The student loan fiasco

If Biden does extend the payment pause again, the decision will be indefensible. The moratorium on student loan payments began in March 2020 as part of the government’s response to the COVID-19 pandemic. But even as other economic relief programs have wound down, the pause endured.

The Department of Education has already extended the pause several times. It described the second-most-recent extension, to Feb. 1 of this year, as “final.” Yet the administration chose to extend the pause once again, this time citing the omicron variant of COVID-19. As of this writing, federal student loan borrowers have gone over two years without making a required payment.

The White House sees this as a badge of honor. As Klain crowed to reporters earlier this month, “Joe Biden right now is the only president in history where no one’s paid on their student loans for the entirety of his presidency.” Yet rather than a noble gesture, the extended moratorium on loan repayment is a runaway burden on taxpayers that serves only to kick the can down the road while doing nothing to change the underlying problems in student lending.

Since the payment pause began, the Department of Education has disbursed more than $126 billion in new student loans, bringing the total volume of federal student debt to $1.6 trillion. The Congressional Budget Office projects that the federal government will disburse $1 trillion in new loans over the next decade, pause or no pause. It is illogical to continue the pause on payments while hundreds of billions in new loans go out the door. If the White House believes most borrowers are not in a strong enough financial position to repay their loans, it should also produce a serious plan to curtail new lending.

Many people think of the student loan payment pause as a cheap way to provide relief to borrowers, a moderate alternative to the full loan cancellation that activists demand. But suspending payments is costlier than it appears. Interest rates are set at zero for the duration of the pause, which is another way of saying that taxpayers have forgiven two years’ worth of interest. Additionally, borrowers can still count these past two years toward loan forgiveness programs such as Public Service Loan Forgiveness. While PSLF normally requires borrowers to make 10 years of payments, the pause means that taxpayers are getting only eight — and potentially fewer.

Add up all these costs, and taxpayers spend $52 billion per year suspending payments on student loans, according to the Committee for a Responsible Federal Budget. For comparison, America’s flagship scholarship program for low-income college students, the Pell Grant program, costs just $23 billion. President Biden’s free community college proposal, which Democrats removed from the Build Back Better plan for being too expensive, would have cost only $11 billion per year.

The moratorium on loan payments is untenable, both as a matter of policy and process.

The payment pause overwhelmingly benefits high earners. Students who attended expensive private colleges or went to graduate school accumulate the most debt. They also tend to be wealthier and accumulate higher lifetime earnings. A community college dropout earning close to the poverty line might have less than $10,000 in debt. But a lawyer with a degree from Harvard or Georgetown and a six-figure job on K Street could have easily borrowed $150,000 or more.

Moreover, low-income student borrowers already have access to safety-net programs, such as income-based loan repayment plans, that reduce their monthly payments. Unemployed borrowers are eligible for loan deferments. As a result, the people who pay the most toward their student loans, and hence benefit the most from the pause, skew wealthier.

The poorest people tend not to have any debt at all, because they never went to college. Just 15% of U.S. adults have student debt, according to the Pew Charitable Trusts. Even among millennials, debtors are not a majority; 66% of people aged 18 to 29 have no outstanding student loans. Despite having more debt, young adults with at least a bachelor’s degree earn 80% more than peers in the same age group who have only a high school diploma.

According to researchers at the Brookings Institution, people in the bottom income quintile, whom the payment pause is ostensibly supposed to help, accounted for just 2% of annual student loan payments in 2019. For every $1 the lowest income quintile paid toward their loans, the top quintile paid $19.50.

The process by which the administration has extended the pause is also questionable. While Congress originally authorized the payment suspension as part of the CARES Act, the executive branch has unilaterally extended the pause several times since then. The moratorium was originally intended as an emergency measure, enacted while the economy was in free fall. Continued extensions since then have gone well beyond the intent of Congress. Though the power of the purse is supposed to rest in the Capitol, the Department of Education has spent tens of billions of taxpayer dollars extending the pause without explicit legislative authorization.

