Report Finds Flaws in Debt Policies.

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Author: Burd, Stephen

Government policies that are designed to help borrowers who have taken on unmanageable levels of federal student-loan debt are "well intentioned but flawed" and need to be revised, according to a report released this month.

The report, "Addressing Student Loan Repayment Burdens," is the work of the Project on Student Debt, an effort being led by Robert M. Shireman, a former senior education-policy adviser in the Clinton administration.

The project, which is being financed by the Pew Charitable Trusts, is aimed at developing public-policy proposals to reduce the burden of student debt on those least able to afford it.

The government now allows borrowers who are unemployed or can otherwise demonstrate "economic hardship" to seek to have their loans put into deferment. Under that arrangement, borrowers defer payments on their student loans for up to three years, without being charged interest or incurring penalties.

The report recommends an alternative approach that has been promoted by Sandy Baum, an economics professor at Skidmore College and a senior policy analyst for the College Board, and Saul Schwartz, a professor of public policy and administration at Carleton University. Their proposal would set acceptable levels of debt for borrowers at different income levels.

Such a policy, the report says, would establish "a more uniform definition of hardship, and phase out the benefits as borrower incomes rise."

The report also explores how the federal tax code could be used to help those with unmanageable levels of debt. Borrowers can deduct from their taxable income the interest they pay on student loans. However, that policy "is not well targeted," the report says. For example, low-income borrowers who do not earn enough to pay taxes receive no benefit.

In addition, because it is a deduction, borrowers with higher incomes receive a larger benefit than those with lower incomes. The report recommends changing the tax deduction to a tax credit and tying it to borrowers' incomes.

The report also recommends extending to all borrowers a repayment option that is now available only in the direct-loan program. In direct lending, which provides loans directly to students through their colleges, borrowers can enter "income contingent" repayment, an option that allows them to repay their loans as a percentage of their incomes for up to 25 years. That option is available anytime they are having trouble with their loan payments.

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By Stephen Burd