“Biden announced that he will—unilaterally, mind you, and for no apparent reason that I can see—extend the pause on student loan payments until the end of the year and forgive up to $10,000 for those persons making less than $125,000 a year. This generosity with other people’s money extends up to $20,000 for Pell Grant recipients.
As David Stockman, a former director of the Congressional Office of Management and Budget, reported recently, “Only 37% of Americans have a 4-year college degree, only 13% have graduate degrees and just 3% have a PhD or similar professional degree. Yet a full 56% of student loan debt is held by people who went to grad school and 20% is owed by the tiny 3% sliver with PhDs.”
Picture two young married lawyers who together earn just under $250,000 and are on their way to making even more mon ey in the future. They will be able to collect from Uncle Joe a nice bonus of $40,000, taken from the pockets of the many people who didn’t go to college—perhaps because they did not want to take on debt—and from those who have responsibly already paid back their debt.”
“even though student debt relief might not look like spending the way we traditionally think of it—the government isn’t cutting checks or awarding grants here, the way it did in the American Rescue Plan, for instance—economically, it will function the same way.
Because money is fungible, student loan borrowers will effectively now have extra discretionary income equal to whatever they would have had to pay towards that $10,000 in loans. That might sound great, but remember that the standard definition for inflation is what happens when a larger supply of money is chasing the same amount of goods and services. Money that would have been spent paying back loans will, upon the conclusion of the repayment moratorium, remain circulating in the regular economy. Ending the repayment moratorium without passing forgiveness would’ve been deflationary by returning U.S. dollars to Treasury.”
“colleges and universities will have even less incentive to lower costs. Economic researchers have often found that the government’s subsidized student loans cause educational institutions to jack up their prices for obvious reasons: If the feds cover the cost on the front end, no matter what it is, universities have every incentive to raise the sticker price. Forgiving student loan debt exacerbates this problem since it encourages more reckless borrowing. Indeed, the Committee for a Responsible Federal Budget estimates the cumulative student debt level will return to current levels in just a few years.
There are structural incentives that push students to borrow money that they can never hope to pay back, and the fact that so many people have fallen into crippling debt is a compelling reason to change these incentives. No rule says the federal government must lure people down a path that leads to financial ruin with some frequency. Congress can sharply limit, or even end, this practice.
A one-off cancelation of some level of debt held by borrowers who happen to be in dire straits at this specific moment does nothing to fix the underlying problems; on the contrary, it exacerbates them. It is a slap in the face to everyone who either paid down their college debt or made different educational choices to avoid accruing it.
If Biden wanted to make the strongest conceivable case for forgiving some college debt, this course of action needed to be paired with serious changes to the entire higher education system. Otherwise, he is simply engaged in a vast transfer of wealth, taking hard-earned money from those who did not fall prey to the federal government’s scam and awarding it to those who did.”
“Loan forgiveness may encourage reckless borrowing, if today’s college students think they won’t actually have to pay back their loans. And this, in turn, could lead to even higher college tuition rates. It could also be inflationary more generally, by freeing up income for tons of people who may then drive up demand for goods and, along with it, prices.”
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“The program amounts to a massive subsidy for middle-class Americans, as opposed to benefiting the most economically downtrodden or financially strapped. It provides a handout to many people for whom loan payments aren’t a problem now (someone making $125,000 per year can surely afford a few hundred dollars per month) or won’t be in the very near future (for instance, a doctor or lawyer on the verge of making big bucks who hasn’t quite gotten there yet). In short, the program “consumes resources that could be better used helping those who did not, for whatever reason, have a chance to attend college,” as economist Larry Summers put it on Twitter”
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“Certainly not everyone who had to take out student loans was lazy, irresponsible, or anything of the sort. And not everyone without student loan debt is responsible or hard-working; many just lucked into having parents who could afford to pay for college. But there are many people for whom avoiding student loan debt or paying it off promptly meant making all sorts of sacrifices. Biden’s loan forgiveness program says to them that this thrift, practicality, etc. may have been for nought.”
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“to simply write off existing student loan debt without addressing the source of the fast rise in college prices —which has a lot to do with the federal student loan program existing—is only ensuring ongoing problems.”
“The federal government’s Paycheck Protection Program, which effectively paid businesses to keep workers on their payroll even if they temporarily closed during the COVID-19 pandemic, was a mess.
After quickly burning through its initial allocation of $349 billion, the Paycheck Protection Program was reauthorized a few times and ended up costing more than $820 billion, making it one of the largest components of the federal government’s humongous COVID relief effort. Despite being lauded by both Democrats and Republicans, independent analysis found that the program was a hugely expensive failure. Only about one-third of the program’s money actually went to workers who would have otherwise lost their jobs, according to a National Bureau of Economic Research study. Another study by the Federal Reserve Bank of St. Louis found that taxpayers paid roughly $4 for every $1 of wages and benefits to workers.”
