Student Debt

Author: Nishant Sheth

The cost of education in the United States is tremendous. This is even truer about private colleges and universities. Increasingly, students take out loans in order for them to be able to afford to attend these institutions. The premise of these loans is that they will be able to pay them back from their future earnings. However, with unemployment so high, who is to say they will have the ability to pay this all back? The next expected estimates of student dept are expected to reach $1 trillion dollars. Now that is just an absurd figure. It is even higher than credit-card borrowing in the United States. Even if credit quality in other class of debt is improving, in terms of student loans they are becoming worse. What is the right solution? In the United States student debt is a slow and everlasting financial burden. Many suggest a change in bankruptcy laws because student debt currently is not a debt that can be wiped out. This is a possible route but many concerns such as taxpayer loss exist which makes it not a good option. The best option is the British model where student loan repayment is based on an income threshold. This seems like a fair option because it makes loan payments reasonable based on personal income flow. Obama proposed the idea to limit loan payments of struggling American graduates to 10% of discretionary income and forgiving outstanding debt after 20 years. Even though this would lead to a repricing of student debt it would be a good thing overall. Do you think the income threshold option would be an effective one? What problems do you foresee?

Article: http://www.economist.com/node/21534781