The Biden administration unveiled its proposed expansion of income-driven repayment (IDR) for student loans on Tuesday. The proposal will slash monthly payments for most borrowers and dramatically increase the cost of the loan program. Moreover, it threatens to further cement the role of debt in our higher education system, with potentially dramatic effects on tuition levels and future rates of borrowing.
The Education Department (ED) invites members of the public to comment on the draft regulation. Comments are due within 30 days. Afterwards, ED will issue a final rule and the plan will go into effect, likely sometime this summer.
What the plan does
Rather than creating an entirely new repayment plan, the administration intends to revise an existing IDR plan, known as REPAYE, to make it more generous. The following are the most significant changes:
- The amount of income exempt from student loan payments will rise from 150% of the federal poverty line to 225%. For a single borrower in 2023, this threshold is $30,578.
- For undergraduate student loans, payments are set at 5% of income above the threshold, down from 10%. Payments on graduate loans will remain at 10% of income above the threshold.
- If a borrower’s monthly payment does not fully cover accrued interest on her loans, any remaining interest will be forgiven.
- Those who borrowed $12,000 or less will see their outstanding balances cancelled after they make 10 years’ worth of payments. Time to cancellation will increase by one year for every $1,000 borrowed.
- Undergraduate-only borrowers will enjoy full loan cancellation after 20 years’ worth of payments; borrowers with graduate loans will receive cancellation after 25 years. These are unchanged from the current version of REPAYE.
The proposal also makes several changes to the broader infrastructure around IDR, including:
- ED will allow borrowers to count time spent in deferment or forbearance toward loan cancellation. Depending on the type of deferment or forbearance, borrowers may need to make catch-up payments to claim this benefit.
- Borrowers more than 75 days delinquent on their loans will be automatically enrolled in an IDR plan, provided ED can access their income information from the IRS.
- In order to streamline the confusing array of repayment options, ED will phase out new enrollments in most IDR plans other than the revised REPAYE plan.
- ED will publish a list of programs that yield “low financial value” in order to dissuade students from enrolling.
The proposal has a handful of good provisions and quite a few bad ones. Moreover, some reforms are notable for their absence from the draft regulation.
The Good: Auto enrollment and new benefits for low-balance borrowers
By reducing monthly payments, existing IDR plans tend to lower the risk of default. But a lack of awareness, plus paperwork burdens, mean that many struggling borrowers who could benefit from IDR cannot access it. Automatically enrolling delinquent borrowers in IDR will help address this problem, as will streamlining the number of repayment plans.
Accelerated forgiveness for borrowers with low balances is also a good idea. Distressed borrowers typically attended college for only a couple semesters before dropping out, meaning most people who struggle with their loan payments borrowed very little. The new IDR plan will grant students who borrowed less than $12,000 forgiveness after just 10 years, down from the usual 20 or 25.
While this change will cost money ($3.7 billion, according to ED’s cost estimates), it is cheaper than most other provisions of the proposed new plan. The expenditure may be worth it: students who borrowed small amounts and did not receive a degree may be reluctant to enroll in an IDR plan if forgiveness is 20 or 25 years away. Forgiveness after 10 years, by contrast, could nudge these borrowers to start repaying their loans and keep out of default.
Enacting these changes by themselves could have improved the student loan repayment system at minimal expense. But the other provisions of the new IDR plan will swell the costs of the student loan program and lay the groundwork for debt-financed tuition hikes.
The Bad: Exploding costs and higher tuition
The central provisions of the new IDR plan—a higher income exemption, a lower assessment rate for undergraduate borrowers, and interest cancellation—will slash monthly payments for most borrowers and significantly reduce the amount students pay on their loans in total.
This might sound like a good thing at first. But it will fundamentally reshape the incentives at play in our higher education system, with many unintended consequences.
Students in who enroll in degree or certificate programs with a modest financial return will repay just pennies for every dollar they borrow from taxpayers. Even students in programs with a typical return might repay only 50% of what they borrowed, according to calculations by Adam Looney of the Brookings Institution.
For certain programs at community colleges, especially cosmetology, students might have their loans forgiven without ever making a single payment. President Biden may realize his dream of free community college, but only by exploding the student loan system in the process.
Because most undergraduate students will receive a subsidy on their federal loans, the rational thing to do is borrow the maximum amount possible from taxpayers, and then repay through the new IDR plan. Currently, 45% of all undergraduates and 77% of community college students do not take out loans. Under the new plan, those students will be leaving money on the table.
The result will be an increased willingness to borrow. The Biden administration intends to reduce the burden of student loans, but it could actually cement the role of debt in our higher education system. Borrowing for college will become more common, especially at community colleges and previously inexpensive public schools. Institutions will attempt to capture this new federal largesse by hiking tuition.
The Absent: Honest cost estimates and accountability
ED’s proposed rule pegs the cost of the new IDR plan at $138 billion. That is almost certainly an underestimate, for several reasons.
First, it assumes that the Supreme Court will uphold President Biden’s plan to cancel $430 billion in student loans. With so much debt already cancelled, the new IDR plan will add fewer costs at the margin. But if the court strikes down the loan-cancellation scheme, as is likely, borrowers who would have received forgiveness will instead repay their loans through IDR. The cost of making IDR more generous will shoot up.
Second, the cost estimate does not account for the likelihood that some borrowers in non-IDR plans will switch into IDR. This is nonsensical, as a central goal of the proposal is to offer more borrowers an affordable monthly payment through IDR. Third, the estimate makes no allowances for increases in borrowing or tuition rates that stem from the IDR plan’s enactment. Accounting for these effects, independent analysts think the true cost of the plan could exceed $500 billion.
The Biden administration makes only a feeble attempt to counter the new plan’s impact on tuition and borrowing. ED intends to publish a “shame list” of programs that provide “low financial value,” to dissuade students from enrolling. While more transparency is always welcome, research has found that such shame lists do little to control tuition or deter enrollment.
To make the new IDR plan fiscally tenable, transparency is not enough. The federal government must stop funding higher education programs that leave students with earnings too low to pay back their loans. There is a proposal in the works to do this for proprietary colleges, but degree programs at public and private nonprofit schools are exempt. Without meaningful accountability, the new IDR plan will offer little more than a blank check for colleges to continue hiking tuition and churning out low-value degrees on the taxpayer dime.
Income-driven repayment needs responsible reforms
The income-driven repayment system has its share of problems. But fixing those problems does not require a massive new infusion of taxpayer dollars. Rather than slashing payments for everyone, ED should focus on low-cost interventions to improve IDR, especially simplification and automatic enrollment of delinquent borrowers.
As written, the proposed rule will fundamentally remake the student loan system. New loan subsidies will make it rational for students to borrow more, a fact which colleges are sure to exploit. While President Biden’s Education Department set out to lessen the burden of student loans, it may wind up cementing debt as the central pillar of higher education finance.