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The federal government’s reverse Midas Touch is on full display with the Biden administration’s newly proposed rule on student loans.
While the administration’s push for student loan debt amnesty is caught up in the courts, President Joe Biden is trying another back-door attempt to have you pay off someone else’s debt. How? Through massive changes to the “income-driven repayment” program, an already generous federal benefit to college graduates.
But in a twist, the proposal would encourage Americans to choose low-return majors, providing larger taxpayer subsidies to students who choose gender studies while requiring engineers to repay their loans in full.
The rule would increase the amount of income exempt from calculating student loan payments from 150 percent to 225 percent of the federal poverty line. That’s about $30,600, which for individuals aged 22-31, puts them in the 65th percentile for earnings – hardly something that should qualify them to make $0 monthly payments, as the rule would. And for many borrowers, the regulation would also reduce from 20 to just 10 years the amount of time before any remaining debt is fully “forgiven” by taxpayers.
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Under current rules, a sociology major who graduates with $30,000 in debt and earns the median salary for her field will repay her loans in full. But Biden’s new income-driven repayment plan will slash her monthly payments so much that she will not even cover interest on her loans for the first 13 years of repayment. After 20 years, she will have over $27,000 forgiven—90 percent of what she originally borrowed.
Contrast this with an engineering major who also owes $30,000 and earns the median salary for her field. The engineer will fully repay her loans in 16 years, receiving no forgiveness.
According to an analysis by the left-leaning Urban Institute, 22 percent of four-year college graduates who repay their loans through the new plan will never make a single payment on their loans. Taxpayers will assume the debts in full. In effect, borrowers who finance their tuition with loans will receive free college, but only if they choose a field with low expected returns.
The Education Department expects the scheme to cost taxpayers $138 billion over the next 10 years. But that is almost certainly an underestimate: for example, the Department’s calculations assume that no borrowers will switch into income-driven plans from non-income-driven plans, even though the former will offer them lower payments and loan forgiveness. Many, if not most, borrowers who could make payments and have been making payments will switch into the new overly generous repayment plan. Independent analysts estimate this effect will more than double the plan’s cost.
The cost estimate also fails to consider any effects on future borrowing. But given that the new repayment plan offers a significant subsidy, it will be rational for most students to borrow as much as they can. Colleges are sure to point out this fact to their students. If students are willing to borrow more, then colleges will find it easier hike tuition.
The proposed changes are the most recent example of Biden’s administrative overreach – part of a pattern of the administration using student loan giveaways to score political points with a favored constituency. Although their first effort to offer blanket student loan debt amnesty of up to $20,000 has received the most attention, the ongoing “pause” on repayments is phenomenally expensive, costing an estimated $5 billion per month, while being highly regressive — providing significant subsidies to doctors and lawyers, for example.
Congress should stop the administration from pursuing any student loan forgiveness moving forward. In addition to being expensive and regressive, these taxpayer-funded giveaways push up the price of tuition, and are simply unfair to the millions of Americans who have repaid their loans or never took on debt to begin with.
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More fundamentally, Congress must limit federal loans so colleges don’t have free rein to raise tuition. Programs without financial value perhaps shouldn’t have access to federal loans at all.
The proposed rule making changes to the already generous income-driven repayment plan will rival student loan forgiveness in cost. Most concerning, it will also enact “free” college through the backdoor—but only for low-return majors. Congress should not allow Biden to unilaterally remake the higher ed system.
Like King Midas, student loan forgiveness in all its forms is premised on foolishness and greed. Foolishness in that it creates perverse incentives and unintended consequences, and greed in that it asks taxpayers to fund giveaways to boost President Biden’s reelection hopes. But unlike Midas, nothing the Biden administration touches turns to gold.
Preston Cooper is a senior fellow at the Foundation for Research on Equal Opportunity.
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