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It’s Time to Scrap the Federal Student Loan Program


March 6, 2024

It may come as a surprise, but the Biden administration has effectively abolished the federal student loan program. Well, at least if a “student loan program” is understood as one in which students borrow money and then eventually repay it. That program has been replaced by a perverse entitlement in which students borrow taxpayer funds, promise to repay them, and then . . . don’t.

Biden’s efforts to “forgive” $500 billion in college loans may seem like old news, given that the Supreme Court struck down the scheme as illegal last summer. While others may have moved on, though, the Biden administration hasn’t. In late February, the president proudly announced that his administration would notify over 150,000 borrowers via an email that bears Biden’s signature, that they were no longer obliged to honor the $1.2 billion they’d promised to repay taxpayers. The White House bragged that it transferred $138 billion in this manner from taxpayers to 3.9 million borrowers.

Meanwhile, the administration is busy making it far easier for borrowers to shrug off obligations via bankruptcy, enhancing the already-generous terms of the Public Service Loan Forgiveness program, and using taxpayer funds to erase billions owed by students who attended for-profit colleges. And forgiveness hasn’t actually gone away. The administration is seeking to radically reinterpret statute to allow the Secretary of Education to discharge massive amounts of debt based upon a vaguely defined notion of “hardship.”

Perhaps most notable, though, is the administration’s move last year to revamp income-driven repayment (IDR) at a cost to taxpayers (according to the University of Pennsylvania’s Wharton School) of $475 billion over the next decade. IDR was originally designed in the 1990s to protect both borrowers and taxpayers. It allowed repayment to vary with income, safeguarding the unemployed and borrowers with modest incomes, while ensuring that taxpayers would be made whole. Biden has shredded that understanding. Henceforth, undergraduate borrowers will pay just five percent of their income over 225% of the federal poverty level and balances will be forgiven after as little as a decade. Under Biden’s new rules, Urban Institute scholars have calculated that not even one-third of borrowers in programs like psychology, teacher education, and the liberal arts will repay their loans. Thirty-five percent of graduates from public associate degree programs won’t repay even half of the money they borrowed.

Meanwhile, loan forgiveness activists seem increasingly disinclined to acknowledge that loans are supposed to be repaid. The Debt Collective has circulated a widely viewed petition that pledges: “I refuse to pay a debt the President promised to cancel.” Such views have become widespread: Newsweek reported last fall that 58% of voters with student debt said they would “consider refusing to repay it.” The result is a culture in which borrowers get the sense that they shouldn’t expect to repay their loans.

The student lending system is broken, and Biden is making the problem worse. In lieu of a student lending program, he’s busy establishing a massive government subsidy to the affluent, the nation’s college-goers, and the higher education cartel. On top of everything else, this is a recipe for runaway tuition inflation. When students don’t expect to repay what they’ve borrowed, they have even less reason to worry about cost. Colleges, in turn, have even less reason to try to control prices.

It’s time to retire the whole apparatus. But is that even feasible? How would students afford college? While it would’ve been helpful if Biden’s team had contemplated this question before taking an axe to the system, there are still options.

There are 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 in the armed forces. There are also private loans that some students can access. And there are promising solutions that the Biden team has sought to stymie, like income share agreements (in which borrowers share future earnings with their lender) or accreditation reform that can facilitate the emergence of lower-cost options.

Of course, none of this would help students cover the eye-popping costs of elite colleges or graduate programs. And that’s okay. In fact, it just might have some enormously healthy consequences. It would steer students to more affordable schools. It would press some colleges to cut costs, some overpriced programs or institutions to shut their doors, and more institutions to demonstrate the value of their diplomas. It might even encourage a few richly-endowed institutions to get serious about spending those funds to help cover tuition.

While it’s not politically feasible to end federal student lending today, much more can and should be done to safeguard taxpayers and keep colleges from exploiting the new rules. Just as in the case of Medicare, federal officials should start negotiating prices with institutions that wish to enroll students using federal loans. Colleges should also be required to benchmark employee benefits, overhead, and administrative ranks against private sector norms, with student eligibility for federal loans contingent on acceptable performance. Moreover, institutions whose students utilize federal loans should pay an annual “student loan repayment assessment” to mitigate taxpayer risks. A good model here is that of state unemployment systems and the manner in which they adjust business assessments based on employee utilization rates.

The Biden administration has done its best to turn the student loan program into an especially dysfunctional version of “free college,” one which encourages cost inflation, rewards irresponsibility, and teaches that obligations aren’t obligatory. If there’s a bright side, it’s how clearly it highlights the need to rethink the troubled enterprise of federal student lending.