"Marketed under the decidedly unappealing name of "income-contingent loans"—how about we call them "smart loans" instead?—the concept is simple: Instead of paying upfront or taking loans with repayment schedules unrelated to income, students would accept an obligation to pay a fixed percentage of their income for a specified period of time, regardless of the income level achieved. Suppose a university charged $40,000 a year in annual tuition. A standard 20-year loan in the amount of $160,000 (40,000 times four) would produce an immediate postgraduate debt obligation of $1,228.50 per month, or $14,742 per year, not sustainable at a salary of $25,000 or anything close to it. Under a smart loan program, the student could pay about 11 percent of his income, with an initial payback of $243 per month, or $2,916 per year, which is feasible at a job paying $25,000. If, after five years, the student's salary jumped to $100,000, payments would jump accordingly and move up over time as income increases. After 20 years, assuming ordinary income increase, the loan would be paid off."
As a person who has around $30K in student loans waiting to be paid off, I have to admit I'm interested in any proposals that would make paying down student loan debt easier. At the same time, I'm kind of a contrarian and because I take issue with just about everything, I take issue with some parts of this proposal as well.
For one, I don't know if you've ever made $25K/yr., but I have and I don't think $243/mo. is a "feasible" monthly payment. I think Spitzer's argument that it is comes in part from the fact that, well, he's probably never made $25K/yr. so he has no idea how quickly $1500/mo. goes when you live in a city where rent is $500, basic utilities are around $200, groceries $200, gas $150, car insurance is as much as $250 (especially for boys who have not turned 25 and have not had their rates lowered), other insurance is around $150, and we haven't even started talking about if you have recently bought a car or if you have to buy new furniture or appliances that most adults already have. But I digress. The first problem is that having a bunch of rich white guys deciding what they think is "feasible" for people living on an income they've never lived on is probably going to be a bad idea for the people who have to actually live with their decision.
The other problem is that because cost of living varies from place to place, $25K in Topeka, Kansas is a very different number than $25K in Seattle or New York City. So I think that if they do set up this kind of progressive interest rate, location and cost of living should absolutely figure in to the estimation of what percentage of a given income real people can pay.
And while I think it's great to talk about how people with existing student loan debt can have easier payment plans, I think a better conversation to have is about making college more affordable. The average annual cost of a college education today looks something like this:
- 4-year private institution: $37,390
- 4-year public institution (in-state): $18,326
- 4-year public institution (out-of-state): $29,193
- 2-year public institution (in-state): $14,054
These aren't pretty numbers for students in college, and they're even worse for those looking to start college in the coming years when the tuition inflation rate runs at almost 6%--or twice the rate of inflation for everything else. Considering that the average American household brings in about $70K/yr., this isn't really a price tag that most families can afford, which means that most students will leave college with student loan debt. (Actually, 65.7% of students at 4-year institutions leave with student loan debt and the average amount of that debt is nearly $20K.)
Looking at these numbers it becomes very clear to me that the best way to address the issue of high student loan payments is to talk about how to make college more affordable, so we can reduce the amount of student loans that have to be taken out period. That really needs to be the direction we need to steer the conversation in the future, although for now, I am definitely willing to strike up talks about how to reduce my own student loan payments, because at $300/mo., that's pretty much every penny of spare cash I have that isn't going toward necessities.
But I've gone on enough. What do you think of this proposal? Do you have a better idea you'd like to put forward?