Expert's take: Obama's student loan reform

President Obama signed a presidential memorandum reducing the burden of student loan debt on Monday. Andrew Kelly, director of the Center on Higher Education Reform and a resident scholar in education policy studies at AEI, weighed in on what this measure does and means for students and taxpayers:

Obama used executive order to expand the “Pay as you Learn” student debt repayment plan. What exactly does this plan say? What does it do for students?

Obama’s executive order expands eligibility for his Pay As You Earn (PAYE) Program to an additional 5 million borrowers. The plan allows eligible student loan borrowers to cap their loan payments at 10 percent of their income and have all outstanding debt forgiven after 20 years (10 years if the borrower works in the public sector or for a nonprofit org).

The announcement represents a shift in eligibility, but not a shift in policy. It means more borrowers will be eligible for loan forgiveness than before, which means growing costs for taxpayers. Forgiven loan balances wind up on the federal tab.

What will the repercussions of Obama’s action be? How will it affect current and future students, as well as the college system as a whole?

The expansion of loan forgiveness programs could lead to all kinds of perverse, unintended consequences. Colleges will have less incentive to keep their tuition affordable if most of those debts will be forgiven anyway. And students will have little reason to borrow responsibly if they can count on the government to sweep in and bail them out. What this policy does, then, is simultaneously make student loans more affordable for the college-educated while making college even more expensive for those aspiring to go. And it also puts taxpayers on the hook for increasingly large college tuition bills.

What are alternative solutions to the student debt crisis? What measures do you think would best serve our society? 

Allowing borrowers to tie their loan payments to their income makes good sense because it will help them avoid defaulting on those loans. But there’s no reason that we must couple income-based repayment with loan forgiveness. It’s the loan forgiveness policies that set us up for tuition inflation and will claw away a larger portion of the federal budget each year.

More broadly, we need to provide students with alternatives to student loans. One idea is to allow private investors and students to enter into income-share agreements, where investors pay the cost of the student’s college in return for a share of their future income. Because investors have an interest in the students’ success, they will help guide students to programs that are valuable. In contrast, today’s loan programs subsidize enrollment in any college and at any price.