Jeb Bush’s higher education plan has attracted little notice in the heat of a campaign that has focused more on personalities than policy details, but his proposed reforms to the federal student loan program deserve serious attention regardless of the outcome of his bid for the presidency.
Existing repayment programs attempt to help students by linking repayments to income, but these programs are difficult to navigate and require participants to file onerous paperwork. As a result, hundreds of thousands of students needlessly default on their loans every year. The Bush plan addresses this—and other—problems by replacing student loans with a $50,000 line of credit that is repaid solely based on income and the amount borrowed.
Loan repayment options for current students include the standard 10-year repayment schedule, which asks students to pay a fixed amount every month, ultimately paying off the loan interest and principal over 10 years, and the existing income-driven repayment plans, which base payments on a formula that takes income but not amount borrowed into account. Under income-driven repayment plans, students pay 10 to 15 percent of their incomes (depending on the plan) until they have paid off the loan with interest, with any remaining balance forgiven after 20 to 25 years.
The Bush plan is a significant deviation from these programs, stipulating that students automatically repay (through the tax withholding system) one percent of their income for 25 years for each $10,000 that they borrow to pay for college. For example, a student who borrows $30,000 and gets a job with a starting salary of $50,000 would pay $125 per month initially (i.e., 3 percent of income). She pays more if her salary increases, but makes no payments during periods of unemployment.
Unlike the current system, the Bush plan charges no interest and caps total payments at 1.75 times the original amount borrowed. Students can borrow up to a total of $50,000 for their postsecondary educations under the Bush plan, which is enough to cover most undergraduate student borrowing, though it will require many graduate students to seek alternative financing options.
How would the Bush plan work in practice? In a recent analysis produced for the Brookings Institution’s Evidence Speaks series, I evaluated Bush’s proposal and found that, compared with the current system, it would lead to more appropriately graduated repayments and a stronger link between borrowing and repayment amounts, addressing some of the primary concerns with automatic income-driven repayment plans.
A key element of the Bush plan is that borrowers pay a constant share of their income. As a result, the total amount repaid increases much more smoothly relative to income under the Bush plan than under the Revised Pay as You Earn (REPAYE) income-driven repayment plan.
The REPAYE formula is generous to borrowers who earn very little but asks those with high incomes to pay no more than those with middle incomes. The upshot is that low- and high-income borrowers pay more under the Bush plan than under REPAYE, whereas middle-income borrowers pay less under the Bush plan than under REPAYE.
Perhaps the most important innovation of the Bush plan is that it creates a stronger link between borrowing and repayment amounts than REPAYE. This means the Bush plan addresses a leading concern with automatic income-driven repayment plans: that they will make students less sensitive to the prices charged by colleges and lead to further increases in tuition.
For example, my analysis shows that REPAYE essentially forgives all borrowing over $30,000 for a hypothetical borrower with a starting income of $30,000. The Bush plan fixes this problem by directly tying payments to amount borrowed.
The core ideas of the Bush student loan plan are worthy of serious consideration by presidential candidates and policymakers on both sides of the aisle. Tying repayment to both income and borrowing could be accomplished in tandem with candidates’ existing proposals. Income-share agreements are a private-sector analog of the Bush plan that have attracted support among Republicans. A Republican candidate might propose the public version for college and a private-sector version focused on the financing of graduate education.
Making student loan repayment income driven and universal has bipartisan support. A Democratic candidate could propose a version of the Bush plan that retains its progressivity at the middle and higher income levels, and makes it more progressive at the bottom by adding an income offset. She or he could also expand it to higher borrowing levels that would better accommodate graduates students, who would otherwise have to seek private financing.
Our student loan system is a complicated mess in many ways. Fixing it should be a priority for Congress and the next president. A student lending policy that is both income and borrowing driven is easily adaptable to the preferences of policymakers with different political philosophies but a common desire to improve our federal student loan system.