Biden's Income-Driven Repayment plan would turn student loans into untargeted grants. Adam Looney. Brookings Institution, September 15, 2022. https://www.brookings.edu/opinions/bidens-income-driven-repayment-plan-would-turn-student-loans-into-untargeted-grants/
There are several dimensions in which it is likely to have significant, unanticipated, negative effects.
* Increased borrowing. In 2016, undergraduate students borrowed $48 billion in federal student loans. But students were eligible to borrow an additional $105 billion that year and chose not to. Graduate students borrowed about $34 billion, but left $79 billion in unused eligibility on the table. Perhaps they didn’t borrow because their parents paid out of pocket or because they chose to save money by living at home—they still were eligible for federal loans. When those students are offered a substantial discount by paying with a federal loan, they will borrow billions more each year. (For more details, see below.)
* It subsidizes low-quality, low-value, low-earning programs and guts existing accountability policies. Because the IDR subsidy is based primarily on post-college earnings, programs that leave students without a degree or that don’t lead to a good job will get a larger subsidy. Students at good schools and high-return programs will be asked to repay their loans nearly in full. Want a free ride to college? You can have one, but only if you study cosmetology, liberal arts, or drama, preferably at a for-profit school. Want to be a nurse, an engineer, or major in computer science or math? You’ll have to pay full price (especially at the best programs in each field). This is a problem because most student outcomes—both bad and good—are highly predictable based on the quality, value, completion rate, and post-graduation earnings of the program attended. IDR can work if designed well, but this IDR imposed on the current U.S. system of higher education means programs and institutions with the worst outcomes and highest debts will accrue the largest subsidies.
* At the same time, the IDR proposal exempts failing programs from existing accountability policies like the Cohort Default Rate rules, which prohibit institutions from participating in federal grant and loan programs if too many of their students default on their loans. Under the proposal, certain students will be auto-enrolled in IDR, which can allow them to cease making payments without defaulting. It would be great to have a system in which default was not an option, but in today’s system, this eliminates the last remaining policy with any teeth that keeps predatory schools out of the loan program.
* High potential for abuse. A large share of student debt is not used to pay tuition, but is given to students in cash for rent, food, and other expenses. At public colleges and for-profits, living expenses represent more than half the estimated cost of attendance (which sets the upper limit on how much students can borrow). At many large for-profit schools (not known to leave money on the table), between 30% to 75% of student loans are returned to students in cash. (Indeed, I think this is a key reason anyone goes to these schools.)
* While students certainly need to pay rent and buy food while in school, under the administration proposal a student can borrow significant amounts for “living expenses,” deposit the check in a bank account, and not pay it all back. Gaming the system like this wasn’t possible when students were asked, on average, to repay loans in full, and it’s not a problem in systems where loans are used exclusively for tuition. But that’s not the system we have. Some people will use loans like an ATM, which will be costly for taxpayers and is certainly not the intended use of the loans.
* Who benefits is arbitrary, unequal, and unfair. As I’ve written in the past, a large share of student debt is owed by well-educated, white, financially successful students from upper-class families, which means that broad debt relief policies are regressive and preserve gaps between more and less advantaged groups instead of closing them. Compared to other federal spending programs intended to reduce poverty or benefit children, broad debt relief programs are more costly and benefit more advantaged Americans.
* Almost all undergraduate and graduate students will be eligible for reduced payments and eventual forgiveness under the proposal, which makes it effectively untargeted. Moreover, the amounts borrowers save (and eventually have forgiven) are based largely on the amounts students borrow, which means the benefits are uncapped and disproportionately flow to borrowers with the largest loans, who are more likely to be graduate students and students who attended more expensive programs. This makes it quite different, for example, from Biden’s recently announced debt relief plan, which focused relief on Pell Grant recipients, capped forgiveness at $20,000, and excluded high-income borrowers from participating.
* Likewise, while the IDR plan will reduce the amounts students ultimately pay for their education, it shouldn’t be confused with a policy to reduce or eliminate tuition and fees at public colleges like we do for public K-12 education. That’s because this IDR plan will cover a much larger range of costs: tuition and fees at for-profit and nonprofit schools, tuition and fees for graduate and professional school, and living expenses for college and graduate students. At many graduate programs, for example, a single graduate student living alone will be able to borrow more than $20,000 per year just for living expenses and never pay it back. For perspective, that is about double what a low-income single mother with two children can expect to get from the Earned Income Tax Credit (EITC) and food stamps combined. (The EITC maximum benefit is $6,164, and the average food stamp benefit for a family of three is $520 per month.)
* College tuition for low-income and most middle-income families is already largely covered by other federal, state and private aid; why is the government making it a priority spend more to cover the cost of expensive colleges, graduate programs, and living expenses for upper-middle-class families instead of on policies that serve the truly disadvantaged?
* Tuition inflation. A common objection to unrestricted tuition subsidies is that it will cause institutions to raise tuition. There’s good evidence for this at for-profit schools. High-price law schools have designed schemes to take advantage of generous debt forgiveness plans called Loan Repayment Assistance Programs (LRAPs), plans under which universities and students effectively shift the cost of tuition to taxpayers by exploiting debt forgiveness programs. It’s plausible that some institutions will change prices to take advantage of the program.
* At the graduate level, it’s clear that many students will never pay their loans at existing tuition levels, and thus will be indifferent if those programs raise tuition. Given the caps that apply to undergraduate loans (which limit the amounts undergraduates can borrow to between $5,500 and $12,500 per year), there is little room for schools to increase revenue by increasing the amount that existing borrowers borrow. Instead, my belief is that increases in undergraduate financial aid increase college costs primarily by increasing the number of (lower-quality) programs and the students who enroll in them. My fear, with regards to overall college costs, is that institutions will have an incentive to create valueless programs and aggressively recruit students into those programs with promises they will be free under an IDR plan.
* Budget cost. While there are huge uncertainties about how many borrowers will enroll in the program and the behavioral responses, it’s plausible that the new IDR proposal will cost as much (or more) as the existing Pell Grant program over the next decade while being much, much worse than the Pell Grant program—for all the incentives described above, plus it isn’t targeted, as Pell is, at lower-income households.
Unfortunately, all the negative effects of the IDR proposal arise because of its generosity—the fact that nearly all borrowers will be asked to repay only a fraction of borrowed amounts.
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