Editor's note: This column is co-authored by Michael Faulkender and Jonathan Pidluzny.
When the Supreme Court struck down the Biden Administration’s unconstitutional student loan bailout last Friday, it scolded the Executive for “seize[ing] the power of the Legislature.” Later the same day, the administration promised to do it again.
In an afternoon press conference, President Biden pointed to a new Department of Education income-driven repayment (IDR) program called SAVE (Saving on A Valuable Education), the result of a rulemaking announced in January. This program will ultimately transfer even more student debt to taxpayers by creating a back door bailout program that amounts to another new social welfare entitlement.
SAVE caps enrolled borrowers’ repayments on undergraduate loans at 5% of discretionary income, down from 10% under the current IDR plan, while raising the definition of disposable income from 150% to 225% of the federal poverty line ($30,000 for a family of 4). Under the plan, a family of four making $75,000 would see their annual student loan payment fall from as much as $3,000 per year to just $375. SAVE would not simply defer payments to higher earning years; it would also cease charging interest when monthly payments are smaller than the interest accrued. Borrowers will have their remaining balance assumed by taxpayers in 10-20 years, depending on the size of the original balance.
This action transfers a significant proportion of the cost of college from the students--who are the ones who benefit from their education--to taxpayers. The Department of Education estimates SAVE will discount the cost of college by 44% for the average undergraduate borrower. The revenue collected by a college or university would not decline; the federal government will just pay a larger proportion of it, without Congressional approval or appropriation.
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SAVE’s cost to taxpayers will be enormous. The Penn Wharton Budget Model estimates it will cost $333 billion to $361 billion over ten years. That estimate does not model how prospective students and universities might behave differently because of these changes. The true cost is therefore likely hundreds of billions higher because the gargantuan subsidy will distort incentives throughout the higher education marketplace, encouraging further overspending and more enrollment by underprepared students in low return on investment degree programs.
What can be done?
First, the student loan portfolio should be sold. Government bureaucrats and contractors are incapable of administering a loan portfolio that dwarfs JPMorgan Chase’s. Until the portfolio is in private hands, the Left will continue modifying loan terms to advance their cherished policy goal of free college for all.
Second, Congress should end Parent Plus and Grad Plus programs. Though a reasonable argument can be made that the lack of borrowing history for 18-year-old undergraduates creates a private market failure, that is not the case for graduate and professional students, let alone parents. Government should not be lending anyone $180,000 to obtain an Masters Degree in Film from an elite university with a multi-billion dollar endowment.
Third, the direct lending programs should be privatized. If the Plus programs are eliminated, the government could consider modestly increasing federal guarantees beyond the present limits for direct loans ($5,500-$7,500 per year for dependent undergraduate borrowers and $20,500 for graduate and professional programs).
Fourth, the Pell program should be redesigned to provide grants to low-income students to pursue more than just traditional degrees, including short term training programs in high-demand sectors and paid apprenticeships.
If Congress is unwilling to privatize student lending, at a minimum, universities should be required to bear first losses when their graduates cannot repay their loans. Risk-adjusted, skin in the game, reforms will force universities to align program portfolios with workforce demand, focus student support initiatives on helping students graduate with marketable skills, and rethink aggressive recruiting practices that bring underprepared students to campus.
If Grad Plus is not eliminated, maximum loan amounts must be indexed to expected earnings. Income-based repayment programs can be a good idea if they are designed to align an individual’s repayment schedule with their earnings trajectory. However, it is critical that the government not be in the business of issuing debt that exceeds a graduate’s likely ability to repay it. Otherwise, IDR will inevitably be a subsidy for low return on investment programs. Congresswoman Foxx’s recent proposal to limit interest charged when borrowers enroll in IDR to what would have accrued under a standard ten-year loan is a good idea; it would protect lower income borrowers from seeing their loans grow in perpetuity despite a perfect repayment history.
Additionally, loan balances should only be forgiven in cases of manifest hardship. Congress should therefore eliminate programs that discharge student debt for favored categories of borrowers, beginning with Public Service Loan Forgiveness, and make student loan debt dischargeable on an individualized basis in bankruptcy.
Finally, Congress should use the appropriations process to forbid the Secretary of Education from issuing regulations that modify expected repayment of existing loans by more than $100 million. Congress should charge any forgone revenue toward the defense -discretionary spending caps negotiated as part of the deal to raise the debt limit. If the Left’s top priority is transferring wealth up the income distribution, the cost should be offset by cuts to other non-defense discretionary spending programs to maintain deficit neutrality.
Michael Faulkender is a former Assistant Secretary of the Treasury and currently a finance professor at the University of Maryland and Chief Economist at the America First Policy Institute
Jonathan Pidluzny is the Director of the Higher Education Reform Initiative at the America First Policy Institute.
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