The unilateral extensions of the pause also create uncertainty for borrowers. Should they make financial arrangements to resume payments or not? The prospect of another extension of the payment pause creates a perverse incentive for students not to pay their loans right now, even though they would benefit from the 0% interest rate. If the pause is extended again, or if the Biden administration decides to cancel some debt by executive action, borrowers who dutifully paid their loans will feel cheated for having done the right thing.

Klain’s brag that no one has been required to pay student loans under Biden is an odd fact to celebrate. The payment pause is an extraordinary policy, meant for extraordinary circumstances. If Klain believes that more extensions of the pause are necessary, it undermines President Biden’s State of the Union message that his administration has delivered “the strongest [economic] growth in 40 years.”

Despite painful inflation, the economy is in decent shape. The unemployment rate has fallen to 3.8%; unemployment is just 2.2% for people with a bachelor’s degree or higher. The labor market situation is a far cry from the massive job losses of March and April 2020. Most student borrowers, who tend to earn above median income to begin with, will be fine if payments resume.

A blanket extension of the student loan payment pause is therefore unwarranted. It’s true that some borrowers are not financially ready to resume payments. But helping this minority does not require spending north of $50 billion per year, most of which will benefit doctors, lawyers, and others with graduate or professional degrees, on yet another extension of the pause. There are far cheaper and more targeted policies available.

First, the Department of Education should ensure that students know about the ordinary benefits that are available to them, such as income-based repayment plans and unemployment deferments. The department plans to do targeted outreach to borrowers at greater risk of defaulting on their loans, which is welcome. A three-month grace period after the payment pause ends, during which interest will accrue but missed payments will not be reported to credit bureaus, is also a good idea.

In the longer run, the Department of Education should work to make paying student loans less painful. It should reduce the punitive fees it charges to borrowers who default on their loans. Unlike borrowers in good standing, these individuals could pay up to 20% of their balance toward fees. (More than 8 million borrowers were in default before the payment pause began.) Policymakers should also allow borrowers to escape default by making it easier for them to rehabilitate their loans. These ideas will cost much less than the suspension of loan payments, but they will help the borrowers who need it most.

But more fundamental reforms to student lending are also necessary. If the administration believes that borrowers can’t be expected to repay the loans they currently owe, it should simultaneously push to reduce the volume of new loans that the government hands out. It should start with graduate programs, where the ratio of students’ debt to earnings after completion is usually the highest.

Loans to graduate students, which account for nearly half of annual loan volume, should be eliminated. Students seeking high-value graduate degrees such as law, medicine, and dentistry will easily secure financing on the private market. But low-value programs such as Columbia University’s master’s degree in film, which leave graduates with debt entirely out of proportion to their income, will not survive without taxpayer support. All the better.

Congress should also subject loans to undergraduate students to stricter controls. As I wrote in these pages last October, 28% of bachelor’s degree programs do not increase students’ earnings enough to justify the costs, on average. Taxpayer-dependent colleges that produce low-value degrees should be penalized and, in extreme cases, barred from accessing federal grants and loans. The right system of carrots and sticks will incentivize schools to expand high-value programs such as engineering and economics, while de-emphasizing majors for which graduates do not earn enough to justify the cost of tuition.

These reforms will not only reduce new student loan volume. They will also leave the students who do borrow in a better position to manage their debts. When the next pandemic or recession comes, perhaps policymakers will recognize that another suspension of student loan payments is not necessary.

A moratorium on student loan payments — an expensive, regressive, can-kicking exercise that fails to address any of the real problems in student lending — cannot be the government’s answer to every economic or social disruption. But without more fundamental reforms to the student loan program, Congress and future administrations may revert to another suspension of payments whenever they smell a recession around the corner.

That would be an abdication of the federal government’s duty to protect taxpayers’ investment and fix the underlying problems in the student loan program it created. The Biden administration should let the student loan payment pause end on May 1. But Congress should also take up reforms to the loan program so that a suspension of payments never happens again.

Preston Cooper is a research fellow at the Foundation for Research on Equal Opportunity.