“President Joe Biden announced that the federal government would forgive between $10,000 and $20,000 of student loan debt for qualifying borrowers who make less than $125,000 per year. But that wasn’t all: Biden also said that he would create a new income-driven repayment (IDR) system for college borrowers.
The IDR aspect of Biden’s plan attracted less scrutiny than the direct forgiveness aspect, which will cost at least $300 billion (and probably much, much more) in the immediate future. But in the long-term, this aggressive move toward an income-driven model of repaying college loans will probably have a bigger impact—and that impact will be catastrophic. In fact, unless the government does something to constrain colleges’ ability to set their own prices, IDR could break the entire higher education financing system and lead to skyrocketing costs for taxpayers.
There are some IDR programs available right now, but Biden’s approach would vastly expand this option. The existing plans require borrowers to pay 10, 15, or 20 percent of their income for two decades, at which point the rest of the loan is forgiven. Biden would make IDR much more appealing than it is currently; according to the Biden-Harris debt relief plan, borrowers will pay just 5 percent of their income (or 10 percent if they took out graduate student loans) for either 10 or 20 years depending on how much money they owe. The income threshold will be raised from 150 percent above the poverty line to 225 percent, and punitive interest rates will be eliminated.
All in all, this IDR model will be extremely appealing for a large number of borrowers, and we should expect the percentage of borrowers who are repaying via IDR to increase substantially in the coming years. But without further changes to the federal student loan program, this is going to be a huge problem.
That’s because both the borrowers and the universities will have increased incentive to bilk the people who actually make the loan: the taxpayers.
Under the current system, a prospective student needs a certain amount of money to pay for tuition at a university—say, $50,000—and borrows that sum from the government (i.e., the taxpayers). Later, the borrower pays it back, with interest. The university’s incentives are less than ideal; it might feel free to raise the price of tuition to $60,000, satisfied that the student really wants the degree, and will thus borrow more money, and deal with the consequences afterward. To the extent that the government loan program disguises upfront costs, it arguably contributes to rising tuition rates.
Under IDR, this situation gets much worse because the university and the borrowers have incentive to cooperate and screw the taxpayers. For the borrower, it doesn’t matter if tuition costs $50,000 or $5 million: The borrower will be repaying the same amount, 5 percent of income for 10 years, regardless of the size of the loan or the cost of tuition. Since it makes no difference to the borrower, the university might as well raise prices. This way, the university pockets more money, and the borrower doesn’t even have to pay it back.
Something close to this scheme already exists in law schools, which have Loan Repayment Assistance Programs (LRAPS). According to leftist writer Matt Bruenig, the arrangement is very likely to produce increased tuition as universities and students figure out that they can essentially cooperate in this game to beat the house”
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“Bruenig notes that Australia also uses IDR, but in Australia, the government prohibits universities from charging obscenely high tuition rates.
“If we are going to make the leap into an IDR-dominant college financing system, then we may need the government to also play a much bigger role in setting college prices, something it probably should have been doing even before the Biden policy change,” writes Bruenig. “Otherwise, we may very well see more unwanted cost bloat beyond what we already have.””
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“One solution would be for the government, at a minimum, to set tuition prices for public, state universities—which, after all, are public and paid for by taxpayers. If the state is going to confiscate wealth from taxpayers in order to maintain public educational institutions, those institutions should be generally affordable to those same taxpayers.
Another idea would be to move to a system in which students don’t take out loans at all; instead of paying tuition, they agree to pay a percentage of their income to the university for some length of time after graduation. This would be like IDR, but it would cut out the government as the middleman, and thus get taxpayers off the hook. Purdue University President Mitch Daniels experimented with such a system, though it was paused earlier this year due to implementation difficulties.
By encouraging students to take on even more debt, and then never expecting them to repay it, the Biden administration is creating a system where everyone involved in higher education has incentive to fleece the American people.”
“The American Civil Liberties Union (ACLU) last week applauded President Joe Biden’s plan to cancel student loan debt, which it describes as “a racial justice issue.” That puzzling position encapsulates how far the venerable organization has strayed from the mission reflected in its name.
Under Biden’s new policy, borrowers earning up to $125,000 a year will be eligible for $10,000 in debt relief or twice that amount if they qualified for Pell Grants as students. The 43 million or so beneficiaries include many affluent people who could readily afford to pay off their loans, while the cost, which is projected to be at least $300 billion, will be borne by taxpayers, including Americans of relatively modest means.
Some of the people picking up the tab never attended college, while others struggled to do so without borrowing money or have already paid off their loans. But in the ACLU’s view, that seemingly unfair redistribution of resources is what racial justice demands.”
