Rethink student loan repayment

Obama should take cues on the student loan problem from the British model.
By
  • Oklahoma Daily
November 15, 2011

President Obama recently outlined his actions to reduce student debt burden. His plan enables students to consolidate multiple loan payments into one monthly payment with a lower interest rate. It also calls for a program that would lower monthly payments by requiring students to pay only 10 percent of their income instead of 15 percent.

Obama’s actions are a good start, but they’re not enough. Reports show student debt will reach $1 trillion this year and almost 9 percent of student loans are in default, according to the Department of Education. A problem this serious calls for serious reform.

Students often can’t find jobs after graduation or must accept a low-paid position. They are then faced with serious consequences like ballooning repayments, wage garnishes and heavy fines.

The problem lies within the American student loan system, which isn’t sensitive to post graduates’ first few years out of school. Unlike ours, in the British system all loan payments are calculated directly from wages. Payments for the year are currently capped at 9 percent of any earnings above $20,405.

This money is taken directly from students’ monthly salaries, like tax, so there’s no chance of default. If a student’s income drops below the cap, no more payments are taken until their income rises. The remaining debt is forgiven after 20 years. This progressive student loan system has kept student debt low and defaults lower than 2 percent, according to the Student Loans Company.

The U.S. student loan program is hemorrhaging money. Adopting the British model may cost money in the short term by lowering payments and forgiving debt after a certain time, but it will ultimately increase revenue by keeping more students paying off their loans.

 An income-based plan would save money for both students and taxpayers, which is why Obama should consider this method.

 

This editorial originally appeared in the Oklahoma Daily at the University of Oklahoma. Please send comments to letters@mndaily.com

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