The Biden administration has abolished the federal student-loan program, at least if a “student-loan program” is one in which students borrow money and then eventually repay it. What’s being erected in its stead is a scheme that’s rife with moral hazard, seemingly designed to inflate college costs, and best described as a “student-fraud program”—in which students borrow money, promise to repay it, and then … don’t.
Biden’s loan-forgiveness shenanigans leapt into public consciousness when he tried to farcically read the 2003 HEROES Act to allow him to shovel $500 billion in loan “forgiveness” to his highly educated base and stick taxpayers with the tab. When that bit of unconstitutional maneuvering was struck down by the Supreme Court this summer, many observers moved on—imagining that the issue was resolved.
You know who didn’t move on? The Biden administration, which has simply shifted strategy and is continuing with a multi-dimensional effort to warp or break federal rules to give borrowers as much free money as it can. The pattern was clear in Biden’s push to extend the Trump administration’s “temporary” 2020 pandemic freeze into fall 2023, long after Biden had declared the pandemic over, halting both payments and interest accrual—and crediting borrowers for three-plus years of payments they never made. The total cost of the pandemic “pause” on repayments? A cool $238 billion.
Last year, the Biden administration issued new guidelines making it easier to discharge student loans in bankruptcy. The restrictions have historically been exceedingly stringent, given that college graduates anticipate above-average future earnings but have few or no assets currently. That’s why banks are reticent to lend them money. The model collapses if borrowers can game the system by declaring bankruptcy, shrugging off their debt, and then proceeding on their merry way. Quite evidently, the Biden team is not troubled by any of this.
Earlier this year, the administration finalized changes to income-driven repayment (IDR), gifting billions in taxpayer funds to borrowers. By having repayment reflect income, IDR was designed to protect both borrowers and taxpayers. But Biden’s new rules further sweetened the Obama administration’s already generous terms. Undergraduate borrowers will pay just five percent of their income above 225 percent of the federal poverty level (down from 10 percent above 150 percent) and will have all loan balances forgiven after as little as 10 years. Urban Institute scholars Jason Delisle and Jason Cohn calculate that less than one-third of undergraduate borrowers in programs like psychology, teacher education, and the liberal arts will repay their loans and that only 35 percent of borrowers in public associate’s degree programs will repay theirs.
In October, the U.S. Department of Education (ED) released the draft of its latest loan-forgiveness plan, and this week it released some additional clarification. While nominally more limited than the plan the Supreme Court shot down in June, this one would “forgive” huge swaths of debt for those with balances that exceed what they originally borrowed, who’ve had loans for more than 25 years, who enrolled in career-training that created “unreasonable” loan balances or provided insufficient earnings, who attended an institution with “unacceptably high” loan default rates, or whom the Secretary of Education deems eligible for forgiveness programs. The odd thing about all these provisions is that there already exist repayment options for borrowers who demonstrate an inability to pay. That makes it unclear why the Biden team thinks it so vital that borrowers who can repay their loans (but who don’t like having to do so) should be able to stick taxpayers with the tab, torching the assumption on which student lending rests—that borrowers have an obligation to honor their debts.
ED has also signaled it may seek to cancel repayment for anyone “experiencing hardship that is not otherwise addressed by the existing student loan system.” What constitutes “hardship,” exactly? Well, ED mentions having received a Pell Grant (as if a taxpayer grant represents an excuse not to repay a taxpayer loan) or dropping out of college. As economist Preston Cooper has noted, “Given that 38 percent of students do not finish college and 54 percent of those that finish received Pell Grants,” these two conditions alone would qualify 71 percent of former college students for forgiveness. While the costs of all this are not yet clear, the cost of this “narrower” cancellation could wind up rivaling Biden’s failed $500 billion scheme.
In pursuing its new forgiveness scheme, the Biden team has turned to “negotiated rulemaking”: This is one of those Beltway rituals in which agency officials modify laws without the hassle of having to pass legislation. Traditionally, this involves convening a broad cross-section of representatives to hash out a workable compromise. Because the Biden team is seeking to turn a modest bit of rarely used flexibility into a recipe for giving away hundreds of billions of dollars, that kind of process wouldn’t suffice. The Biden team has instead stacked the 14-member panel with friends of the cause while, as AEI’s Michael Brickman has observed, “entirely exclud[ing] groups that are significantly affected, such as those representing taxpayers.” Of course, such conduct is hardly shocking from an administration that brags about giving away more than $127 billion in taxpayer funds to more than 3.5 million borrowers and that blithely ignored the admonition of former House speaker Nancy Pelosi that Biden lacked the authority to forgive student loans.
The Biden team has been so eager to free borrowers from their obligations that the Government Accountability Office (GAO) found the Department of Education grossly negligent in its rush to push forward with its unconstitutional HEROES scheme. Indeed, the GAO reports that Biden’s officials didn’t seem to seek to prevent “ineligible borrowers from receiving relief.” Two million borrowers were automatically approved for forgiveness based solely on their self-reported income, without an application or any verification of earnings and despite GAO’s having previously found that such processes are rife with fraud. For an administration that watched hundreds of billions in pandemic emergency aid and unemployment insurance be stolen by bad actors, this kind of negligence borders on criminality.
