A Great Idea For Solving College Debt

We’ve discussed the problems with student-loan debt at length. Let’s look at a possible solution. I concede that it has many hurdles, most of them political.

Escaping the Student-Debt Trap – WSJ: “Here’s his solution in a nutshell: Suppose an industrious young person wants to get a degree at a top university but needs about $50,000. Under an income-share agreement, the student promises an investor a certain percent of his income over a fixed period in exchange for cash. The agreements are not loans, and there is no outstanding balance. Students who earn more pay more, and students who earn less pay less.

Federal loan programs “encourage students to pursue any degree regardless of price,” he says. Students can borrow cash directly from the feds through Stafford loans. Parents have an even easier line of credit: Under the federal Parent PLUS program, mom and dad can borrow up to the cost of tuition after a credit check. “People are sometimes mortgaging their homes on what their kids will do,” Mr. Palacios says. It’s not working.

Mr. Palacios says income-share agreements, or ISAs, can mitigate the damage from what he calls the coming student-loan ‘train wreck.’ First, they ‘send a strong signal about value,’ he says. Want to get a peace-studies degree for $100,000? Be prepared to pay a hefty portion of your income for a really long time. ISAs give students much-needed information about which programs are more likely to lead to employment. Over time, colleges would be forced to lower costs and offer better value. Most important, ISAs take away ‘the risk of financial ruin,’ Mr. Palacios says. If you don’t earn any money, you don’t pay any money.”

And the largest hurdles? Things like this:
“… ISAs are often portrayed by critics as indentured servitude. ‘Part of that is fear, and I think it’s completely misplaced,’ Mr. Palacios says. ‘ISAs in no way tell anyone what to do. The contract can’t force anyone to work.’ He maintains they are more liberating than student loans: ‘You have the same freedoms, but you don’t have the same worries.’

Others view ISAs as exploitation. Dave Bergeron, of the left-leaning Center for American Progress, told Reuters in April that ISAs are unfair to students because some would pay back ‘substantially more’ than they borrowed. ‘That takes a static view of the student,’ Mr. Palacios argues, noting some rich ideological inconsistency. ‘These people who talk about exploiting students have no qualms saying the 1% should pay much more of their income to the federal government. If that student has to pay a lot, it’s because that student became part of the 1%. To them, the right tax rate for the 1% is always just ‘more.””