How to fix America’s student-finance problem

America’s total student debt, at over $1.5trn, is larger than the national borrowing of most countries. It has quintupled in size since 2004, overtaking both borrowings on credit cards and car finance.This growth is often presented as evidence of a crisis. But the rise in total debt, though arresting, is not the real problem. It largely reflects increased borrowing by graduate students, such as budding lawyers, who will go on to be high earners. And 92% of student debt is owed to the federal government, meaning defaults pose no risk to the financial system (see Finance section). The real problem is that 11m Americans, many poor and non-white, and many duped into studying for worthless degrees, struggle to repay even modest debts.

Some Democratic candidates for president seems not to know this. Bernie Sanders, the front-runner, wants to cancel all student debt—a handout that would indeed provide relief to those who are struggling but would also offer an enormous windfall to the well-off. Elizabeth Warren would cancel all debt up to $50,000, a policy that is similarly indiscriminate. Thankfully Joe Biden and MikeBloomberg, who announced his student-debt policy on February 18th, have plans that are better suited to the problem. Messrs Biden and Bloomberg want to put all existing and new borrowers for undergraduate degrees into an income-linked repayment scheme, under which borrowers must repay only a fraction of their annual earnings above a certain threshold. The Economist has long argued in favour of such a repayment mechanism, which works well in Britain. Linkingrepayments to income makes it impossible to be impoverished by student debt, and frees graduates to take risks early in their careers.

America already has income-linked repayment schemes for distressed borrowers, but they are flawed. The earnings thresholds at which repayments begin are too low: typically around $18,000, compared with £26,000 ($34,000) in Britain. The interest rates, which are typically around 6%, are unjustifiably high for borrowing from the government. And the schemes are an administrative nightmare.Students must choose from one of four options and fill out new paperwork every year to avoid penalties. Any outstanding debt is forgiven after 20 or 25 years, but debt forgiveness is taxable, putting struggling debtors at the mercy of the internal Revenue Service.