So if you're an institution providing an expensive but worthless education, you aren't going to get paid for it.
Let's treat universities the same way we treat teachers -- let's assess the results.
It's progressive, there's a safety net, and it is, for the time being, solvent (government makes 30-50% profit on each dollar lent). Yes, people with great credit who would end up paying less under a standard 10 year repayment at say 5% end up subsidizing those who graduate without getting a decent job, but I think that's uniquely justifiable in this context, because everyone involved is turning to the student loans as a way to better their economic situation (after all, nothing stops you from paying in cash or getting a private loan at 5% if you can qualify for one).
I think if you added a cap in there instead of going up to full cost of attendance, to force schools to moderate their tuitions, it would be nearly perfect.
20 years just seems too long.
And the key point here is that when a balance is forgiven, the institution should bear the cost, not the government. Maybe that's already the case. Can you provide more detail?
That assumes they really feel it. If a school charges you $500,000 per year for tuition and then gives you financial aid of $480,000 per year, they aren't really giving you that money.
If a school extends you $150,000 in credit, and then in 20 years you've only paid $40,000 of it back, they haven't really lost $110,000. They are just practicing perfect price discrimination, getting the most money from the people most willing to pay, backed up by the government who is doing the work of auditing people's tax records to ensure compliance.
Those out to study degrees that don't offer great employment opportunities will be offered more expensive loans which will curb demand for such degrees which will depress the cost of the degrees. It will also make sure that fewer people will go to a party college and study an easy degree (or, at least, that those that do aren't subsidised by tax-payer underwritten credit).
Extra bonus: All those companies that clamour for STEM grads have a very simple avenue for putting their money where their mouths are: Simply go out and underwrite some cheap loans. (And no, indentured servitude is still illegal - companies underwriting student debt shouldn't be allowed to change the terms of the loan if the student comes to work for them).
This assumes that a lender's primary interest is in having a loan repaid quickly. I don't think it's true - they are in it to make a profit, and exploiting the young adult with penalties and hidden fees or tricks helps expand that profit.
I think one good reason for government participation in the student loan market is that it helps reduce exploitation of the borrowers, who are mostly just-turned-18 adults so eager to attend a college they'll sign anything.
The idea that all education at any cost carries positive externalities is exactly what got us into the mess that is education today.
Edited to add: Also, my proposal isn't incompatible with neither financial aid nor grants to institutions. But like underpriced mortgages caused a housing bubble, underpriced student loans is causing an education bubble.
Time for me to find some investors and pull my own Kyle Bass :P
[0]: http://m.washingtonpost.com/business/economy/sallie-mae-to-s...
If you want to see what happens when a society mindlessly thinks "more kids in more college is better, damn everything else," look at society right now.
There are dozens of legitimate ratings of colleges and universities and NYU rarely ranks at the top academically (except their research staff, which I know can be exceptional). That won't stop kids from paying $40k/yr from going there so they can party it up in the Village for 4 years.
And then we make it 20%, and then 30%, and then extend it out to 15 years, and then . . .
We've been putting people into debt they cannot escape to go to college while telling them they "need" to go to college. Given the history, the end result of any kind of "we take a portion of your income" plan will be to make it ever more efficient for the colleges to capture 99% of the lifetime earning difference between a high-school grad and a college grad.
We need price pressure on the cost of education.