Designing better student loans using system thinking

graduation

Students go into debt to pay for college. In the United States, the amount of student debt has surpassed $1.3 trillion, which puts it on par with auto loans. Americans like to think the student debt is an American phenomenon, but this article from the New York Times shows that students in other countries also borrow, and borrow almost as much.

Borrowing may not be American, but struggling to repay is. Seven million Americans are in default on their student loans. Economists worry that the burden of student loan repayment, and low credit ratings from not repaying, delay or prevent young Americans in starting families, buying houses, and saving for retirement.

There’s got to be ways to improve this system of pricing the social good of education.

Systems thinking, which is part of design, gives public and social sector marketers tools for developing better products and services. The New York Times article, without explicitly referring to systems thinking, ticks off several systems approaches that other countries have taken to reform their pricing of higher education:

  • Interdependence, Time Delays – The length of payment should match the lifespan of the asset. Houses last much longer than cars; mortgages extend over more years than car loans. Similarly, education lasts a lifetime, yet in the US, student must repay their loans in 10 years. Other countries have longer repayment periods: Germany 20, Sweden 25, England 30. Longer repayment allows for smaller individual payments, which are easier to make.
  • Change Over Time: A college graduate’s income will change over time. It makes little sense to charge someone fresh out of college the same payment as someone who has been working for ten years. Countries like Australia tie loan repayment to income. Repayment starts once borrowers start earning income above $40,000. Payment equal four percent of income, and come directly out of paychecks. This way, payments change over time as income changes.
  • Connections: In the US, private education loans cannot be discharged in bankruptcy. This makes these loans nearly unique. Making student loans dischargeable like other loans brings them in line with the rest of the credit market. It would also make lenders less likely to loan to risky borrowers.

These systemic changes, already in place in other countries, are quite possible to implement here in the US. Offering these terms would help new students acquire both education and financial security. Using these new terms to refinance existing student debt could easy burdens to those struggling to repay and reduce the delinquent loans lenders must process.

Are you or someone in your family struggling to repay student loans? Would life be better if you could pay over a longer period of time, and tie your payments to your income? I’d be interested in hearing your thoughts.

(Image courtesy of Flickr)

Leave a Reply

Your email address will not be published. Required fields are marked *