Let Students' Debts Vary With Life's Ups and Downs

In this series, students and industry experts share stories and perspectives from inside the student debt crisis. Share yours here using #StudentDebt.

Claire Miller has been a high-school teacher since 2010. To carry out her dream of becoming an academic leader, she has enrolled in a 15-month principal-training program at Lehigh University. Tuition is substantial. Her funds are limited, and she doesn't want to be faced with years of rigid debt payments, in case her earnings don't grow as hoped. What can she do?

As far back as the 1950s, economists have been advocating a flex-pay system that would tie education-loan repayments to students' future earnings. Make a lot of money, and you pay back more. Run into some bumps after graduation, and your payments are scaled back. The result (in theory) is an education-finance program that allows hard-luck graduates some slack while still letting lenders enjoy solid overall returns.

Making all the pieces of a variable-pay system come together is tricky. For decades, such programs have existed only in economists' essays -- and nowhere else. Now, though, theory is turning into reality. Regardless of how the 2016 presidential election plays out, I would encourage anyone in a position of political power to look at Miller's story and the way that a small Chicago organization, Education Equity Inc., has helped her construct a future-facing way of financing the next chapter of her education. 

Like many people, Miller (pictured above) doesn't fully trust the big, impersonal machinery of today's student-loan industry. She worked multiple jobs in college to avoid going deeply in debt; she repaid her modest $3,500 in loans as fast as she could.

Now, she has chosen a flex-pay approach to help pay for her master's degree. Most of the tuition money is coming from Education Equity. In return, she has agreed, after graduation, to repay 0.7% of her annual income annually, over a 10-year span, for each $5,000 of financing that she initially received. If she ends up earning less than about $100,000 a year, her repayments will be smaller than a conventional student loan. If her earnings exceed that amount, then she pays back more.

Miller is pretty confident about her long-term future as an educational leader, but she also likes her current job as director of instruction at Catalyst Maria High School in Chicago's Marquette Park neighborhood. She wants to be able to manage her transition to more senior jobs in a way that balances everyone's educational needs and opportunities, without needing to grab the first high-paying offer that comes along, in order to keep fixed-rate debt payments under control.

"I was drawn into a system that was much more personal and could ease the financial strain that I would feel stepping into my masters program," she told me in a recent email exchange. To her, this new form of education finance is "much more ethical and equitable."

About 40 million Americans currently have student-loan debt, with millions more signing up every year. The flexible-pay approach won't work for everyone, and it will take both time and careful execution to scale it up from a tiny start. But the potential to create something bigger is clearly there. In talking with Education Equity's founder, Andrew Davis, several key factors come into view: 

• Flexible-payment systems work best when they are connected to educational programs that have strong, highly predictable payoffs for graduates. That's especially true for masters' programs that may turn a $60,000-a-year teacher in to a $120,000-a-year principal. But other examples aren't hard to find. The key objective is to find a program where there's plenty of economic gain can be divided between the newly minted principal and the education financiers in the background.
• Students will value flexible payment if there's still a whisper of uncertainty about outcomes, so there's leniency just in case plans go off course. That's true for principal training programs, where some graduates take a year or two to find their ideal job. Others go back to classroom teaching at some point. And a few choose low-paying leadership jobs at small charters or independent schools. 
• Even flexibility has its limits. If graduates do amazingly well -- and face a formula that calls for ever-larger repayments -- then there's likely to be a tussle over whether the full terms of the contract are enforceable or not. For that reason, Education Equity caps repayments if any graduates end up earning $200,000 or more. The firm also has chosen not to finance MBAs or law degrees, because giant post-graduate earnings could create some odd headaches.  

Even with these caveats, opportunities to expand this flexible payment approach are bountiful. Education Equity recently announced that it will be using an investment from the CME Group Foundation to start targeting college juniors and seniors who are majoring in computer science or accounting.

Politicians in both political parties should appreciate the way that the flex-pay approach brings the interests of students and their funders into better alignment. That's because backers earn more money if their graduates thrive. As a result, Education Equity actively shares career tips and contacts within the participant population, instead of merely sending out billing notices.  

As economist Milton Friedman pointed out long ago, we already finance many other capital investments with similarly flexible approaches. Buy stock in a company, and you will collect a rich stream of dividends down the road if things work out. If the company falters, you collect less. Risks and opportunities are divided in a way that feels fair to both sides. When it comes to building human capital, why not consider a similar approach, too?