Eliot Spitzer, in a piece on Slate, advocates an "income contingent" student loan repayment system as a way to reform higher education financing. He points out that such a system was first proposed by Milton Friedman.Essentially, an income contingent system would base the amount of student loan repayments on the amount of income that the graduate is making at any given time (thus, it could change over time):
"The concept is simple: Instead of paying upfront or taking loans with repayment schedules unrelated to income, students would accept an obligation to pay a fixed percentage of their income for a specified period of time, regardless of the income level achieved. Suppose a university charged $40,000 a year in annual tuition. A standard 20-year loan in the amount of $160,000 (40,000 times four) would produce an immediate postgraduate debt obligation of $1,228.50 per month, or $14,742 per year, not sustainable at a salary of $25,000 or anything close to it. Under a smart loan program, the student could pay about 11 percent of his income, with an initial payback of $243 per month, or $2,916 per year, which is feasible at a job paying $25,000. If, after five years, the student's salary jumped to $100,000, payments would jump accordingly and move up over time as income increases."The political problem with an income contingent loan repayment system, as Spitzer acknowledges, is that it is redistributionist -- the wealthier students subsidize those making less. My retort to this is that our tax system is redistributionist, and this seems like such a good approach/method for influencing the way graduates choose jobs so that earning-capacity becomes less of a focal point.
115. It's so Slate-ish that Spitzer is writing for them -- who approached who? Did Slate seek him out or vice versa?
116. I think I read an article a few years ago about Australia using this kind of loan system (and Spitzer points out that it is used in foreign countries). Other than the redistribution angle, what are the other drawbacks of this system? Does it create perverse incentives to work less? In terms of reconceptualizing our societal economic "goals" (see my post on February 23), maybe that would be a good thing?