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“it has nothing to do with protecting civil liberties. The 14th Amendment guarantees equal protection under the law, but it does not promise to eradicate racial disparities in educational or economic success.
As the ACLU sees it, however, any such disparities result from “centuries of structural inequities and racism.” The federal government therefore has a duty to ensure equal outcomes, which requires wide-ranging interventions, including welfare programs, education spending, job training, affirmative action, public housing, tax credits, and state-subsidized health care.
To give you a sense of how far afield that cause takes the ACLU from the defense of constitutional rights, the organization argues that “broadband access for all” is a racial justice issue because “people without broadband access are disproportionately Black, Latinx, Indigenous, rural, or low-income.” The ACLU describes the Patient Protection and Affordable Care Act, which it urged the Supreme Court to uphold, as “a great civil rights law” because “it is not possible to fully participate in the economic, social, and civic life of our nation without stable health coverage.”
If “stable health coverage” is a prerequisite for fully participating in “the economic, social, and civic life of our nation,” so is stable housing, stable employment, and a stable supply of food, clothing, and transportation. Such reasoning expands the ACLU’s mission to include pretty much any domestic policy issue.”
“President Joe Biden made millions of Americans up to $20,000 richer by excusing them from repayment of money they had borrowed, costing taxpayers hundreds of billions of dollars.
The recipients aren’t the poorest Americans, the neediest, the unluckiest, the most indebted or those serving our nation most nobly. They qualify, rather, because they borrowed money for college.”
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“many of those receiving relief borrowed to finance graduate degrees like JDs and MBAs — a group hardly in need of financial help, but one that will remember this giveaway come November. But from afar, this choice looks absurd. As of June, American households held more than $4.5 trillion in consumer debt (excluding home mortgages), most of which was not student loans. According to the Federal Reserve, fewer than 1 in 4 households have student-loan debt, and it is more common among those with higher incomes. By what logic is “borrowed money for college” a sensible standard for selecting the recipients of unprecedented public beneficence?
The logic is uniquely American, and incredibly harmful. It is captured well in the familiar Hollywood trope of a teenager, discovering his family’s financial troubles, conceding gloomily that he can abandon his first-choice school and attend the state university nearby, only for a determined parent to insist: No, we will find a way.
In America, this is meant to be inspiring. But the statistics suggest it’s more likely to be a tragic mistake.”
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“Students who enroll in college are more likely to drop out or graduate into jobs that don’t require their degrees than they are to travel the expected college-to-career path. Research also suggests that what school you attend just doesn’t matter all that much: For men, school selectivity has no effect on future earnings; for women, more selective schools lead to more hours worked and lower marriage rates.”
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“On average, colleges in America consume more than $25,000 per student per year — second only to Luxembourg among developed economies and more than twice the spending in countries like Denmark, France and Germany. The focus on elite private colleges is especially harmful: While we constantly conflate the cost of the “college experience” with affording an “Ivy League education,” median tuition for an in-state, four-year public university is still only $8,300 per year. Every child in America can pay his or her own way at a perfectly good college for about half the income from a part-time, minimum-wage job.”
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“America should embrace the banality of the student loan as just one form of debt among many — chosen by some for purposes of investment, and by others for what amounts to conspicuous consumption, exploited by sellers of a product with variable quality. As luck would have it, America has a very good legal system for governing regular debt, complete with structures for managing risk on all sides, options for sellers to provide credit themselves if no one else will, and equitable relief for those who make commitments they cannot keep.
The keystone is our uniquely lenient bankruptcy system. Unlike in most other countries, the typical American can go to court, declare himself insolvent, hand over some remaining assets, default on his remaining debts and return home to a house exempted from the proceedings. This choice is by no means an easy one — his credit score plummets and borrowing becomes more difficult and costly; friends and neighbors are likely to notice, along with anyone who runs a background check in the future; feelings of failure and accompanying shame are common. Thus, while Americans file for bankruptcy far more frequently than Europeans, the occurrence is sufficiently rare that consumer credit remains widely available and affordable. The cost of bankruptcy is low enough to encourage risk taking and ensure that someone who truly needs a fresh start can get one, but high enough that most who can avoid it will do what they can to steer clear.
This is the option that should be available to all student-loan holders.
Continuing the desacralization of student debt, we should eliminate the labyrinth of government grants, loans, subsidies and guarantees that assert an open-ended public commitment to financing anything a university can think to charge for. Public support should come at the state level through funding of state university systems and at the federal level through a simple, means-tested grant that covers, say, 50 percent of the median state’s four-year public university tuition. Tying the grant value to the median state would prevent individual schools from extracting more money by raising tuition. Costs of room and board would be excluded. Young adults not enrolled in college do not expect the public to pay for their housing or food; neither should those enrolled.”
