President Joe Biden
announced
that his administration will cancel up to $20,000 in federal student loans for current borrowers. The move, however, will do nothing to stop nearly $85 billion in new student loans slated to go out the door every single year. Much of that taxpayer funding subsidizes bloated tuition and degree programs of questionable quality, contributing to the student loan crisis Biden claims to be attempting to solve.
Biden’s plan would cancel $20,000 for borrowers who received Pell Grants and $10,000 for everyone else, up to an income cap of $125,000 for single people and $250,000 for couples. The Education Department will also slash required payments for undergraduate borrowers going forward by making income-based repayment plans more generous. According to the administration’s
fact sheet
, a borrower earning $77,000 per year could see monthly payments cut by almost 80%. Preliminary estimates have pegged the
cost of the scheme
at half a trillion dollars.
Despite the income limits on eligibility, the benefits of these plans will still flow mostly to borrowers who finished college and enjoy an above-average standard of living. Moreover, as student debt holders tend to skew young, many of the people who benefit from Biden’s loan forgiveness policy will reach higher income brackets later in life. Despite some halfhearted attempts to make the policy more progressive, loan forgiveness is still welfare for the professional class.
Moreover, the loan cancellations will reduce the outstanding stock of student loans only temporarily. Independent analysts have
concluded
that, despite last week’s announcement forgiving hundreds of billions of dollars, student debt will climb back up to its current level in just a few years.
This development will renew calls for loan cancellation by executive fiat. It’s a fair bet that the next Democratic president will use Biden’s precedent to issue a second round of loan forgiveness. Biden himself may give in to the temptation to forgive more loans before his first term is out, particularly if his reelection prospects look dire. Already, his Education Department is
cooking up
new loan cancellation initiatives.
Student loan cancellation is an inherently backward-looking policy that does nothing to address the high cost of education, nor the structural reasons why some borrowers are unable to pay their debts. It may even make things worse if schools hike tuition to exploit the possibility of future forgiveness, which is a safe bet. To stop the next student loan crisis, more fundamental reforms to higher education are necessary.
Some liberals
argue
that we can avoid a repeat of the student loan mess with nationwide free college. State governments have “disinvested” in their public colleges, the argument goes, driving up tuition and leading to more student loans. Free college, they say, would obviate the need for student debt.
This argument could not be more wrong. The free college plans under mainstream consideration apply to a narrow segment of the higher education system: state resident undergraduate students at public colleges and universities. However, the vast majority of student loans are disbursed for other types of education.
Nearly half
of new student loans issued every year are for graduate school, not college, and the share is rising. While students with bachelor’s degrees end up with
just over $30,000
in debt, on average, graduate students
typically owe
$80,000 or more. Even though people with graduate education represent just a quarter of borrowers, their larger balances and slower repayment rates mean they owe
roughly half
of the outstanding debt.
At the undergraduate level, most loans go to students at private schools or public schools outside their home states. These institutions operate outside any realistic free college scheme. Eliminating new student debt would require making graduate schools and private colleges free, too, yet no reasonable person would propose taxpayers pick up the tab for tuition at Harvard Business School.
But even the intended beneficiaries of free college, state resident undergraduates at public institutions, would still borrow under a national free college program. Some would take out loans to cover rent or other living expenses. Others would simply use whatever lines of credit are available — if it might be forgiven, why not? For these reasons, student debt is still a fact of life in many European countries with free college, such as
Sweden
.
An
analysis for the American Enterprise Institute
by me and Jason Delisle concluded that free college would reduce new student loan volume by just 15%. Tens of billions of dollars in loans would still go out the door every year. And that doesn’t even consider the possibility of increased borrowing to take advantage of future loan forgiveness.
But increased borrowing is likely. When government creates the expectation that forgiveness will be a regular feature of the loan program, people react accordingly. Students’ willingness to borrow rises. Colleges respond by hiking tuition and adding new programs, many of middling to no economic value. The result is more loans and bigger loans, all courtesy of the federal government.
We’ve seen this movie before. In the past,
some law schools
have exploited loan forgiveness programs for public servants to charge students higher tuition — and pass on the cost to taxpayers.
Now that Biden has set a precedent for loan cancellation, the cat is out of the bag. Even if Democrats managed to pass a nationwide free college policy, it would barely put a dent in federal student lending going forward. The only way to solve the problem for good is a dramatic reduction in the scale and scope of the federal student loan program.
The responsibility for such a change lies with Republicans. Fiscally conservative reformers should start by eliminating loans to graduate students, which account for almost half of the new loan volume and are set to expand. Graduate students in high-value programs such as law and medicine could
easily find loans
on the private market to cover the cost of attendance. But private sector lenders will refuse to fund the low-quality programs that have
proliferated
in the wake of federal intervention in student lending. The result will be a stronger graduate education sector at no cost to taxpayers.
Policymakers should subject federal undergraduate loans to strict new controls. Only programs in which graduates earn enough to repay their debts in a timely manner should remain eligible for student loan funding. Colleges should be financially responsible for any shortfall in student loan payments, giving them a direct stake in their students’ career success.
While the government would continue to make some new loans under such a system, the volume would go down substantially. Moreover, the vast majority of borrowers would be able to repay loans instead of relying on handouts from taxpayers.
The silver lining of Biden’s loan cancellation announcement is that it may finally prompt members of Congress who care about fiscal responsibility to tackle the Leviathan of federal student lending. For too long, federal student loans have served to drive up tuition and subsidize low-quality programs, with unsavory economic and political consequences. Loan forgiveness will pour fuel on the fire, and free college would be just a Band-Aid. But commonsense conservative reforms can fix the problem for good.
Preston Cooper is a research fellow at the Foundation for Research on Equal Opportunity.
