Under an income-contingent loan system, like those in Australia and Britain, students pay a fixed percentage of their income toward their loans. Payments are automatically deducted from their paychecks by the IRS, just like income-tax withholding. Self-employed workers pay in quarterly installments, just as they do with their taxes. If borrowers earn a lot, their payments rise accordingly, and their loans are retired quickly. If their income falls below a certain level—say, the poverty line—they pay nothing. After an extended time period of 20 or 30 years, any remaining debt is forgiven.
In other words, nobody ever defaults on a federal student loan again. The whole concept of "default" is expunged from the system. No more collection agencies hounding people with 10 phone calls a night. No more ruined credit and dashed hopes of home-ownership. People who want to enter virtuous but lower-paid professions like social work and teaching won't be deterred by unmanageable debt. [...]
The concept has been proven to work—Australia and Britain have used it for years—and both liberals and conservatives have reason to get on board. The Nobel Prize-winning economist Milton Friedman proposed the idea all the way back in 1955.
Indeed, income-contingent loans are such a good idea, one might wonder why they don't exist already. [...]
Sunday, December 04, 2011
Kevin Carey on the Best Kind of Student Loans
Posted by Abi. Posted at 9:59 PM