One of the big questions in student loans these days concerns “manageable debt”.  How much debt is manageable, exactly?  And how do we best help borrowers whose debt is unmanageable?

As nearly everyone agrees, manageable debt is a flexible concept. For someone with no income, pretty much any amount of debt is unmanageable.  As income rises, however, an increasing amount of debt can be serviced.   Interest rates and repayment terms matter too, of course;  any established debt-to-income ratio is a lot easier to manage with rates at 4% over twenty years, than it is at 8% over ten years.

National student loan programs around the world have been wrestling with the concept of “manageable debt” for roughly 20 years, now.   Income-contingent programs – like those in the UK and New Zealand – work on the principle that low-income borrowers pay nothing, and then, once their income exceeds the floor, pay a percentage of marginal income.  But even programs which do not label themselves as income-contingent (such as the US, Canada, the Netherlands, Germany, and Sweden) all establish similar thresholds, below which students are asked to pay nothing – an implicit acknowledgement that, below a certain level of income, no debt load is manageable.

There’s a discussion to be had about where that debt threshold should be; most countries locate that point somewhere in the mid $20Ks (the United States places their threshold much lower, while Australia’s is set a little higher).  But there’s a second discussion, one focusing on the appropriate load amount, once one exceeds the threshold.  The UK and New Zealand systems essentially say that students should pay the same amount on each marginal dollar (e.g. 10 cents on the dollar); Canada’s Repayment Assistance Program (RAP) and the Australian system both suggest that the load should increase gradually, as one’s incomes moves above the threshold.  The latter is almost certainly the right approach since the higher one’s income is above the “minimum threshold”, the more income one has available to deal with debt.  Nevertheless, there remains much room for legitimate discussion about how to phase in higher repayment rates.

Carleton’s Saul Schwartz and his colleague, Sandy Baum, from the College Board wrote a comprehensive summary of different ways to look at concepts of “manageable debt”.  The key take-away from the Schwartz and Baum paper is that there isn’t a single answer to this question, and that any final answer is, in part, a normative one.  At the end of the day, it still comes down to a judgment call by policy-makers as to what kind of standard of life new graduates should have, and whether or not it’s worth it for the public to subsidize that standard of life.

Tomorrow: a look at those subsidies, and how well they hit their mark in Canada.