Loans for Educational Opportunity: Making Borrowing Work for Today’s Students

By: Susan Dynarski & Daniel Kreisman | The Hamilton Project | October 2013

In this paper, the authors propose a better model of loan repayment. A single, simple, income-based repayment system called Loans for Educational Opportunity (LEO) will replace the current bewildering array of repayment options. Student loan payments will automatically rise and fall with a borrower’s earnings, just as contributions to Social Security rise and fall. A fraction of earnings will be deducted from each paycheck, with a larger fraction taken when incomes are high and a smaller fraction when incomes are low. A borrower who wants to pay off the loan more aggressively can file a W-4 that indicates the higher payment. If a borrower loses his or her job or suffers a pay cut, the borrower will not need to file paperwork to adjust the payments, since the withholding will automatically adjust. Payments will continue until the loan is paid off, for a maximum of 25 years.

This is a system of loan repayment designed for the 98 percent of students who borrow a manageable amount. For the other 2 percent, the authors propose stronger consumer protection: Private student loans will not survive bankruptcy, loans that need a credit check will not be marketed as “student loans,” and individuals will exhaust all federal student loans before being allowed to take out any private loans.

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