President Biden’s changes to student loan repayment are welcome, but they give schools a bad incentive.
by Ryan Cooper
August 29, 2022
5:20 AM
Silas Stein/picture-alliance/dpa/AP Images
The government can and should prevent astronomical price tags by requiring any school that accepts federal student loans to keep their tuition costs under a modest cap.
President Biden’s recent package of student loan reforms has several parts. The forgiveness of $10,000 of student loans for people making under $125,000, or $250,000 for families (and $20,000 for Pell grant recipients), has gotten the most media attention—and caused an epic meltdown among austerian deficit paranoiacs—but the changes to repayment are arguably more significant.
Specifically, the “income-driven repayment” (IDR) system is now much more generous. Once enrolled, borrowers with undergraduate debt will now be limited to paying just 5 percent of their discretionary income, while those with graduate debt will be limited to 10 percent. No more will unpaid interest be capitalized into the loan (thus preventing the ballooning debt balances so common today), and those with debt under $12,000 will have it forgiven after just ten years.
In terms of students, this is all to the good—though as David Dayen points out, there will be administrative problems if this is done along the lines of current practice. It would be much better to simply have all students automatically enrolled in IDR with a minimum of hassle.
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But the new IDR system does create a bad incentive for colleges and universities. If students can take out loans of any size and not have to worry about actually paying them back, then there is every reason for schools to hike their prices to the moon. This was a conservative argument about the student loan program more broadly, but it’s more acute if the burdens of student debt are not as onerous.
Fortunately, the government can and should prevent this by requiring any school that accepts federal student loans (which is almost all of them) to keep their tuition costs under a modest cap.
Imagine a high school senior considering which college to apply to. One school offers eye-popping amenities—a fitness center like something out of an oligarch’s resort, ultra-luxurious dormitories, a team of in-house chefs, weekly yachting expeditions, and so on—with a tuition cost of $150,000. But not to worry, say the admissions staff, while she’ll rack up $600,000 in debt over four years, the school has a program that will zero out the cost to her. The school will cover the 5 percent payments under IDR out of its dragon hoard of federal money, and when those payments lapse after 20 years, the debt will be written off.
As Matt Bruenig points out at the People’s Policy Project, many law schools already have a system like this, called Loan Repayment Assistance Programs (LRAP), that involves covering the cost of payments if graduates become public defenders or some other profession eligible for the Public Service Loan Forgiveness (PSLF) program, where borrowers pay 10 percent of their discretionary income toward student loans for just ten years and then have the balance forgiven. (In theory.)
Now, a PSLF-style program for undergraduate loans has even better monthly payment terms, with only a 5 percent income share regardless of their debt balance. Colleges can set up a fund to pay that for graduates, while collecting ever higher sums from the government on the loans. This really is a way for colleges to game the system and extract a fortune in public money.
Under the current regulatory status quo, the Education Department arguably already has the power to add at least a facsimile of a tuition cap.
Now, there will be some limits on how fast this will happen. Most students can’t just choose the most expensive college they want, because there’s still a selective admissions process. And some institutions may worry about sticker shock for incoming students. But once the IDR system is in place, schools will surely catch on quick. The example is already present, and there is a whole consultant industry geared around helping colleges and universities jack their prices up as high as possible. There’s no way they will miss such a juicy opportunity.
As Bruenig notes, one solution is obvious: Just cap the amount of tuition schools are allowed to charge. Australia finances its colleges with an IDR-style system, but tightly controls prices so the government isn’t ripped off.
Luckily, there is already a mechanism available for this: the Program Participation Agreement (PPA), which all schools that accept federal student loans must sign. There are already numerous requirements in there for institutions to comply with Title IV of the Higher Education Act, follow rules around “financial responsibility,” and so on. The secretary of education has wide statutory authority to add conditions to these agreements, which we have already seen in action. For instance, stricter enforcement of PPAs is how the Obama administration closed down several predatory for-profit colleges.
Under the current regulatory status quo, the Education Department arguably already has the power to add at least a facsimile of a tuition cap, which grants numerous powers of “limitation” including “Other conditions as may be determined by the Secretary to be reasonable and appropriate.” It might also be necessary to limit the amount spent on administration or pointlessly fancy new buildings, which have eaten up a steadily increasing proportion of school spending over the years.
But if this is too much of a legal stretch for the Biden administration, Congress can and should step in with explicit new powers. If the IDR program is going to be how higher education works going forward, there is no reason whatsoever for it to include a blank check for schools. Even Republicans ought to be on board with this one.
In many ways, this isn’t an ideal way to finance higher education. In my view, it would be better and simpler to pay tuition for public schools directly out of tax revenue—which would actually be cheaper than all the various indirect subsidies already in place. But it would be a large improvement on the status quo. If students won’t have to worry too much about student debt in the future thanks to the government, let’s make sure America is getting a good deal for the money.
Ryan Cooper is the Prospect’s managing editor, and author of ‘How Are You Going to Pay for That?: Smart Answers to the Dumbest Question in Politics.’ He was previously a national correspondent for The Week.
August 29, 2022
5:20 AM
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