Borrowed Time

America has a student loan problem: Collectively we have more than $1 trillion in debt from college costs, an astonishing figure that dwarfs many other forms of debt. That all-too-common burden has led an ever-increasing number of college goers to default on what they owe. It’s clear enough that we need to fix this growing problem, but one of the most popular solutions may instead be making things worse.

The problematic solution in question is known as income-driven repayment (IDR). In theory, at least, IDR plans are tailored for individual borrowers, establishing payment amounts “based on your income and family size,” as the Federal Student Aid office explains. Those who fail to pay off their loans within 25 years can have their remaining debt forgiven. In 2013 these programs accounted for 6 percent of borrowers in repayment, but by 2014 that figure rose to 11 percent. 

The rapid growth of IDR programs has brought increased attention to their consequences. Perhaps most notably, a recent report by the General Accounting Office (GAO), found that IDR programs will cost the federal government about $74 billion dollars in 2017, far more than what was projected by the U.S. Department of Education. This has raised concerns from some about the ability of the department to estimate loan program costs at all, potentially providing ammunition for Republican lawmakers to repeal the student loan program without a viable replacement.

So far, responses to that GAO report have largely fallen into predictable camps: Some have doubled down, reaffirming that those costs are preferable to the pain of borrowers in the pre-IDR landscape. Others propose modest tweaks (without explaining how ‘simplifying’ IDR to reduce costs will still assist borrowers) or suggest modifications likely vulnerable to the same failings. And a third approach decries IDR enrollment and costs as evidence of borrower irresponsibility, intolerable political generosity, or both.

To be clear, we urgently need an honest conversation about IDR. We should consider what its growth signals about college financing and what we should expect in exchange for billions in taxpayer investment. However, this discussion on how to fix IDR misses two key takeaways:

1. Since attempting to minimize the downstream effects of student borrowing is more expensive and difficult than forecasted, we need real innovations on the front end. That is, we should rethink borrowing, and not just repayment.
2. There are cheaper and better ways to help student borrowers than dangling the promise of loan forgiveness at the end of two decades of repayment, particularly given what we know about the effects of student debt on retirement saving, home equity, net worth, and other measures of wealth accumulation.

IDR is not merely an inefficient way to back into loan forgiveness. It exacts real costs from borrowers by asking them to purchase more manageable payments with foregone investment during critical early-career years. Because IDR increases the length of loan repayment, it may keep those who use it from building their assets for longer than they otherwise would, thereby contributing to the gap in wealth holdings among college graduates with and without outstanding student debt.

There’s plenty of evidence that this gap matters: Robert Hiltonsmith found that college-graduate households with median student debt had $134,000 less in retirement savings and $70,000 less in home equity than peers without student debt. A growing number of studies have found that households with college debt have lower net worth than those without. Further, new research shows that outstanding student debt increases the amount of time that it takes individuals to build net worth, no matter how large or small their debt actually is. This means that degrees are less valuable for those who have to borrow, a problem that disproportionately affects students from low-income backgrounds.

Mounting evidence of unequal returns is not the only failure of today’s high-stakes financial aid system: There are real concerns, for example, about the unmet needs of nontraditional students, poor completion rates, and the increasingly ‘private’ nature of public colleges. But a nation that makes higher education central to opportunity vests education with an outsized role and needs financing systems that are both equitable and affordable.

Instead of funneling disadvantaged students into a financial aid system that further disadvantages them (and hoping the repayment approach can lessen the blow), we should take this moment to pivot to asset-based approaches. These approaches, which work by helping families build college savings, starting when a child is young, have been shown to improve educational outcomes before and during college, as well as returns after graduation.

For example, a policy that deposits $8,400 in children’s accounts at birth and encourages families to deposit $5 per month could yield over $34,000 by the time those children are 18—equal to the average cost of a four-year degree at a public university in 2015. What’s more, it could do so for all children born in a given year (though there might be reasons for fiddling with the particulars) for an estimated $34 billion annually, less than the cost of IDR alone. These accounts could then serve as conduits for contributions from employers, scholarship providers, and states to augment balances and reaffirm the societal benefits of educational attainment.

Of course, there are no silver bullets: other ills—requiring other policy remedies—afflict higher education today. However, this approach could constitute a uniquely American financial aid system—and an infrastructure for lifelong, mobility-enhancing, wealth building. In the transition toward this long-term recalibration, equity should be financial aid reform’s North Star, reminding us that it is unwise to rely on IDR. It’s a policy that we should have known was unfair, even before we knew it was so expensive. What Americans need isn’t a softer landing from their student debt, but a ladder on which to climb.