Rethinking Student Loans

Rethinking Student Loans - Possible Solutions to Student Loan Debt

When the topic of student loan debt rears its ugly head, there is inevitably an argument about who is at fault for our current situation. Many believe the government should be working toward a free college system. Others strongly insist that the colleges themselves are to blame. And there are even some who feel students have played a leading role in why so many Americans are struggling with student loan debt. Regardless of where we place the blame, one thing is clear – the current system is not working.

President Obama thinks he has found the solution in his plan to provide two years of free community college, but I’m not sold on it. Even if he finds a way to fund the program, it doesn’t guarantee that students who transfer to a 4-yr college to continue their degree programs won’t be overwhelmed by student loan debt.

Oh, and there’s a catch. Students with a family AGI of $200,000 and above would not be eligible.

So, technically it’s not free for everyone. And before I get a slew of angry comments about how families with that income should pay for college, please remember that not every student has a good relationship with his or her parents.

There are many students who do not receive any support, emotional or financial, from their parents. If it’s going to be free, it should be free to all students.

There is also growing support for a new college model that allows students to attend college for free in exchange for a percentage of their future earnings. Oregon, for example, is considering a program where students can attend a public, in-state college tuition-free (bachelor’s degree) if they agree to give back 3% of their income over 24 years.

It’s being dubbed the ‘Pay it Forward’ plan because students aren’t necessarily paying back what it may have cost to attend the schools, but are, instead, reinvesting in the program to allow future generations to attend college for free, as well. The problem is that tuition is not the only expense students incur. In some cases, housing and meal plans far exceed tuition fees, so these students will still need to borrow to help cover their other expenses. That means that they will not only continue to graduate with debt, but also be obligated to give up a portion of their income for the majority of their adult lives.

But, states are not the only ones looking into this indentured servant model. Some companies, such as Lumni, are also investing in students. Unlike private student loans, no cosigners are needed for approval. Instead, students are evaluated based on their potential to succeed in college and in their careers. If approved, they commit to giving a certain percentage (apparently this varies by student) of their income for 10 years.

Payments do not commence until students have their first job after graduation. As of this date, though, the company is no longer accepting applications from U.S. students. Hmm, is it possible the model is not giving investors a big enough profit?

Even Mark Cuban is jumping into the student loan debate and offering his own solution to the problem – capping federal student loans at $10,000. Nice thought, but as we have seen in the past, students are more than willing to take out private student loans to cover any additional expenses, so that doesn’t really solve the problem. But here’s a thought – what if we actually tied the Cost of Attendance (COA) to a student’s anticipated income level upon graduation, and made that the student loan debt threshold? Think about it.

Whenever you apply for a mortgage or even a car loan, lenders factor in your income to determine if you will be able to manage the monthly payments and satisfy the debt.

Why shouldn’t we treat college the same? For example, students interested in a theatre degree can expect to earn $33,200 upon graduation, according to To help prevent student loan default and keep payments manageable, the total debt threshold allowed should remain close to this anticipated salary.

For those who are undecided, a median starting salary could be used as the total allowable debt and adjusted once they declare a major. This would require students to research colleges, look at their return on investment, and find alternate funding sources to help cover their expenses (scholarships, work-study, etc.) to ensure they do not exceed their total loan limit (federal and private combined).

The responsibility of student loan debt would essentially be in the students’ hands. Students would no longer suffer from buyer’s remorse because they would know upfront how much their earning potential was and how much student loan debt they could amass. As students become smarter shoppers, colleges would eventually need to lower rates or offer larger financial aid packages to become more competitive in the market.

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