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Replace the Federal Student Loan System with an Income Share Agreement Program

American Enterprise Institute

August 3, 2020

Key Points

  • The higher education narrative has been dominated by the student loan crisis as of late. While the magnitude of this problem is often oversold, borrowers do sometimes need help.
  • However, debt forgiveness plans, such as those proposed by Sens. Bernie Sanders (I-VT) and Elizabeth Warren (D-MA), deliver the biggest benefits to those who need it least.
  • A better solution would be a government-sponsored income share agreement, in which the amount due each month depends only on how much the borrower is earning, and a simplified IRS-managed income withholding repayment system.

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We hear a lot about how student loans are unaffordable for borrowers. That notion was central in the 2020 Democratic primary race, with Sens. Bernie Sanders (I-VT) and Elizabeth Warren (D-MA) proposing to wipe away massive amounts of debt. Student loans—an oft-forgotten policy issue in days past—were addressed in the first COVID-19 relief bill, even though many other more pressing areas of the economy were left untouched.

The problem with generous debt forgiveness plans like Sanders’ and Warren’s is that they deliver the biggest benefit to those who need it least.1 College typically pays huge dividends during a career. Even with a student loan payment, people with college and graduate degrees are among the more well-off in the economy.

But sometimes college doesn’t pay off,2 and borrowers do need help. We’ve tried to fix this problem with a system for loan repayment3 that relieves borrowers from having to make unaffordable monthly payments. Unfortunately, that system doesn’t work well, because over time it has become a cobbled-together safety net of different programs with different terms and rules for eligibility. The result is that people who are underwater on their investment in college sometimes end up defaulting on their loans and paying an unnecessary price.

We need to replace this patchwork of programs with a simple, universal program in which all borrowers repay their federal student debt through a single plan: a government-sponsored income share agreement (ISA). While quietly embraced by conservatives for several years, the idea of using an ISA program to replace the federal lending program was formally proposed4 for the first time as part of Jeb Bush’s campaign for the Republican nomination for president in 2016. It is described in detail by its architect, Jason Delisle of the American Enterprise Institute, in a recent Manhattan Institute report.5

Read the full report.