The Aim Higher Act would let borrowers out of loans they could afford to pay back.
Should the Democrats regain control of the House of Representatives in November, their largely unnoticed plan to forgive billions of dollars in student loans at taxpayer expense will be on the agenda. Many borrowers with the means to repay would qualify.
The plan was devised by the top Democrat on the education committee, Representative Bobby Scott (Va.), as part of the Aim Higher Act, a reauthorization of student-aid programs. And earlier this month a group of Senate Democrats led by Jeff Merkley (Ore.) introduced a similar version in the Senate.
At first glance the proposal appears to be minor and harmless. It could be mistaken for a benefit restricted to low-income borrowers. In reality, it is nothing of the sort.
Under the existing “Income-Based Repayment” program for federal loans, borrowers may cap their payments at 10 percent of income above a base amount — meaning they pay nothing at all if their income is below that base threshold. Both Democratic proposals would increase this exemption from 150 percent to 250 percent of the poverty line, or from about $18,000 to $30,000 for an unmarried individual with no dependents. Any remaining debt would be forgiven after 20 years of payments, consistent with the current version of the program.
Many borrowers would see their monthly payments cut in half or more as a result of the larger exemption, which translates into the government forgiving more of their debts after 20 years. According to a U.S. Department of Education presentation, a typical borrower enrolled in Income-Based Repayment has an income of approximately $35,000. Based on the terms of the current program, these borrowers would pay $140 per month on their loans. Assuming their incomes start at $35,000 and grow by at least 4 percent annually, their payments — which increase with their incomes — would be sufficient to repay a typical amount of debt among those who take out loans and earn bachelor’s degrees, about $30,000.
Compare that scenario with what is proposed in the Aim Higher Act. Raising the income exemption to 250 percent of the poverty line means the borrower’s initial payments would be just $39. And even though the payments would grow over time as income increases, under the Aim Higher Act the payments would still be so low that they would barely cover the interest on the $30,000 loan. That would mean all of the original principal balance would have to be forgiven after 20 years of payments.
The act would also increase the generosity of another loan-forgiveness program: the Public Service Loan Forgiveness program, which gives better repayment terms to borrowers in non-profit or government jobs. These borrowers have their debts canceled after just ten years of payments. Combining that benefit with the lower monthly payments under the Democrats’ plan results in the borrower in the above example paying just $9,000 toward the $30,000 loan — with the government forgiving the rest.
Such generous repayment terms transform federal loans almost into grants, signaling that borrowing more is better than borrowing less. For graduate and professional students who, unlike undergraduates, can access unlimited federal loans for tuition and living expenses, the Aim Higher Act would turn the loan program into a veritable ATM that dispenses taxpayer dollars, at least for those who ended up earning middle-class incomes.
Suppose the student from the above example borrows $65,000 to attend graduate school and then earns a starting salary of $55,000. Under the current terms of the Income-Based Repayment program, the student would earn enough to fully repay the debt, including annual interest at 5 percent, over 20 years. But under the Aim Higher Act, the student’s total payments would be so low that a substantial portion of the obligation would be forgiven. After 20 years of payments, this borrower would still have $35,000 remaining on his loan, which would be forgiven. In other words, the Aim Higher Act ensures that borrowers with middle-class incomes who borrowed to finance graduate and professional degrees stand to routinely benefit from loan forgiveness.
It gets worse. Normally, a student would have to pay more for borrowing more. But thanks to the income exemption in the Aim Higher Act, payments are low enough that the additional principal and interest owed on debts higher than $65,000 for a borrower with the given income profile are simply forgiven at the 20-year point. A $165,000 loan costs this borrower the same as a $65,000 loan. Either way, monthly payments would be identical for 20 years, and then all remaining debt is forgiven. Graduate students who do not max out their loans under such incentives would literally leave free money — provided at taxpayers’ expense — on the table.
The Aim Higher Act will surely send the cost of the Income-Based Repayment program further into the stratosphere. In 2009 the Department of Education put annual costs at less than $1 billion. Today, the annual budget is $13 billion after factoring in the effects of Obama-era policies to forgive unpaid program balances sooner and reduce monthly payments. Those policies have made the program so expensive that the cost of forgiving loans now greatly exceeds the $4 billion that the government expects to lose via loan defaults each year. And it is not as if borrowers find the current terms of Income-Based Repayment unattractive. A quarter of borrowers are enrolled today, and these borrowers collectively hold over 40 percent of the debt in repayment. Most of them borrowed to finance a graduate degree.
The irony of the Democrats’ proposed expansion of the Income-Based Repayment program is that even President Obama admitted he overreached in changing the system, quietly proposing in later budget requests that lawmakers roll back some of his policies. Democrats should learn from those mistakes, not amplify them.