WASHINGTON D.C. – Today, the Texas Public Policy Foundation published the paper Unleashing Market-Based Student Lending.

“Student lending in the United States is in need of significant reform,” said Andrew Gillen, Ph.D. economist and senior policy analyst with the Texas Public Policy Foundation. “The recent shift toward income-driven repayment is a substantial improvement but still fails several important criteria. To help remedy these problems, this study offers reforms that would help improve the current governmental lending system, but the best performing system would rely on a private lending system.”

Key Points:

  • Student loan programs should be evaluated using 15 criteria spread across six categories (access, accountability, efficiency, incentives, borrower protections, and affordability).
  • Historically, most loans have been made through the Federal Family Education Loan and the Direct Loan programs. With standard repayment plans, these programs perform poorly.
  • The recent movement toward income-driven repayment has been a substantial improvement but still leaves many criteria unmet.
  • The current student loan system, where the federal government is the lender, could be improved by (a) having all loans enter income-driven repayment, (b) with payments collected through the tax withholding system, (c) abolishing loan forgiveness provisions and interest rate subsidies, (d) imposing caps on annual and aggregate borrowing, and (e) introducing skin-in-the-game for colleges. But even with these improvements, there are a number of insurmountable disadvantages of having the government as the lender for student loans.
  • The best student loan system would (a) rely on private, income-contingent lending, (b) forbid loan guarantees as well as bailouts of lenders or borrowers, (c) ensure continuous competition among lenders, and (d) impose caps on annual and aggregate borrowing.

To read the paper in full, please visit: