Hillary Clinton and Marco Rubio agree: this is the best way to tackle student loans

Presidential hopefuls from Hillary Clinton to Marco Rubio agree: The current system for paying back student loans makes no sense. It's arbitrary and confusing.

Surprisingly, the two candidates from opposite ends of the political spectrum recommend the same solution: The size of student loan payments should be tethered to how much people earn.

People with more money would make higher payments and pay off their loans more quickly. Those with less would make lower payments and pay longer, or eventually have the balance forgiven.

Income-based repayment is already an option in the United States — but Rubio and Clinton think it should be the default payment system. And that's actually not that far-fetched: The United Kingdom, Australia, and New Zealand all use this approach.

How income-based student loan repayment works

(Shutterstock)

The basic idea of income-based loan repayment is that student loan payments shouldn't be higher than people can afford.

This would, ideally, smooth out a problem with student loans: students take out the loans to go to college assuming that they'll make more money after they graduate. But they don't necessarily reap the economic rewards of their degree right away, particularly if — like most people — they start in a low-paying, entry-level job. The standard method of paying back student loans, though, requires you to pay about the same amount every month for 10 years.

Meanwhile, about half of all college students in the US drop out, and those people are still expected to repay their debt.

Income-based repayment is supposed to solve both problems: Payments get higher if people earn more money, and if they never do, the payments stay low. People with student loans don't ever pay back more than they borrowed to begin with, plus interest, though if payments are lower than they would be under a standard 10-year repayment plan, they will pay more interest.

The most generous income-based repayment program, called Pay As You Earn, requires people with student loans to pay 10 percent of their discretionary income — defined as their income in excess of 150 percent of the federal poverty level. (Income is determined based on tax data.) A single person with no kids wouldn't have to make a loan payment at all if she makes less than $17,655 per year; someone making $30,000 per year would owe just over $100 per month.

Any remaining balance on the loans is forgiven after 20 years of payments – 10 years for people who spend the entire time working for the government or for nonprofits in any capacity.

Why Clinton and Rubio want income-based repayment to be universal

(Kevork Djansezian/Getty Images News)

Income-based loan repayment is already an option, and it's becoming much more popular. The Obama administration has heavily promoted the program as well as made it more generous, and a recent report from Bloomberg News found enrollment in the plans has quadrupled since 2012.

Still, people with student loans say that enrolling in income-based repayment can be glitchy and confusing. People have to verify their incomes annually or they're kicked out of the program. Until recently, much of the enrollment process could only be done on paper.

Robert Shireman, a former Education Department official who spearheaded the Obama administration's student loan reforms, wrote on a Huffington Post blog about helping his niece enroll in income-based repayment last year: "The system seemed designed to confuse rather than inform, purposely rigged against the borrowers who most need help," he concluded.

Rubio characterized the current system as "extremely underutilized," as well as "terribly insufficient and replete with unintended consequences." Clinton has called for streamlining the four different options into a single plan similar to Pay As You Earn — paying 10 percent of discretionary income for 20 years. That method would become the default repayment option.

The progressive argument for income-based repayment is that it targets help with student loans to people who need it most — those who are least able to afford their payments. Allowing refinancing of student debt, as Clinton has also proposed, tends to help people with the most in loans, who aren't necessarily those who are struggling.

The program appeals to conservatives, on the other hand, because it maintains the idea that students and not the government should bear some of the cost of their education, since the students benefit economically.

And Rubio and Clinton are likely to disagree on some specifics, particularly when loan forgiveness should happen and how generous it should be.

Rubio's warning of "unintended consequences" refers to concerns that people with high debt from graduate programs working at nonprofits or in government will end up with tens of thousands of dollars of forgiven loans once they are eligible. The Obama administration has proposed making the program less generous for those people, and Rubio's critique suggests he'd want to do that as well.

The problems income-based repayment doesn't solve

Still, there are critics of making income-based student loan repayment the default system. And those critiques come from many political viewpoints.

Making student loan payments vary with income doesn't change the fact that students have to borrow more than they used to to attend college in the first place — it's just supposed to make the debt more manageable.

It could make students more tolerant of large debt loads — and colleges therefore more willing to raise their prices, because students know they won't be borrowing more than they can afford to pay back.

It also suggests the government would need to change how it regulates colleges. Most of the quality control in the federal financial aid system relies on looking at whether students are able to repay their loans after graduation. Colleges where too many students default eventually end up kicked out of the federal student loan system; new regulations for for-profit colleges look at how students' debts compare with their incomes. Income-based student loan repayment makes those calculations more difficult or possibly irrelevant.

Supporters of income-based repayment acknowledge these concerns. (This paper from the Lumina Foundation sums them up in more detail.) But they argue that because student loan default is so financially ruinous — unlike other debts, student loans can't be discharged in bankruptcy — the benefits of tying loan payments to income outweigh the possible drawbacks.

The really radical change: paycheck deductions

Taking student loan repayments directly from paychecks is the final frontier. (Shutterstock)

In the United Kingdom, Australia, and New Zealand, government student loan payments are based on income. And the payments are withheld from people's paychecks, just as taxes are.

This system has several advantages. It ensures that the payments are actually made, making it basically impossible to default on a federal student loan. (Missing payments or defaulting is still possible under income-based repayment; just because the federal government deems the payment affordable doesn't mean that every borrower will follow through and pay.) It also allows payments to vary based on what a worker made that week or month, rather than their past income from tax data.

Clinton and Rubio have both called for changing the system this way — Rubio in a bipartisan bill with Sen. Mark Warner, and Clinton in her higher education plan. Making the switch would be difficult — for one, it would cut out the private companies who currently service student loans. But it would make paying back student loans far simpler by making it virtually automatic.

Correction: A previous version of this article said Clinton and Rubio hadn't called for a paycheck deduction system.

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