The student loan system currently faces a critical flaw: loans are approved based mostly on creditworthiness, without requiring borrowers to demonstrate how they'll repay the debt after graduation. This contributes to high default rates and financial stress. One way to address this gap could be to adapt a practice from business lending—requiring a viable repayment plan as part of the loan application process.

Layman's Explanation

Imagine applying for a student loan where, instead of just checking your credit score, lenders ask you to outline a realistic plan for paying it back. You'd estimate your future income based on your chosen career field, create a post-graduation budget, and even think through backup options if your first plan doesn’t work out. Universities or lenders could provide simple tools to help students craft these plans. The approach could be scaled—for example, larger loans might need more detailed plans—to keep it practical.

Technical Implementation

To execute this, one approach might involve:

• Pilot testing the requirement with graduate programs (e.g., law or medicine) where debt loads are predictably high.
• Digital tools that pull salary data (Bureau of Labor Statistics) to automate parts of plan creation.
• Regulatory incentives, like lower capital requirements for lenders who adopt the system, to drive participation.

For students with fewer resources, the system could offer free financial counseling or simplified templates to ensure equitable access.

Comparison with Existing Solutions

Unlike income-driven repayment plans—which adjust payments after graduation—this idea prevents overborrowing upfront. It also differs from models like Upstart (which assesses earning potential algorithmically) by actively educating borrowers. While similar to Lambda School’s income-share agreements, this approach keeps risk with lenders but reduces it through preemptive planning.

By integrating repayment planning into loan approvals, the system could shift from indiscriminate lending to sustainable investment in education—benefiting borrowers, lenders, and taxpayers alike.