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“Where would students find additional funding for more expensive options? A private loan market would likely exist but, absent the guarantees and subsidies, credit would be scarce and expensive. Borrowers would tend to have limited credit history and few assets. Lenders would be poorly positioned to evaluate the likelihood of successful repayment. The prospect of discharge in bankruptcy would add further risk. These obstacles are features, not bugs. Loaning large amounts of money to teenagers with uncertain prospects and no collateral is a bad idea for lenders because it is a bad idea, period. Finding ways to make it sufficiently attractive to saddle those teenagers with the loans does no one (besides college administrators) any favors.
Fortunately, institutions exist with the capital to finance all the necessary borrowing, the information to assess the wisdom of borrowing to enroll, the resources to help students succeed and the incentives to make the system work. Those institutions, of course, are the colleges themselves. Just as sellers provide financing for cars, capital goods and sometimes real estate, colleges should be expected to finance the education they provide. Instead of cashing tuition checks before freshman orientation has begun, and leaving the student to someday pay back a third-party lender, colleges should receive tuition from their students after the fact, when those students have been launched into careers that allow them to afford the payments.
This shift would initially require institutions without large endowments to borrow working capital for providing today an education that would be paid for tomorrow. But most institutions will have sufficient fixed assets to secure the loans, and the federal government could play a role if needed in guaranteeing that financing — with default leading promptly to liquidation.
Meanwhile, students who made the choice to borrow under the old system would continue to repay those debts if they can, and would have the option to declare bankruptcy if they cannot. Such bankruptcies would cost the federal government much less than Biden’s broad-based loan forgiveness, and would help the transition to a better system and mindset rather than Biden’s doubling down on the broken one.
Colleges dependent on their own alumni’s future earnings to fund their operations would face a radically different set of incentives than today’s.”
“The overwhelming majority — 92 percent — of the $1.7 trillion of outstanding student loan debt is made up of federal loans. The federal government continues to lend upwards of $100 billion each year to students from all income levels. In fact, more than 50 percent of federal loans outstanding have been made in the last decade. In addition to the 43 million Americans paying their own federal student loans, 3.6 million parents owe $103.6 billion in federal Parent PLUS loans. Roughly half of federal loans are made not for access to undergraduate programs but to pursue graduate programs. These graduate school borrowers are often top earners in the economy after they complete their degree.
Many federal borrowers benefitted greatly from their undergraduate or graduate education and are managing their obligations well and without undue burden. There is a group that is struggling, however, and they are too often first-generation college students or those from historically marginalized communities. A study from the bipartisan Brookings Institution found Black graduates hold an average of $53,000 in student loan debt four years after graduation — almost twice as much as their white peers. In addition, Black families hold 19 percent of the federal loans made directly to parents, despite Black students making up just 12 percent of college students.
Put simply, the current system does too much for too many and not enough for those who truly need public support to access and complete college. And without a focus on the front-end of the federal loan program, another generation of students and their families could very well be in the same situation, and we’ll likely be having the same difficult discussions 10 or 15 years from now.
There are a number of pragmatic steps that can break this cycle of federal student loan debt while protecting access to higher education for all:”
“Under the terms of the settlement, the Department of Education will forgive roughly $6 billion in loans for 200,000 attendees of dozens of technical schools and for-profit colleges. The settlement also requires the Department of Education to reimburse borrowers who already made payments or even paid off the entirety of their loans. It is not clear how many borrowers covered by the settlement will receive loan forgiveness for outstanding debt and how many will receive full reimbursement for debt they already repaid.”
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“Over the past two years, the Biden administration has approved debt forgiveness claims for thousands of former students at for-profit colleges. Earlier this month, the administration announced over $5.8 billion in loan forgiveness to former students of the now-defunct Corinthian Colleges.
However, the Department of Education’s role as the largest issuer of student loans in the country means that it continues to fund colleges and universities that fail to prepare students. Low standards for federal funding incentivize the creation of schools whose sole mission is to collect federal loan money. Even for-profit institutions that do serve the majority of their students still put taxpayers on the hook for attendees who can’t make the most of their education. Debt forgiveness for all borrowers, including nonprofit private colleges and public institutions, would have the same effect.”
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“There is clear evidence that “federal student aid fuels the ivory tower’s infamous price inflation, including roughly a doubling, in real terms, of sticker prices between the 1991–92 and 2021–22 school years,” wrote Neal McCluskey, director of the Cato Institute’s Center for Educational Freedom. He continues: “It also makes logical sense: If you give loads of people easy money to pay for one thing, the price of that thing will rise as people demand more of it, and with greater bells and whistles.””