Rubio revives free-market tuition reform plan
Sen. Marco Rubio re-introduced a bill last week that would allow students to graduate college debt-free.
“In the 21st century, higher education is no longer an option for Americans, it has become a necessity,” Rubio said in an Oct. 20 press release. “A complex and confusing student loan system makes it increasingly difficult for millions of people trying to meet the challenges of our economy.”
"When the $1,500 monthly bills for my loans started coming in, I realized I couldn’t pay them."
Whereas some political leaders have responded to that challenge with proposals for large-scale government interventions into the student loan market, Rubio is advancing a more conservative approach that envisions a new type of arrangement between students and private lenders—a proposal originally pioneered by Milton Friedman that also has the backing of the American Enterprise Institute.
The Investing in Student Success Act, which Rubio had introduced last year only to see the bill stall in committee, aims to create the legal framework to allow for income share agreements (ISA’s), whereby private lenders finance a student’s tuition and other educational expenses in exchange for a specified percentage of that student’s income for a predetermined period of time after graduation.
ISA’s differ from traditional loans in that there is no principal or interest, though Rubio’s bill includes provisions designed to ensure that the repayment terms of ISA’s are roughly equivalent to the costs of repaying a standard loan, such as a “commitment factor” based on the share of income pledged and the length of repayment. The maximum commitment factor is 2.25, which is equivalent to pledging 7.5 percent of income over a period of 30 years.
In addition, borrowers are not required to make repayments for any year in which they have an income below $15,000, while for years in which they exceed that threshold the repayments are tax-deductible.
“Allowing private entities to invest directly in an individual student is an alternative to student loans that will help make higher education more accessible,” Rubio claimed. “By clarifying the lawfulness of income share agreements, this bill incentivizes the free enterprise system and allows people to access the skills needed to take advantage of the opportunities created by the free market.”
Rubio’s insistent advocacy of ISA’s is motivated not only by economic considerations, but also, as he explained in a speech last year at Miami-Dade College, by his own experience paying off over $100,000 in law school debt as a young professional.
“My first job paid well for a young attorney. I was making over $50,000, which was more than either of my parents had ever made,” he told the audience. “But I was living with my parents and paying them rent. I was trying to save for my wedding and hopefully to buy a house. And when the $1,500 monthly bills for my loans started coming in, I realized I couldn’t pay them.”
Noting that tuition rates have been rising faster than the rate of inflation for many years, Rubio explained that “colleges know the federal government will continue lending students as much as they need in federally guaranteed loans,” and therefore feel free to turn tuition hikes into a “free subsidy” that they can use to pay for non-academic amenities and new administrative positions.
Under an income-based repayment system, though, he explained, investors “would look at factors such as your major, the institution you’re attending, your record in school—and use this to make a determination about the likelihood of you finding a good job and paying them back.” Not only would this insulate students from unaffordable debt burdens, it would create market pressures on schools to rein in rising tuition.
“For millions of Americans trapped in low-paying jobs or at risk of dropping out of school, higher education may be the only way they will ever be able to move to a better paying job,” Rubio pointed out. “What they need is more affordable degrees or career education options that are tailored to their specific needs and talents.”
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