How to make college affordable: no one is talking about the best and cheapest solution - income-contingent long-term student loans - includes related article on cost of student loans

Washington Monthly, April, 1997 by Nurith C. Aizenman

No one is talking about the best and cheapest solution

Unless your last name is Rockfeller, chances are you're unnerved by the sky-rocketing cost of a college education. Perhaps you've heard that between 1981 and 1995, tuition at even traditionally affordable public colleges increased by 234 percent--almost three times as fast as median household income. Not to worry. Help, or rather, the politicians are on the way. President Clinton has introduced a series of measures that, he claims, will make at least the first two years of higher education affordable for everyone. The good news is that Clinton's plan has sparked a spirited debate. Deep thinkers from both ends of the spectrum have come forward with proposals of their own. The bad news is that tEe most effective--and least costly--solution isn't even being mentioned.

The debaters fall into two camps. On one side are the tax break cheerleaders. Included in this category are hard-right Republicans, who favor a variety of measures--like allowing people to deduct part of the interest on their student loans--that are of dubious benefit unless you happen to be in a high tax bracket. Also in the tax break camp is Bill Clinton, who is touting a less regressive plan. Still, Clinton is hardly mounting a socialist revolution. One of his main proposals, to let families with incomes of up to $100,000 take a tax deduction of up to $10,000 for the cost of higher education, is as generous a gift to the upper middle class as anything the GOP could come up with. To mollify the critics, Clinton has also suggested a tax credit to allow families to keep up to $1500 a year for the first two years of postsecondary school. Since students would have to deduct any federal grant money they receive from the credit, the main beneficiaries would be those in the lower-middle class, who earn too much to qualify for grant assistance, but not enough to really gain from the deduction. The cost of Clinton's tax breaks: $36.2 billion over the next five years.

In the second camp are those who claim federal grants are the way to go. Members of this group include think-tanks like The Institute for Higher Education Policy, which recently co-published a report pointing out that even Clinton's tax credit is of no help to the people who really need it: low-income kids who can't afford to go to college. The meteoric rise in the cost of college, combined with the dramatic decline in government assistance, has hit these kids particularly hard. From 1981 to 1994 the real value of federal "Pell grants" fell by 22 percent. According to economist Thomas Mortenson's analysis of the government's Current Population Survey, today less than 10 percent of kids from low-income families earn a college degree--compared to 80 percent of those in high-income households. Instead of wasting billions of dollars on tax breaks for middle-class students who would go to school anyway, the grant advocates argue, why not spend it on more and larger grants to the neediest students? The Clintonites counter that the point is moot. To ask for anything more than the small Pell grant increase included in Clinton's budget is hopelessly naive, sighs David Longanecker, Assistant Secretary for Postsecondary Education. "We're working with a Congress that doesn't give us that option."

But by framing the issue as a choice between tax breaks or grant increases, Longanecker and the rest ignore a crucial point: there's a third option--one which is far more effective and a whole lot cheaper than either grants or tax breaks. What's more, this plan, or at least a flawed version of it, is already on the books. All that's needed is to get rid of the defects and to implement it properly.

The Third Way

The idea, in its ideal form, is deceptively mundane. Instead of requiring students to pay back their college loans on a fixed schedule, give them the option of taking out long-term loans that are "income-contingent." In other words, the student's monthly repayment is set according to his ability to pay. If his income is low one year, he will pay less back. If he gets a big raise the next year, his payments will go up accordingly. This plan is hardly new: it's been advocated for years by such diverse figures as conservative economist Milton Friedman, and neo-liberal writers Walter Shapiro, Mickey Kaus, and Timothy Noah.

The seemingly simple "pay-as-you-can" formula has enormous potential. And unlike tax breaks or grants, it helps people in all income groups. Working-class students who take out an income-contingent loan will not be forced to repay their debt in impossibly large installments--making them far less likely to default. Middleclass graduates who want to go into useful but low-paying fields, like teaching or social work, will be able to afford that choice. Lower-income kids contemplating college will no longer be discouraged by the fear of taking on a financial burden they might be unable to carry upon graduation. In short, if income-contingent loans were to become widely available, college could become affordable and accessible to everyone. An added bonus: since students would increasingly be the ones paying back their loans, they might be more likely to insist on getting their money's worth, spending less time partying and more time studying, and pushing their schools to reciprocate with lower prices and better quality.