New paper: US student loan system needs reform

In a CGHE working paper published today, Professor Bruce Chapman from the Australian National University and Professor Lorraine Dearden from the UCL Institute of Education argue that student loan arrangements in the US are in need of reform. They demonstrate how US student debt problems could be solved through the adoption of income-contingent loans.

The paper, ‘Conceptual and empirical issues for alternative student loan designs: the significance of loan repayment burdens for the US’, compares income-contingent student loans – which operate in England and Australia – with the mortgage-type student loans which operate in the US. The authors look specifically at ‘repayment burdens’, the proportion of a debtor’s income required to repay a loan.

Mortgage-type student loans are repaid over a set period of time and so are unrelated to a borrower’s capacity to pay. The repayment burden associated with this type of loan can be adversely high for low-income graduates, many of whom default. By contrast, income-contingent loans offer a form of ‘default insurance’, being capped at a fixed and low proportion of the debtor’s annual income.

Professor Chapman and Professor Dearden illustrate the financial benefits of income-contingent loans using a hypothetical student loan experience. They argue that an equitable and fair student loan system is essential to the attainment of educational opportunity, and conclude that only by moving away from the current mortgage-based model towards a universal income-contingent model will the US solve its student debt crisis.