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Blog Post

Federal Student Lending is Beyond Repair


March 28, 2024

The integrity of the federal student loan program has been in precipitous decline since early 2020, when then-President Trump responded to the Covid-19 pandemic by putting a pause on student loan repayment. In retrospect, that move was the first domino to fall in a string of policy changes, culminating in the implementation of President Biden’s SAVE Plan, that have worked to erode the economic integrity of the entire federal student loan program.

For decades, much of the public and many lawmakers have had gripes with federal student lending and have called for its modification. Calls for change often came with the refrain that student loans were unaffordable or that the terms were usurious. But neither of those claims have ever really held water. For the vast majority of borrowers, loans made sense. They financed an investment that paid off. And below market interest rates paired with safety nets for borrowers with truly unaffordable loans that were established over the last decade made it an even better deal.

I’ve long suspected that the complaints that have been lobbed against the student loan program actually reflected something deeper. The existence of student loans, and the irritation they’ve generated among some, seem to only be a problem to the extent that they reflect the fundamental design of our system of higher education as largely a self-funded model. That is, we don’t have a socialized system of higher education, like we do in the K-12 space, but rather a highly subsidized marketplace in which students (and their families) have some financial skin in the game. 

Regardless of the underlying psychology, student loans succeeded in becoming the policy boogeyman that Democrats were determined to stamp out. And in large part, they’ve succeeded. The accumulation of reforms executed under the Biden Administration have left our student lending program without any of its defining features. Instead of offering liquidity to students who will ultimately pay it back—with interest to compensate taxpayers for the expense—the program has become a convoluted system of subsidies: One that is sufficiently opaque that the neediest aspiring students won’t know how to navigate its complexity to extract the benefits, while more privileged students will use it strategically to their financial advantage.

In theory, it’s conceivable that Republican and moderate Democratic lawmakers could unwind the changes to federal student lending in a way that would recover its functionality. But that would be a political moonshot. Voters on both sides of the aisle have largely been persuaded that student loans, as they previously existed, were predatory. And so any lawmaker working to take us back will likely burn significant political capital doing so. The stars likely won’t align in a way that would ever make that possible. In reality, we’re probably now stuck with the giant entitlement program that President Biden created in his effort to achieve backdoor student loan cancellation.

I’ve generally hesitated to embrace the calls from the right to eliminate student lending (or even the Department of Education) entirely. But at this stage, it’s hard to imagine a path forward for higher education finance that doesn’t require a fresh start. The federal student loan program will forever be a casualty of the Biden Administration. It will either now stumble along in its dilapidated state, bleeding resources from the US Treasury that could be better spent elsewhere, or it’ll be shut down and put out of its misery by enterprising, fiscally concerned lawmakers.