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Opinion Biden’s student loan ‘fix’ will likely make the problem worse

President Biden, alongside Education Secretary Miguel Cardona, delivers remarks on student loan debt at the White House on Aug. 24. (Alex Wong/Getty Images)

There are so many things wrong with President Biden’s newly unveiled policy on student loans that one hardly knows where to begin. So I might as well start with … the Medicare doc fix.

In 1997, Congress became alarmed by the rising cost of health care, which was particularly concerning because it was amping up the cost of Medicare. So when Congress passed the Balanced Budget Act, it created something called the Sustainable Growth Rate (SGR), which was supposed to keep physician reimbursements from growing faster than gross domestic product.

That was all well and good until 2003, when the federal government realized it would need to actually impose significant cuts on those reimbursements. Physicians squealed, and a wincing Congress passed the first “doc fix,” temporarily suspending the caps. Freed from the constraints of the SGR, physician reimbursements continued to grow faster than GDP — which meant that every year, the cost of actually imposing the SGR got bigger.

The “doc fix” became a regular ritual in Washington, because the alternative became increasingly unthinkable: By January 2013, doctors were facing a potential pay cut of 26.5 percent. Unwilling to anger doctors, or to anger seniors whose doctors stopped taking Medicare, Congress kept granting reprieves, until the Obama administration finally bit the bullet and pushed through a (now very expensive) reform in 2015.

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Biden spent those years either in the Senate or the Obama administration, so you’d hope he would have learned something about the dangers of costly short-term fixes that don’t solve the underlying problem. But apparently not, because his administration just announced a jaw-droppingly expensive plan for student loan forgiveness that is actually going to make the problem of college costs worse, while increasing the political pressure for the government to shovel in even more subsidies.

On Wednesday, the Biden administration announced that it would forgive up to $10,000 in student loan debt (up to $20,000 for Pell Grant recipients), using a little-known provision in the post-9/11 Heroes Act, which allows the Education Department to waive or modify student loan payments in times of national emergency. Any debtor making less than $125,000 a year, or $250,000 for a family, will be eligible. The income-based repayment program will also become far more generous; required monthly payments will be capped at 5 percent of debtors’ discretionary income, and smaller loans can be forgiven after 10 years instead of 20.

Who qualifies for Biden’s plan to cancel $10,000 in student debt?

How many ways can a single policy be bad? This one could cost the federal government somewhere between $400 billion and $600 billion, completely unpaid for. Its legality is at best an abuse of the law to address the “national emergency” of upcoming midterm elections. It will pour “roughly half [a] trillion dollars of gasoline on the inflationary fire that is already burning,” says Jason Furman, formerly the top economic adviser to President Barack Obama. And with the income caps set so high, it remains an extremely regressive policy, heaping benefits on the most affluent demographics, while leaving everyone else to pay the cost through some combination of higher taxes, lower benefits, or higher inflation and interest rates.

Worst of all: What do Democrats do for an encore?

Students who start college next year will get the benefit of the more generous income-based repayment program. But they will look longingly at recent graduates who got better repayment terms and $10,000 knocked off their debt. They will correctly point out that this is unfair — after all, tuition is still rising, so they’re even worse off than their predecessors! They will badger Democratic politicians to help them out, too.

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Democrats are putting themselves in the same position as those who kept passing “doc fixes”: This first action will beget demands for a second and a third. Because this isn’t going to cure the underlying drivers of excessive tuition growth, any more than the “doc fixes” fixed the problem of soaring health-care costs.

The student loan program itself represents an attempt to solve the problem of rising college costs, and the theory seems sound enough. After all, kids who went to college would eventually earn a lot more money than they would have otherwise, and loans let them monetize some of that future income to pay their tuition.

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But, of course, tuition prices were already partially based on the expectation of higher future incomes, and all that future income shifted backward in time meant colleges could charge even more. One study suggests that when Congress raised the caps on subsidized federal loans, as much as 60 cents of every extra dollar lent got eaten up by tuition increases. Which in turn ballooned loan balances, and in turn created political pressure to make student loan programs more generous to borrowers — as the government has over the years, undoubtedly putting further upward pressure on tuition.

Trying to fix these problems by making it even more attractive to borrow money is like trying to quit smoking by switching to unfiltered cigarettes. When you’re doing something destructive, your best bet is to stop. But if you can’t manage that, you should at least refrain from making the problem worse.