Washington Monthly - September/October 2012 - 48

Why have even liberal politicians been willing to make the student loan repayment system ever more draconian? Partly it’s because, in an age of federal deficits, they’ve been desperate to find ways to boost government revenue without raising taxes. Partly it’s been a general political eagerness to signal that they are not about to coddle deadbeats. But it’s also because, for years, a number of Democrats have had a vision about how to crack down on freeloaders while at the same time easing the burden on borrowers who through no fault of their own simply cannot repay their loans. The idea is the income-contingent loan, or ICL (see “Answering the Critics of ‘Pay as You Earn’ Plans,” page 52), whereby people who take out student loans can repay them based on a fraction of their annual income, rather than fixed payments. The free-market economist Milton Friedman came up with the basic concept in the 1950s as an alternative to state funding of higher education, and it

Should our student loan system take no account of the reality that some students embark on careers that are vitally needed by society but that only pay modest or uneven income, from being a primary care doctor to starting a new business?
was tested in pilot form by the Reagan administration. But by 1988 Democratic presidential candidate Michael Dukakis was advocating a version of the idea as a way to make student loans more affordable. Bill Clinton made ICL a central plank in his 1992 presidential campaign. He argued that such loans would not only offer relief to borrowers who never managed to graduate or became unemployed, but would also make it easier for students to embark on socially vital but low-paying public service careers, such as teaching or social work. He also championed the idea that the federal government could save money by making loans directly to students rather than paying banks to do so. In 1993 he signed legislation creating both a direct lending program (the one Obama would expand in 2010) and an ICL option. The hope was that the two initiatives together would provide a cheaper, simpler, and safer alternative to the traditional student loan system. But lobbyists for the banks, whose subsidies were threatened, convinced Congress and Department of Education regulators to
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limit the reach of the two programs, and for years relatively few borrowers were made aware of them. Even borrowers who do learn of the income-contingent option often face a bureaucratic nightmare when they try to exercise it. Consider the case of Kayleen Hartman. When she first entered Georgetown University Law Center in 2008, she knew she wanted to become a human rights lawyer, and that such a career would likely give her only a modest income. The only reason she thought she would nonetheless be able to carry the cost of her law degree was that she planned to repay her federal student loans through an updated and more generous version of the Clinton initiative called the incomebased repayment, or IBR, program. So after she graduated in May 2011 and passed her bar exam later that summer, she put in the paperwork for consolidating all her federal loans and using the IBR option for repaying them. But she didn’t hear back from the Department of Education for months—and became alarmed when she started getting letters from her original lenders warning her that she was overdue on her payments. By February, completely panicked, she started trying to reach the loan “servicer.” Servicers are the organizations (some for-profit, some nonprofit) that the government or lenders hire to handle the paperwork on student loans. The servicing representative she talked to dismissed her concerns, saying that the consolidation would be completed any day now. It wasn’t until April that she learned that the department was having trouble consolidating one of her loans—a Perkins loan she had received through her alma mater, Davidson College. The department had been alerted to the problem months earlier, but for some reason the servicer was unaware of it. Meanwhile, her original loans had become delinquent and were in danger of defaulting. The consolidation was finally completed in May, and she thought her problems were behind her. In her application for consolidation, she had checked a box indicating that she wanted to repay through IBR, and assumed that she would now hear from the department about how to enroll in the program. Instead, she received her first monthly bill from the department for $1,600, a figure that represented half of her take-home pay. She called the servicer again, and learned for the first time that she had to fill out a separate application and submit a copy of her income tax return. A servicing representative mailed her the form, and she promptly returned it with all of the required documentation. She once again thought she was in the clear, until she received another bill for $1,600. Irate, she called the servicer again, only to be told that the servicing company had never received her application. The representative first questioned whether she had really sent the form, and then accused her of sending it to the wrong address. Now she is waiting for the servicer to mail her a new application form to fill out. Nearly a year has passed since she began the process, and even with a law degree, she has still not figured out how to make the bureaucracy and its various con-

Washington Monthly - September/October 2012

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