You might not have noticed, but President Biden is trying to overhaul the student loan system. Even as his controversial student debt forgiveness scheme heads to the Supreme Court, the Education Department is advancing another audacious plan to reshape how higher-education loans work — and not just for existing borrowers, but future ones, too. This means it could soon redefine the nation’s higher-education loan system, which some 70 percent of college students use to finance their degrees.
The new plan is better than many of the ideas Democrats have proposed to help students finance higher education because it is tailored to help low-income graduates, particularly those who attended community college. But it still poses some big risks for taxpayers and even the borrowers themselves. It would be expensive. And it would amount to a huge new subsidy for higher education that Congress never specifically approved. The Biden team is committing itself and future administrations to the plan without the blessing of federal lawmakers.
To impose this big new policy without going through Congress, the administration proposed taking an existing student loan program and making its terms so generous that it would essentially become a grant program. The new repayment scheme would require individual borrowers to pay only 5 percent of their yearly income above roughly $31,000 to service their undergraduate debt. So a nursing assistant earning $30,000 annually would pay nothing. For those with less than $12,000 in debt, the government would forgive whatever is left after 10 years. For every additional $1,000 borrowed, the forgiveness timeline would increase by a year to a maximum of 20 years for undergraduate loans.
In a new analysis, the Urban Institute estimates that a typical community college student who takes out $12,000 in debt could expect to repay only $1,000. Many would pay nothing. Some 49 percent of borrowers in bachelor’s degree programs would pay back less than half of what they owe, and 78 percent would get some degree of forgiveness.
This would represent a shift in philosophy on debt forgiveness, from viewing it as a safety net for those who fall into financial distress to an entitlement for most undergraduate borrowers. Because the new program would be so generous, it would create a strong incentive to borrow, which could encourage more students to take on debt rather than pay for their education out-of-pocket.
In theory, more education debt would not be a problem for students if they took advantage of generous new loan terms and made all their payments. Yet the Education Department acknowledges that many borrowers fail to enroll in existing loan repayment programs that would save them money and, if they do, to complete necessary paperwork such as recertifying their incomes. “Far too often borrowers end up in default on a student loan when they would have had a low or even a $0 payment on an [income-driven repayment] plan,” according to a department analysis. Administration officials say they are taking steps to ensure student borrowers do not fall through the cracks, but they have far to go in improving borrower services.
Officials also emphasize that their new plan’s generous higher-education subsidies are designed to help low- and middle-income borrowers. Community college graduates, who typically do not take out huge loans but also do not earn high incomes after graduation, would generally be debt-free after 10 years. This reflects Mr. Biden’s campaign promise to make community college free. Meanwhile, borrowers making less than $15 an hour would pay nothing. Borrowers a little higher on the income scale would see debt relief that, Biden officials say, would help relieve financial pressures that prevent them from starting families or buying first homes.
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But many of the graduates the administration’s new plan would help are capable of repaying their student loans. The department projects that even households with only undergraduate debt making above $100,000 per year on average over their repayment periods would see their payments drop by a total of $16,702 over the life of their loans. These are not students for whom college did not pay off. They obtained valuable credentials and now hold good jobs. Meanwhile, the department estimates that the new program would cost about $138 billion over 10 years while the University of Pennsylvania’s Penn Wharton Budget Model projects a much higher price tag, a whopping $333 to $361 billion. The cost would be financed by the American public, a majority of which did not attend college.
All the more reason that it would have been better for Congress to decide whether a substantial new higher-education subsidy is worth it, who should benefit and how much. Not only would the policy have been more legitimate and more durable, it could have been better designed; it would be simpler to grant needy students more money to attend college instead of requiring them to take out loans, enroll in the right repayment program and meet all its requirements in pursuit of eventual debt forgiveness.
In bypassing Congress, the Biden officials argue that they are exercising, albeit aggressively, powers that Congress gave the executive branch in a decades-old higher-education statute. This Congress is unlikely to approve a higher-education plan as ambitious as the one the Biden administration is pursuing. But, if that’s the case, so be it; that outcome would reflect the political system’s will, or lack thereof, to spend vast additional amounts of money on higher-education subsidies. The administration might be obeying the letter of the law — but not its spirit.
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