There are many proposals for making higher education more affordable, such as offering free community college or eliminating student loans altogether. Given that postsecondary schooling yields benefits for all of society — through greater tax contributions, higher productivity, reduced dependence on the social welfare system, and so forth — some public subsidization of the cost of higher education makes sense.
But the standard federal student loan does not align with the economic realities of postsecondary schooling and the labor market. And, though education is an investment that does not pay off for everyone, students face complex and limited options for reducing repayment burdens and are prohibited from discharging the debt through bankruptcy.
But the existing plans are not optimally designed. Borrowers must opt into such a plan over the standard repayment plan. Payments are based on the prior year’s income, which means they do not seamlessly adjust to changes in borrowers’ earnings and employment circumstances. Nor do they automatically adjust to borrowers’ current hardships, necessitating complicated forbearance and deferment rules and requiring annual recertification.