Abstract
American students graduate from college with tens of thousands of dollars in debt, leading to substantial repayment burdens and potentially inefficient shifts in spending patterns and career choices. A political trend towards austerity coupled with the rising student debt make the effective allocation of federal higher education resources and manageable repayment burdens on graduates high priorities. In this article, we evaluate the net cost and distributional characteristics of four methods of US student loan repayment: the standard option, the income-based option, Pay-As-You-Earn option, and the proposed Student Loan Fairness Act. Conducting repayment simulations on 1993 and 2008 graduate debt levels for 502 constructed graduate salary paths, we find an inherent trade-off between public loan cost and repayment burdens; student loans that are more generous to poorer graduates are also those that are most expensive to the taxpayer. We conclude with a discussion of how the introduction of a targeted interest rate on income-contingent loans can circumvent this policy trade-off by extracting greater repayments from higher earning graduates.
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Notes
One caveat for the US debt write-off feature is that under the tax code, the write-off is considered taxable income (Lieber, 2012). Hence, graduates may lose 10,000 worth of debt after the write-off takes effect, but gain a significant tax bill.
The costs of loan subsidies also have substantial implications for the rationing of ICLs, via means-testing and/or limiting university places. While we acknowledge that these implications are important for student loan access, we do not discuss them here.
Borrowers can move between schemes during the repayment period, a potential complication not factored into this analysis. For example, a borrower could shift to standard repayment after 15 years of income-based repayment, significantly altering their total expected debt repayment and monthly repayment burden.
The SLFA has a provision that prevents unpaid interest from expanding the loan balance to beyond 10% of the amount borrowed (Department of Education, 2013).
Nearly all studies examining loan subsidies use the interest rate on long-term (10-year) government bonds as the government’s cost of borrowing (Dearden et al., 2008; Johnston and Barr, 2013).
Though US Stafford loans provide ‘subsidized’ and ‘unsubsidized’ interest rates, the former are not truly subsidized unless they are lower than government’s cost of borrowing — hence, it is possible for the US government to still earn a ‘profit’ off subsidized Stafford loans.
Pairwise correlation coefficients on year-to-year wages never drop below 0.77 with complete cases even during the biannual survey period, validating the use of interpolation.
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Hauser, D., Johnston, A. Public Costs, Relative Subsidies, and Repayment Burdens of Federal US Student Loan Plans: Lessons for Reform. High Educ Policy 29, 89–107 (2016). https://doi.org/10.1057/hep.2014.25
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DOI: https://doi.org/10.1057/hep.2014.25