How the next president should fix the student loan problem in the United States

AAMERICA TOTAL student debt, at over $ 1.5 billion, is higher than the national debt of most countries. Its size has quintupled since 2004, surpassing both credit card borrowing and auto financing. This growth is often presented as a sign of a crisis. But the increase in total debt, while startling, is not the real problem. This largely reflects the increase in loans from graduate students, such as aspiring lawyers, who will continue to earn a lot of money. And 92% of student debt is owed to the federal government, which means defaults pose no risk to the financial system (see article). The real problem is that 11 million Americans, many poor and non-whites, and many duped into studying for worthless degrees, struggle to pay even small debts.

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Some Democratic presidential candidates appear to be unaware. The frontrunner Bernie Sanders wants to write off all student debt – a handout that would indeed relieve those in trouble, but also provide a huge boon to the better-off. Elizabeth Warren would write off all debts up to $ 50,000, a policy that is just as blind. Fortunately, Joe Biden and Mike Bloomberg, who announced his student debt policy on Feb. 18, have plans better suited to the problem.

MM. Biden and Bloomberg want to put all existing and new borrowers for undergraduate degrees into an income-linked repayment program, whereby borrowers are only required to repay a fraction of their annual income above a certain threshold . The Economist has long advocated for such a reimbursement mechanism, which works well in Britain. Tying repayments to income makes impoverishment through student debt impossible and frees graduates from early career risk-taking.

America already has income-linked repayment programs for troubled borrowers, but they are flawed. The income thresholds at which repayments start are too low: typically around $ 18,000, compared to £ 26,000 ($ 34,000) in Britain. Interest rates, which typically hover around 6%, are excessively high for government borrowing. And the schemes are an administrative nightmare. Students must choose from one of four options and complete new paperwork each year to avoid penalties. Any unpaid debt is written off after 20 or 25 years, but the debt forgiveness is taxable, putting troubled debtors at the mercy of the Internal Revenue Service.

By registering everyone automatically, Mr. Biden and Mr. Bloomberg’s plans would dramatically improve the status quo. Both would reduce repayments from 10% of income above the threshold to 5%, even less than in the UK system. Mr. Biden would increase the repayment threshold to $ 25,000 and make all debt forgiveness tax-free. Mr Bloomberg would write off debts at failed or predatory for-profit universities and exempt debt forgiveness up to $ 57,000 from tax. Both applicants should also consider reducing the high interest rate.

Making student loans less expensive for borrowers, however, is only half the cure. Congress should also crack down on shoddy for-profit colleges. These institutions depend almost entirely on federal student loans for their income, charge the highest possible prices, and market themselves aggressively. When students graduate and can’t pay off their debts, the taxpayer foots the bill. Barack Obama’s White House has tried to bring these colleges under control, but Donald Trump’s has relaxed the rules. All Democratic candidates recognize this problem. Republicans are supposed to be wary of the government’s feeding frenzy, but they’re in denial.

A reform program could also include federal government loans to graduate students. Unlike undergraduates, it’s unlimited. While not a major source of debt distress, it can fuel an unnecessary and costly arms race among the wealthy. Governments have a role to play in funding higher education, but well-intentioned policy can often go wrong.

This article appeared in the Leaders section of the print edition under the title “Getting the maths right”

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