The Economist: Fixing Student Loans

By Ray PerrymanStudent loans are once again in the news with the Obama Administration proposing to add some 5 million individuals with outstanding loan balances to the Pay as You Earn plan.
July 5, 2014 at 2:05 a.m.

The plan caps student loan payments at 10 percent of income, and loan balances disappear after 20 years (10 years for people working in the public sector).

Most students now taking out loans can already access PAYE, but many of those with older loans have not been eligible. In addition, many students with loans are unaware of the PAYE option. The new proposal would enhance both the availability of the program and efforts to make students aware of its existence.

As a White House fact sheet puts it, tuition is up more than 250 percent during the past 30 years while average income levels for typical families are up just 16 percent. It's therefore no surprise that debt has become an extremely common aspect of higher education.

More than 70 percent of people earning a bachelor's degree take on loans to do so, with an average balance of close to $30,000. Clearly, having to repay these loans may delay other purchases such as houses or cars.

There are also plenty of examples of people with debt far outstripping their ability to pay.

Enhancing educational attainment is beneficial to individuals, businesses and to society as a whole. Those with college degrees (or even some college attendance) are far less likely to be unemployed and tend to earn substantially more during their working lives. Recent academic studies have confirmed these long-held truisms.

Within these definite overall relationships, however, is a wide range of outcomes for individuals. Employment and earnings are driven by many factors (personality, work ethic, choice of career, location and much more).

College attendance is only one aspect of future wages, and simply receiving a degree is no job guarantee.

While helping people hamstrung by student loans is certainly a worthy societal goal, this area is one where we should tread very carefully. The PAYE plan distorts the decision process, both before and after college.

Knowing that future loan payments are capped at 10 percent of earnings and that balances will go away entirely at some point in time makes debt a much more attractive option. Whether the balance is $20,000 or $1 million suddenly is less relevant. Upon entering the workforce, some of the pressure is also off to obtain a well-paying job. By reducing the potential fallout from over-borrowing, there is a very real risk that the problem of ballooning student debt will grow even worse. The difference is that taxpayers will be picking up more of the tab.

The Texas Higher Education Coordinating Board has some very helpful information, but naturally, it's only for public colleges and universities.

M. Ray Perryman is president and chief executive officer of The Perryman Group ( He also serves as institute distinguished professor of economic theory and method at the International Institute for Advanced Studies.



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