Addressing What Biden Has Done
At this point, those concerned about fairness, personal responsibility, perverse incentives, or the exploding federal debt have been left with only one choice: to acknowledge in statute what the Biden team has done in practice and pull the plug on the federal student-lending program. We no longer have a federal lending program. Instead, we have a massive government subsidy to the affluent, the nation’s college-goers, and the higher-education cartel.
The champions of loan forgiveness are remarkably forthright and unapologetic about all this. The Debt Collective, a prominent student-debt activist group, recently circulated a widely viewed petition in which signatories pledged: “I refuse to pay a debt the President promised to cancel.” This is not borrowing. This is government-aided theft. But such views have been normalized: A poll conducted for Newsweek this fall found that 58 percent of voters who hold student debt said they would potentially or absolutely “consider refusing to repay it.” The Biden administration has fostered a mindset in which borrowers increasingly get the sense that they should not expect to have to repay their loans.
While UPenn’s Wharton School calculates that Biden’s IDR modifications alone will cost taxpayers $475 billion over the next decade, such estimates can’t account for how these incentives and changes in culture will change behavior. That’s why cost estimates for changes to repayment programs have consistently underestimated the cost to taxpayers. As my AEI colleague Nat Malkus has calculated, Congress expected IDR (and Public Service Loan Forgiveness) to cost about $8 billion over a 10-year period. With Biden’s changes, IDR could cost 45 times that much.
Until 2010, the federal student-lending program mostly worked by guaranteeing that banks that made loans to students would be repaid with federal funds, so long as they followed the rules and made a good-faith effort to collect what was owed. Champions of “direct lending” argued that taxpayers and students alike would benefit if this were all replaced by cutting out the banks and issuing lower-cost loans directly to students. When federal direct lending replaced the federally guaranteed loan program, some of us feared that Congress might be tempted to keep sweetening the terms for borrowers. But I don’t know of anyone who anticipated a giveaway as unilateral or grandiose as what Biden’s proposed.
The Biden administration is rewarding irresponsible behavior by students and colleges. It gets forgotten, for instance, that student loans are routinely used to pay for living expenses. Biden’s proposed forgiveness policy would mean that students who borrow money can enroll, screw around for a few years, drop out, and then get those loans canceled … because they didn’t finish a degree. This encourages students to borrow while making a sucker of anyone who gets a job or joins the armed forces, thus forgoing several years of taxpayer-funded partying. That’s unlikely to have healthy effects on students or American culture.
And this is a recipe for runaway college price inflation. When students expect that they won’t have to repay everything they borrow, they’ve even less reason to worry about cost. Colleges, in turn, have every reason to tell students, “Don’t worry, it’s free money.” This is a recipe for a massive transfer of wealth from a deep-in-the-red U.S. Treasury to some of the nation’s best-endowed universities.
What Now?
If student lending went away, how would students afford college? Well, perhaps that’s something the Biden team and its progressive cheerleaders should’ve contemplated earlier. But there are some options.
There already exist federally supported Pell Grants for low-income college-goers. There are scholarship funds, and colleges with endowments can tap their resources to help potential students. There are tuition benefits from volunteering for the armed forces. There are also private loans that some students can access. And there are promising solutions the Biden gang has worked to quash, like income-share agreements (in which borrowers share future earnings with their lenders) or accreditation reform that facilitates the emergence of lower-cost options.
Of course, none of this would be much help when it comes to the eye-popping costs of tony colleges or graduate programs. And that’s okay. In fact, it just might have some enormously healthy consequences. It would steer more students to more affordable schools. It would press some colleges to cut costs and might put other overpriced institutions on the ropes. It would force some college officials to demonstrate and ensure the value of their diplomas. It might even lead a few richly endowed institutions to start putting more of their own funds into covering tuition.
If it’s not currently feasible to shutter federal student lending (and it’s not), we need safeguards to protect taxpayers and curb bad behavior. For starters, Washington should start negotiating permissible tuition and fee increases with any institution that accepts students with federally held loans, just as Medicare does with hospitals. Those institutions should also be required to pay an annual “student-loan repayment assessment” (based on their students’ total borrowing and repayment rates), to help cover the costs of forgiveness. The model should be state unemployment systems, funded by business assessments that are adjusted based on their employees’ utilization rates. Colleges that enroll students with federal student loans should also be required to benchmark their benefits and administrative ranks against private-sector best practices, with eligibility for participation contingent on acceptable outcomes.
The Biden administration has, by hook and by crook, sought to turn the student-loan program into an even worse version of “free college.” The Biden version adds new layers of dysfunction by encouraging cost inflation, rewarding irresponsibility, and teaching educated Americans that obligations aren’t obligatory. If there’s a silver lining, it’s that Biden’s lawless profligacy has made brilliantly clear the need to rethink the whole wretched enterprise of student lending.