No More Gimmicks To Fix Student Loan Debt | Commentary
As President Barack Obama indicated when signing his memorandum on student loans, the student debt crisis shows no sign of abating. Though the obvious causes are the ever-growing cost of college and the weak job market for recent graduates, the real culprit is congressional inaction.
Congress has failed to propose substantive changes to the federal loan program that would prevent colleges from saddling students with burdensome debt loads. To be sure, Senator Elizabeth Warren has proposed a few measures, such as lowering student loan interest rates to near-zero and allowing students to refinance their loans, but they’ve failed to take off. These proposals, moreover, are gimmicks. They would only empower students to assume more debt — hardly a way to deflate the debt crisis.
Republicans have mostly been silent on the issue of higher-ed reform, but they’ve now found their own gimmick: so-called Income Share Agreements, or ISAs. ISAs create partnerships between investors and students where investors fund students’ college tuition and students repay with a fixed percentage of their incomes for a certain number of years. The free-market economist Milton Friedman suggested this idea in a 1955 essay, with the government playing the role of the investor. In 2002, Felipe Vergara and Miguel Palacios created Lumni Chile, which established partnerships between private investors and students, and they now have branches in Colombia, Mexico, and the United States.
Senator Marco Rubio is leading the push for ISAs. In April, he proposed SB2230, the “Investing in Student Success Act of 2014,” which establishes regulations for these contracts. The bill would exempt the first $10,000 of income a student makes from the amount she must repay, sets the maximum income percentage and repayment period at 15 percent and 30 years, respectively, allows students to end their contracts prematurely if they pay a particular amount, and prohibits students from annulling the contract through bankruptcy. Conservative scholars and pundits have caught on, writing policy briefs, op-eds, and profiles in favor of this idea.
Though we always should welcome innovative proposals for higher-ed reform, ISAs won’t come close to solving the problem of student debt. For one, as I’ve written before, ISAs will never cover the majority of students. Investors want to make a profit, so they’ll look for students who have a good chance of succeeding and avoid those who show average potential. Most students will thus need to continue relying on federal and private loans.
Furthermore, it seems the students chosen for ISAs won’t escape the burden of federal loans. The current interest rate for Federal Stafford Loans is 3.86 percent. Students are unlikely to find a similarly good deal from private lenders, who, unlike the federal government, care about the return on their investments. To that end, ISA funds can likely only supplement, but not replace, the federal loan program. Palacios has admitted as much. In an interview he said he encourages Lumni beneficiaries to take full advantage of the federal loan program since it offers “free money.”
Perhaps most importantly, ISAs don’t change the structural problems that have created the debt explosion. Student debt is reaching record heights due to a combination of the recession and the inflation-outpacing growth of college tuition. Colleges can continue to raise tuition because the federal government ties loan awards to the cost of attending an individual college. The more college costs grow, the larger the loan award that students request, and the more loan funds colleges receive. Any real solution to the student debt problem will remove, or at least alter, this federal cushion.
By simply providing a new source of tuition funds that will be available to a select few, ISAs will not meaningfully change this incentive. They’ll certainly make it possible for some students to attend their dream colleges, but they can’t help the majority of American students who’ll need to borrow from traditional lenders. If Republicans really want to solve the problem of student debt, then they’ll need to look elsewhere.
Judah Bellin is an associate editor at the Manhattan Institute, where he researches higher education policy and edits Minding the Campus, the Institute’s higher-education website.