The Wrong Reform on Student Debt

by The Editors

There are plenty of problems with American higher education: Its price keeps rising rapidly, some qualified students still don’t have access to it, and others end up at institutions for which they are ill suited. President Obama proposed a plan this week to enable existing student-loan borrowers to lower their payments, which addresses none of these concerns. Student debt is a real problem, but the cost of college is a much bigger one, and this is a temporary salve, applied unevenly.

A number of federal programs already limit annual payments on recently issued student loans to a certain percentage of the borrower’s income — 10 or 15 percent of adjusted gross income, with balances entirely forgiven after 20 or 25 years. Now, with no particular justification, it will be 10 percent and 20 years for all federal student loans.

Such programs are an important way to keep student debt manageable: Students do need ways to finance their education without taking on unaffordable payments. But even though student default rates are increasing, relatively few borrowers take advantage of these programs. Meanwhile, the forgiveness offered at the end of a uniform term means that the greatest financial benefits of these programs flow to borrowers with the largest loan balances, and a large amount of the benefits even go to grads with six-figure incomes. Graduates with $120,000 in law-school debt can easily end up paying the same amount each year as those who borrowed much less (say, for college). After 20 years, both borrowers will see their balances forgiven — no matter how much they borrowed and how much they still owe.

Noting that participation rates in these programs are still low, the president has proposed making them retroactive and even more generous. A better idea would be to reform them and enroll borrowers in them automatically going forward.

A proposal by Representatives Thomas Petri (R., Wis.) and Jared Polis (D., Colo.) would make enrollment in income-based repayment automatic, though not mandatory. It would end the policy of loan forgiveness and cap the amount of interest that can accrue. All borrowers would then be less likely to slip into default, but would still have incentives to repay their loans faster and to consider the price of their education and how much they need to borrow for it.

The president’s proposal, meanwhile, doesn’t appear to address the existence of easy ways to game the system, which the New America Foundation has identified as serious problems with the current programs. Just ending loan forgiveness, as Petri and Polis have proposed, would correct a number of these distortions.

Moreover, President Obama has talked about how he wants to use his pen and his phone to accomplish executive actions, but he doesn’t have a checkbook to go with them. The expansion of existing income-based-repayment programs could cost billions of dollars over the next 10 or 20 years. How do we know this? Because the president’s 2015 budget (soundly rejected by Congress) proposed more or less these same ideas and projected how much they would cost. The costs may be worthwhile, but they can’t be simply ignored.

The president sells his plan as economic stimulus, arguing that student debt is holding back consumer spending and other forms of borrowing. The existing income-based repayment, though, barely reduces borrowers’ balances, so they’re not necessarily any more likely to seek out or secure, say, a mortgage. And President Obama’s proposed stimulus, such as it is, conveniently accrues to the better-educated and younger segments of American society, which are more likely to be supporters of his.

The open-ended nature of many federal subsidies for higher-ed borrowing is a big contributor to college costs in the first place. Bringing down prices down will mean more competition and more alternatives, along the lines of what Republican senators Mike Lee (Utah) and Marco Rubio (Fla.) have proposed. Financing opportunity in a sensible way and making education more affordable are important goals. It’s too bad the president has shown little interest in them.

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