Sheila Bair on college admissions scandal and a student debt solution

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Bair is a big proponent of changing the student loan system — and she has plan she thinks could solve the problem. There is now $1.5 trillion in outstanding student loan debt in the U.S.

The main issue is the way the current loans are structured, she said. For one, it isn’t known what the repayment capacity of an undergraduate is going be after graduation. Plus, economic incentives are misaligned, Bair noted.

“All the risk on the student to repay the loan. If they default, it’s on taxpayers. But the proceeds of those loans are going to colleges, which don’t have financial risk if the student does not succeed.”

Instead, Bair proposes something that isn’t debt, but is instead an income share. The financer and student would sign a contract that has the student pay a certain percentage of his or her income over a certain period of time, subject to a cap. She said the percentage is “affordable” and only kicks in once the now-graduated student has a “decent” income.

In fact, she said the Trump administration’s suggested changes to the Higher Education Act are a step in the right direction. The proposal suggests consolidating repayment options so that the government would offer just two plans: one standard 10-year fixed plan and one income-driven repayment plan. The latter would limit monthly payments to 12.5 percent of a borrower’s discretionary income and offer loan forgiveness after 15 years.

“This would actually move us nicely in the direction of income share,” Bair said. “I hope that particular proposal gets some serious consideration in Congress.”

— CNBC’s Abigail Hess contributed to this report.

Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.



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