UNITED STATES – MARCH 25: Rep. Virginia Foxx, R-N.C., speaks at a news conference in the Capitol … [+]
Earlier this month, Republican representatives Virginia Foxx (R-NC), Elise Stefanik (R-NY), and Jim Banks (R-IN) released a sweeping bill to overhaul the federal student loan system. The Responsible Education Assistance through Loan Reforms Act (REAL Reforms Act) would cap currently-unlimited loans to graduate students and change loan repayment plans to prevent excessive interest buildup. The bill would also pare back some loan forgiveness programs and end the Education Department’s ability to spend taxpayer dollars without Congressional approval.
While the Congressional Budget Office has not yet scored the bill, it is likely to save taxpayers a bundle. The federal student loan program, currently hemorrhaging at least $200 billion, requires a serious course correction. The bill could go farther in some areas but represents a significant step in the right direction.
Sensible caps on graduate borrowing
Under current law, students in graduate programs can borrow effectively unlimited amounts from taxpayers. After finishing school, graduate borrowers can then enroll in income-based repayment plans that allow much of their debt to be canceled. There is little accountability for universities participating in the graduate loan program; as a result, over 40% of federally-funded master’s degree programs do not increase students’ earnings enough to justify the cost of attendance.
The result of these policies—unlimited loans, forgiveness opportunities, and few guardrails—is an explosion of poor-quality graduate programs, including many at prestigious schools such as Columbia University. Students end up deep in debt and taxpayers must bail them out when they cannot fully repay. Colleges have seized the opportunity to add thousands of new graduate programs, many of questionable value, and raise tuition for existing ones. All this fuels a wasteful educational arms race and ensures the next generation of students ends up even deeper in debt.
The REAL Reform Act’s solution is a cap on graduate borrowing at $25,000 per year, with an aggregate cap of $100,000. While these caps are still quite high, any sort of limitation on graduate borrowing is an improvement over the status quo. Taxpayers are on track to forgive over $160 billion in graduate loans during the coming decade; if enacted, the REAL Reforms Act would cut that total significantly.
But fiscal savings are only part of the benefit. Caps on graduate lending will also take some of the air out of the current bubble in graduate degrees. During the pandemic, enrollment in graduate degree programs has increased 4% even as undergraduate enrollment shrank nearly 10%. Since 2006, the number of master’s degrees awarded annually has risen 41%. More workers with graduate degrees means more jobs requiring them; this in turn will lead more students to pursue advanced degrees in the future. Limiting federal subsidies for graduate education can arrest this vicious cycle and reduce the need for future generations to borrow.
Controlling runaway interest
Federal student borrowers can put their loans into income-based repayment plans, which cap loan payments as a percentage of income and cancel any remaining balances after 20 or 25 years. While lower monthly payments can help borrowers struggling to repay their loans, they also mean borrowers make less progress paying down their principal. In some cases, the low monthly payment on an income-based plan is not enough to cover interest.
Many borrowers on income-based plans see their balances rise year after year. A ballooning loan balance is psychologically distressing, even if there is the promise of loan cancelation down the road. The prospect of rising balances is enough to deter some struggling borrowers from enrolling in income-based plans. This is a problem as many low-income borrowers would benefit from the reduced monthly payments these plans offer.
The Republican plan offers a new benefit to fix this problem. Borrowers who enroll in income-based repayment will not be obliged to pay any more than they would under the ten-year non-income-based repayment plan. For instance, a borrower who owes $30,000 and enrolls in the ten-year plan will pay $38,200 over the lifetime of the loan. Under the REAL Reforms Act, borrowers who choose an income-based plan will also pay no more than $38,200 in total.
For borrowers worried about runaway interest charges, this plank of the Republican plan will be a major comfort. However, it will cost the government money to offer this benefit. Essentially, borrowers will be allowed to pay only ten years’ worth of interest on a loan that could stretch to 15 or 20 years.
To recoup the costs of this new benefit, the REAL Reforms Act raises the share of discretionary income that borrowers in income-based plans are obliged to pay from 10% to 15%. The plan also imposes a $25 minimum monthly payment. (Only new borrowers will be subject to these terms, though current borrowers may opt in if they so choose.) While the changes will ask borrowers to pay more on a monthly basis, this is a progressive way to raise revenue for the new interest cap. For higher-income borrowers, the jump from 10% to 15% of discretionary income means a much higher monthly payment in absolute terms, while for lower-income borrowers the increase may only be a few dollars per month.
It is critical that the new interest cap remains paired with the REAL Reforms Act’s limitations on new borrowing in order to keep costs down. Forgiving several years’ worth of interest on a $200,000 loan is far costlier than forgiving interest on a $30,000 loan. To make the scheme fiscally tenable, caps on graduate borrowing are indispensable.
Other cost savings
The Biden administration has stretched its executive authority to the limit by expanding existing loan forgiveness programs by executive fiat. Most recently, the Education Department proposed a regulation that would grant $85 billion in new loan forgiveness—all without a vote in Congress. There is also the specter of Biden issuing an executive order to cancel student loans en masse, at tremendous cost to taxpayers.
The Republican plan would prohibit the Education Department from issuing new regulations or executive actions that increase the fiscal cost of the student loan program. The prohibition would bar the Department from modifying the terms of repayment plans or suspending loan payments altogether without say-so from Congress. Most importantly, the bill would clarify that the president does not have the power to cancel student debt on his own.
These are important steps towards reasserting Congressional authority. Duly elected representatives, not the Education Department, should decide how generous the federal student loan program should be.
Another major cost savings in the bill is the elimination of the Public Service Loan Forgiveness (PSLF) program, which allows government and nonprofit workers to receive loan cancelations after ten years of service. (Only new borrowers will be ineligible for PSLF; current borrowers will be unaffected.) Recently I argued that PSLF is not the best way to support public servants; the program is poorly targeted and creates incentives for excessive borrowing. Moreover, PSLF compounds the public sector’s acute credential inflation problem. If Congress wishes to support public servants, it should do so with direct aid that is not conditional on education or debt levels.
House Republicans could go further
While the REAL Reforms Act is a clear step in the right direction, certain planks of the bill could go farther. In particular, the cap on graduate borrowing ($25,000 per year) is probably too high to have the major beneficial impact on tuition and taxpayer costs that the bill’s authors desire. While I have argued that a complete end to federal graduate lending is justified, the bill’s authors might consider lowering the annual graduate loan cap to $12,500, which is currently the maximum amount allowed for independent undergraduate students. It makes little sense that graduate students enjoy higher federal loan limits than undergraduates despite having more access to credit on the private market.
The bill also lacks a comprehensive accountability system for higher education programs which depend on federal student loans. While caps on lending will curb the worst excesses of the graduate diploma machine, many low-quality programs will continue to receive funding under the proposed framework. To supplement their loan reforms, Republicans should consider adding penalties for federally-dependent programs with poor student outcomes.
Overall, Republicans have offered a promising alternative to the Biden administration’s fiscally imprudent student loan policies and left-wing calls for debt cancellation en masse. While the REAL Reforms Act could be bolder, it would change the federal role in higher education for the better.
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