The educational credit trust: a proposal for reconstitution and reform of the student loan system

Document Type

Article

Publication Date

1986

Department

College of Business

Abstract

After a brief review and critique of the history and current status of the system of Federally sponsored loans for college students in the United States, the paper develops fundamental principles for the reconstitution of the system, emphasizing (a) the general inappropriateness of loans as vehicles for the subsidization of education; (b) the desirability of diversity in the loan system (institutional participants, terms of access to credit, etc.) paralleling the diversity of post-secondary education; (c) the need for comparability of the terms on which alternative long-term (educational and noneducational) investments can be financed (identifying amortization in relationship to returns and protection against financial uncertainties and against the risk of unexpectedly low earnings); and (d) the legitimate Federal interest in the efficient functioning of the capital market, an interest which can best be pursued by the facilitation of private action as opposed to the creation of a direct or indirect governmental monopoly. A concrete proposal for a decentralized, essentially private and unsubsidized alternative to the current system is then developed. With virtually free entry. 'Educational Credit Corporations' would make loans to specific subpopulations of students on terms tailored to the prospects of eligible borrowers. Limiting loan terms (income contingent and adjustable fixed-term graduated repayment) would be offered by 'state-sponsored' educational credit corporations. Approved lending corporations would he eligible to borrow up to a fixed fraction (20%) of the outstanding obligations of students from Federally chartered 'Educational Credit Trust'. Further Federal facilitation would be limited to (a) provision to lenders of access to the Federal personal income tax returns of borrowers; and (b) provision for voluntary waiver by the borrower of the right to discharge a student loan obligation through bankruptcy. The paper concludes with a financial analysis of the proposed limiting loan terms which would be offered by state-sponsored lenders.

Publication Title

Economics of Education Review

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