Most Americans are in debt struggling with massive student loan debt that is keeping them from living the American dream, including buying the car of their dreams, the home of their dreams and even starting that family they’ve always wanted.

Student Loan Debt

From the earliest days of student loan programs, observers have worried that repayment would impose too heavy a burden on young people leaving school. Although assessing the empirical dimensions of the hardship created by student loan repayment has proved far more difficult than expressing concern over its existence, few observers doubt that some students are experiencing real difficulties.

Anecdotal evidence of hardship is readily available and surveys have revealed that while student debt rarely has a significant impact on the lifestyles of borrowers in repayment, nontrivial proportions of former students feel burdened by student loan repayment.

The fact that average loan burdens are manageable does not diminish the problems facing the minority of students who devote high percentages of their incomes to debt repayment in order to meet their obligations.

Investments in Human Capital

One of the major goals of student loan programs is to allow young people to borrow in anticipation of future income. Student loans finance investments in human capital that the borrowers hope will yield positive returns over the rest of their lives.

Because the loans originate early in the borrowers’ lives, most of those who are repaying their student loans are relatively young. Not only will they have borrowed from student loan programs, but they will likely have borrowed to buy cars and houses, all in anticipation of rising income.

This has become a serious issue for many college graduates who thought that simply getting that college degree would put them in elite company and make it easy to pay off their student loan debt in just a few short years. Unfortunately, for most, this is just a pipe dream. Another student will have to work off those degrees at lesser jobs for many years to come.

Not Enough Jobs

Getting a college degree has become more expensive than ever, and for what? We have been through a recession that has caused other financial issues for the majority of Americans. Just because you graduate doesn’t mean there’s a job for you in the real world. Many millennia’s have ended up being forced to take jobs that aren’t even in the field they studied in, and it’s costing them money.

And let’s not even get started on the ridiculous interest rates that are being tacked on to these student loans that are “awarded” to college students.

Earnings and Consumption Premiums

Graduates from colleges and universities earn more, on average, than individuals with lower levels of educational attainment. Some of the earnings differences between individuals with different levels of education may be attributable to other factors, because educational credentials are correlated with socioeconomic status and other personal characteristics.

However, careful statistical analyses indicate that differences in median earnings do not measurably overstate the financial return to higher education.

Income-Contingent Repayment Loan Systems (ICRL)

The problem of excessive debt burden among former students can be largely avoided by the creation of an income-contingent repayment loan system. Such systems have existed in Australia since 1989 and in New Zealand since 1992; a full-blown ICRL system came into force in England in 2006.

In all three systems, students pay no tuition at the beginning of their studies; instead, they pay the fees after leaving school. Moreover, if their post-schooling income is less than a threshold amount, no payments need be made.

ICRL systems solve several problems that have plagued the mortgage-style student loan systems in place in the United States and Canada. The major problem is the one under discussion here—mortgage-style loans have a fixed repayment period and therefore the size of the monthly payment is determined by the size of the loan.

Students with very large loans will have very large monthly payments, regardless of their earnings. By contrast, ICRL systems gear payment amounts to income levels. There is little need for debt management programs aimed at former students because repayment rates are generally kept fairly low.

Conclusion

Acknowledging that debt obligations should not exceed certain percentages of income is insufficient protection for students. Sound advice for students is important but does not, on its own, provide viable alternatives for financing education. Given the uncertainty of the return to individual investments in higher education, a combination of policy approaches is required.

Well-designed loan forgiveness programs, income-contingent repayment plans consistent with manageable repayment levels, and provisions for discharging education loans in bankruptcy are all necessary components of an education financing system that protects students from excessive debt burdens.