Borrowed Time

America
has a student loan problem: Collectively
we have more than $1 trillion in debt from
college costs, an astonishing figure that dwarfs many other forms of debt. That
all-too-common burden has led an ever-increasing number of college goers to
default on what they owe. It’s clear enough that we need to fix this growing
problem, but one of the most popular solutions may instead be making things
worse.

The
problematic solution in question is known as income-driven repayment (IDR). In
theory, at least, IDR plans are tailored for individual borrowers, establishing
payment amounts “based on your income and family size,” as the Federal Student
Aid office explains. Those who fail to pay off their loans within 25 years can
have their remaining debt forgiven. In 2013 these programs accounted for 6
percent of borrowers in repayment, but by 2014 that figure rose to 11 percent. 

The
rapid growth of IDR programs has brought increased attention to their
consequences. Perhaps most notably, a recent report by the General Accounting Office (GAO), found that IDR programs will
cost the federal government about $74 billion dollars in 2017, far more than
what was projected by the U.S. Department of
Education. This has raised concerns
from some
about the ability of the department to estimate
loan program costs at all, potentially providing ammunition for Republican
lawmakers to repeal the student loan program without a viable replacement.

So far, responses to that GAO report have largely fallen into
predictable camps: Some have doubled down, reaffirming that those costs are
preferable to the pain of borrowers in the pre-IDR landscape. Others propose modest
tweaks (without explaining how ‘simplifying’ IDR to reduce costs will still
assist borrowers) or suggest modifications likely vulnerable to the same failings.
And a third approach decries IDR enrollment and costs as evidence of borrower
irresponsibility, intolerable political generosity, or both.

To be clear, we urgently need an honest conversation about IDR. We
should consider what its growth signals about college financing and what we
should expect in exchange for billions in taxpayer investment. However, this
discussion on how to fix IDR misses two key takeaways:

1. Since attempting to minimize
   the downstream effects of student borrowing is more expensive and
   difficult than forecasted, we need real innovations on the front end. That
   is, we should rethink borrowing, and not just repayment.
2. There are cheaper and better
   ways to help student borrowers than dangling the promise of loan
   forgiveness at the end of two decades of repayment, particularly given
   what we know about the effects of student debt on retirement saving, home
   equity, net worth, and other measures of wealth accumulation.

IDR is not merely an inefficient way to back into loan
forgiveness. It exacts real costs from borrowers by asking them to purchase
more manageable payments with foregone investment during critical early-career
years. Because IDR increases the length of loan repayment, it may keep those
who use it from building their assets for longer than they otherwise would,
thereby contributing to the gap in wealth holdings among college graduates with
and without outstanding student debt.

There’s plenty of evidence that
this gap matters: Robert Hiltonsmith found that college-graduate households with median student debt
had $134,000 less in retirement savings and $70,000 less in home equity than
peers without student debt. A growing number of studies have
found that households with college debt have lower net worth than those
without. Further, new research shows that outstanding student debt increases the amount of time
that it takes individuals to build net worth, no matter how large or
small their debt actually is. This means that degrees are less valuable for
those who have to borrow, a problem that disproportionately
affects students from low-income backgrounds.

Mounting evidence of unequal returns is not the only failure of
today’s high-stakes financial aid system: There are real concerns, for example,
about the unmet needs of nontraditional students, poor completion rates, and
the increasingly ‘private’ nature of public colleges. But a nation that makes
higher education central to opportunity vests education with an outsized role and
needs financing systems that are both equitable and affordable.

Instead of funneling disadvantaged students into a
financial aid system that further disadvantages them (and hoping the repayment
approach can lessen the blow), we should take this moment to pivot to
asset-based approaches. These approaches, which work by helping families build college
savings, starting when a child is young, have been shown to improve educational
outcomes before and during college, as well as returns after graduation.

For example, a policy that deposits $8,400 in children’s accounts
at birth and encourages families to deposit $5 per month could yield over
$34,000 by the time those children are 18—equal to the average cost of a
four-year degree at a public university in 2015. What’s more, it could do so
for all children born in a given year (though there might be reasons for
fiddling with the particulars) for an estimated $34 billion annually, less than
the cost of IDR alone. These accounts could then serve as conduits for
contributions from employers, scholarship providers, and states to augment
balances and reaffirm the societal benefits of educational attainment.

Of course, there are no silver bullets: other ills—requiring other
policy remedies—afflict higher education today. However, this approach could
constitute a uniquely American financial aid system—and an infrastructure for
lifelong, mobility-enhancing, wealth building. In the transition toward this
long-term recalibration, equity should be financial aid reform’s North Star,
reminding us that it is unwise to rely on IDR. It’s a policy that we should
have known was unfair, even before we knew it was so expensive. What Americans
need isn’t a softer landing from their student debt, but a ladder on which to
climb.