On Thursday, The Oklahoma Daily published a letter from President Barack Obama outlining recent actions to reduce the burden of student debt.
His plan enables students to consolidate multiple loan payments into one monthly payment at a lower interest rate.
It also calls for a program that would lower monthly payments for those students using the income-contingent payment option from 15 percent of students’ salaries to 10 percent to go into effect next year, two years earlier than planned.
We have to say, President Obama, your 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, not Band-Aids.
Students often can’t get work right out of school or must accept a lower-paying position. If students lose their jobs, can’t find work or can’t make a living wage, they will get behind on loan payments. They are then faced with serious consequences, such as ballooning repayments, wage garnishes, heavy fines, destroyed credit scores and the inability to borrow for a house or car.
Even if they manage to get ahead financially, the burden of their debt will push them back under. They will inevitably default, costing the government — and, ultimately, taxpayers — money.
The problem is the American student loan system is not sensitive to the difficulties of those first few years out of school. Under the usual model, the payments are on a set monthly schedule regardless of income and spread over just 10 years. Otherwise, for example, students must specially apply for the income-contingent option every year.
But in the British system all loan payments are calculated directly from wages. So payments for the year are capped at 9 percent of any earnings above £15,000, or $20,405. Because of changing costs of living, that cap will be increased to £21,000, or $28,571, for those starting their loan in 2012.
This money is taken directly from students’ monthly salaries, like income tax, so there’s no chance of default. If students’ incomes drop below the cap, no more payments are taken until their income rises. The remaining debt is forgiven after 20 years.
The UK’s progressive student loan system has kept student debt low and defaults lower than 2 percent, according to the Student Loans Company.
In 1997, the year before this system was instituted, the Student Loans Company, which handles all student loans, estimated £61 million, or $83 million, would not be repaid because of defaults. This resulted in the British taxpayers paying for 20 percent of the balance that year. Under the new system, that monetary burden has all but evaporated.
The U.S. student loan program is hemorrhaging money. Adopting the British model may cost the government money in the short-term by lowering payments and forgiving debt after a certain time, but it ultimately will increase revenue by keeping more students paying off their loans.
Since American students pay more for their education, and thus must borrow more, the U.S. can expand the time before debt forgiveness to 30 years.
Yes, students may end up paying more in interest by paying off their loans over a longer period, but this increase is vastly outweighed by the fines and fees involved in defaulting.
An income-based plan would save money for both students and taxpayers, not to mention giving the next generation of Americans a way to navigate our failing job market and economy without choosing between an education and a chance at financial success.
In your letter, President Obama, you said you hoped we would join you in your efforts. Now, we’re asking you to join us in an effort to take real action to reform a broken system.