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.
The smart loan model would permit all students to fund their own educations, guaranteeing that finances would no longer be a barrier to the education our work force needs. It would also free parental savings for other obligations — such as health care — at the same time that it would recognize that the student’s ability to repay will grow over time as income increases through a career. The current system of hitting graduating students with immediately sky-high payment obligations just as they enter the work force is nonsensical. Pegging repayment amounts to income earned is common sense. A student who wanted to teach for several years could do so, with proportionately reduced payments, knowing that when she moved over to a more remunerative job, her payments would jump accordingly.
Yes, this model raises all sorts of complex subsidy issues: Do we let lower-income earners stop repaying after 20 years even if they haven’t repaid in full? Should higher-income earners subsidize lower earners by paying for the full 20 years even if they have repaid their individual debts in full? Should we set a minimum-income threshold, below which no repayment is required? Should we set an annual cap on repayments for exceptionally high earners? Should we make the percentage paid progressive, so as income increases a slightly higher percentage is paid each year?