Giving Compass' Take:

• Sandy Baum, Kristin Blagg, and Matthew Chingos propose an alternative student loan repayment scheme that they believe will be more logical and equitable than the current system. 

• How can funders work to ensure that student loans are beneficial for individuals and society as a whole? 

• Learn about racial gaps in student loans. 

Imagine two borrowers with federal debt. One borrowed $50,000 as an undergraduate, so she will repay for 15 years under Trump’s proposal (or less if her income is high enough to repay the entire debt in a shorter time period). Another borrowed $30,000 as an undergraduate and $10,000 for graduate school, for a total of $40,000. She will repay for up to 30 years. If both have the same relatively low incomes after leaving school, the graduate borrower will end up paying more for her lower level of debt.

In the table below, if the interest rate is 5 percent, the borrower with graduate debt will end up paying for more than 29 years, reaching a total of about $79,000 because her monthly payments will reduce her loan principal by only a few dollars a month after covering interest.

A more sensible approach would adjust the repayment period based on the total amount of federal debt a borrower has accrued.

For example, the system could require that all borrowers repay a specified share of their income every month for 15 years before the remaining balance would be forgiven. However, each $1,000 of debt beyond $31,000 (the maximum for dependent undergraduate students) would add one month to the time a borrower must repay before having balances forgiven. A borrower entering repayment owing $43,000 would repay for 16 years. A borrower entering repayment owing $151,000 would repay for 25 years. This system would still free borrowers with very low incomes from any repayment obligations, while ensuring most borrowers repay the amounts they owe through affordable monthly payments.

This system would make students think more carefully about how much debt they are taking on and would diminish the incentive for students to borrow larger amounts because they can count on the extra debt falling to taxpayers to repay. It would also diminish the incentive for graduate programs to raise their tuition prices, knowing that many students can borrow more without increasing their repayment obligations.

Read the full article about the student loan repayment scheme by Sandy Baum, Kristin Blagg, and Matthew Chingos at Urban Institute.