Yahoo Finance Former U.S. official: The student debt system is 'a nightmare'
Sheila Bair, who served as the 19th Chair of the U.S. Federal Deposit Insurance Corporation (FDIC) and the president of Washington College in Maryland, knows all about the dysfunctional U.S. student debt situation.
Student debt in America is “a nightmare. It really is,” Bair told Yahoo Finance’s Seana Smith at the recent All Markets Summit. She added that the burden is “heavily skewed towards lower-income students and families.”
The FDIC is a U.S. government corporation providing deposit insurance related to U.S. commercial banks and savings institutions. American student debt currently stands at over $1.5 trillion.
“We’ve got to find a better way to finance college,” Bair said. “I think colleges need to do a better job of constraining tuition increases in their own budgets and expenses. But also, I’ve been a big advocate of income share.”
‘Everyone benefits from an educated population’
Income share has shown to be successful in Australia for financing college. Instituted in 1989, the program links loan repayment to the borrower’s income. The Brookings Institute explained:
Borrowers pay a low interest rate equal to inflation and are exempt from payments until they earn AU $55,874 (US $36,850). Once a borrower’s income exceeds the threshold, [the borrower] owes a flat percentage of all income toward the loan that year. This rate increases as a borrower’s income rises, creating a progressive repayment structure.
Bair asserted that the system of income share “is sound.”
Undergraduate students would “sign a contract that says a certain percentage of their income over a certain period of years will be paid back to the government, and that’s their obligation,” Bair said. “If you’re an engineer or a hedge fund manager [and] make a lot of money, you’re probably going to be paying more than somebody who decides to teach math in an inner-city high school.”
Under the Australian system, there is no loan forgiveness after a borrower makes a certain number of payments, unlike the system in place in the U.S. However, loans are “available for the full tuition price, and because of the subsidized terms, many students opt to take them,” Brookings said.
When the New York Times opened the question of the U.S. college financing system to Australian readers, the responses were mostly shock or disgust. One wrote that “it is a tragedy when anyone with the ability, drive, and desire to access education is prevented from doing so for purely financial reasons. Everyone benefits from an educated population.”
Bair said that there’s nothing wrong with an income share system as “it’s based on capacity to pay.
“And that doesn’t really bother me because everybody gets the same flat rate.”
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