How to solve the student debt crisis? A reverse pension

Public higher education has been the great American engine of mobility and more: It drives innovation and is a boon for low- and middle-income students knocking at the door of the knowledge-based economy. The growing student debt crisis, however, is undermining the mission of public colleges and shutting the doors of opportunity to millions. We need a solution to this crisis: Replace the present loan model with one similar to the way pensions function today.

No other country on earth has the extensive variation in public higher education that we do. And in every niche of this vast ecology, public universities are innovating. While the rest of the world continues to emulate the American public higher education model — for its breathtaking range of options, flexibility and paths to a second chance — our own system is in crisis. While many institutions of society are increasingly looked at with mistrust, that is not what is killing higher education. 

The biggest threat to public higher education in the U.S. is student debt. With $1.7 trillion in education loans, some 45 million Americans carry a burden that is crushing to many — especially rural, first-generation and urban students of color. 

Washington appears ready to forgive most or at least some student loans. What happens next will determine how higher education will be financed in the future. Can we recast the issue so that it avoids the tired, old forgiveness-verses-non-forgiveness debate? Can we shrink student repayments so that the burden goes away? We think so.

Our institutions, the University of Massachusetts Boston and Hildreth Institute, are developing a new model that would draw on the principles of the pension system to lower students’ debt burden without adding to the nation’s debt.

Americans pay for their retirement over a lifetime. The same model could be adapted to paying for higher education. We could reduce monthly payments to about $50 from $370 on the average debt load of $35,000 — and much less on the smaller amounts that community college students typically borrow. This would be accomplished by adopting two characteristics of pensions: payments spread over a lifetime, and zero interest (which composes about one-third of what students must pay under the current system).

Think of it as a reverse pension. Instead of receiving retirement money in old age, students would receive government support during college. When they graduate and get jobs, they would begin to pay it back in small amounts through payroll deductions. Employers could contribute as well, reducing student payments further. 

This model could be administered through the Social Security Administration or as a separate program. Just as Social Security does, the payments students make could be invested in Treasury bonds, creating a revolving fund for continued investments in students. Today, student repayments go into the government’s general fund, making it necessary to appropriate more money each year for new loans.

Clearly, students would benefit, but taxpayers and colleges would, too, because there would no longer be any need for forgiveness plans that sap resources. 

For public colleges and universities, this system would provide a secure source of financing at a time when demographic shifts are already creating financial challenges. The student loan system — battered by defaults, non-payments, and forgiveness — shows clear signs of breaking. That would create yet another existential problem for public schools, which receive more than 50 percent of their tuition from government payments via student loans.

Marcelo Suárez-Orozco is chancellor of the University of Massachusetts Boston. His forthcoming volume, “The Education Global Compact” will be published by Columbia University Press next January.

Robert Hildreth is a former International Monetary Fund economist whose professional work involved restructuring South American debt and marketing sovereign debt loans. He founded the Hildreth Institute dedicated to restoring the promise of higher education.