Students: Learn Now, Pay Much Later

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Long-term student loans to help finance a college education are easy to get. A federal program lends almost $100 million annually, and banks in almost all states participate in plans to guarantee loans. But repaying the loans can be painful. In most programs, repayment arbitrarily begins two to six months after graduation and must be completed in three to six years (although the federally sponsored National Defense Student Loan Program extends the debt-redemption period to ten).

In the current Harvard Educational Review, Economist Edward Shapiro of the University of Detroit argues that loan programs are unrealistic because they are unrelated to the borrower's ability to pay. He proposes a federally financed program that he believes would take "the sting" out of long-term student loans without cost to the taxpayer.

Under Shapiro's plan, repayment would be geared directly to income. A former student would pay back nothing until his taxable income was more than $4,000 a year. The repayment sum would be 2.25% of taxable income at that level, rising progressively to 19.4% at the $10,000 level. Shapiro estimates that the average student loan would be paid back in ten years. The deficit created by a minority of defaulters and former students who fail to reach the pay-back income level would be met by assessing prospering graduates above the $5,500 income level a slight additional percentage that would be siphoned into the communal kitty.

While most current programs have loan limits of $3,000 to $5,000, Shapiro's plan would enable a student to borrow whatever he needed to get him through college. Since tuition will doubtless continue to rise, the unacceptable alternative to a massive and flexible loan program, as Shapiro sees it, is to exclude more and more qualified students from the schools, a shortsighted and unprofitable way to invest intellectual capital. In education, current debt, individual or national, is future wealth.