for the government, which can levy funds by charging a higher rate to students with higher incomes.

Gary Orfield, a UCLA professor of political science and education, said that he predicts a move toward student debt repayment as a share of lifetime income.

“It would be better if we could support our college students outright,” said Orfield. “But if we don’t do that, (income-based repayment) is a more equitable way to keep colleges running and enable people to make the choice to go there without putting themselves in serious debt.”

Orfield said the fact that student loans are not forgiven in bankruptcy puts students in a vulnerable position. Given that vulnerability, legislators should move to keep students from declaring bankruptcy in the first place.

The Obama proposal makes a move in that direction by seeking to cap loan repayments at 10 percent of discretionary income. But 10 percent of after-tax income is still a sizable sum, especially for students struggling with their loan payments in the first place.

For the students making $100,000 salaries two or three years out of college, whoever they may be, perhaps an interest rate of 10 percent is reasonable. But for college graduates with annual incomes in the ten or twenty thousands, a rate of 2 or 3 percent should be put in place.

Federal belt-tightening calls for real legislative leadership on the issue of college access. Low-income families who are looking to send their kids to college in the upcoming year should not be subject to an interest rate that might double because of Congressional gridlock.

On May 1, thousands of new Bruins will submit their Statements of Intent to Register. Congress owes it to those students to pass a lasting and creative solution to the problem of student debt.