Biden’s changes to student loans means the vast majority of borrowers will never repay their debt
Last month, the left-leaning Urban Institute published a new report that examined the consequences of the Biden administration’s proposed changes to student loan repayment rules. Not surprisingly, their analysis finds that the generous changes to repayment rules will result in the program shifting from its intended purpose, to provide a safety net to borrowers who struggle to repay their debt, to a giveaway program for most students who borrow. Specifically, their analysis indicates that less than one-quarter of borrowers would ever repay their debts in full under the proposed regulations.
This new report comes on the heels of a similar analysis from another left-leaning think tank, the Brookings Institution, which showed how severely the proposed changes will affect the share of borrowed dollars that ever get repaid to the taxpayers who financed these loans in the first place.
The proposed changes impact a program generally known as Income-Driven Repayment (IDR), a system for loan repayment that allows borrowers to make reduced payments when their income is low and ultimately have their loans forgiven if they remain outstanding for more than 20 years. In these repayment plans, borrowers make payments that are determined as a set share of their “disposable income” (which is defined by regulation) and borrowers with exceptionally low income are off the hook from making payments altogether.
The proposed changes make this regime more generous in four distinct ways. First, they cut in half the share of income that borrowers are expected to put toward monthly payments, which slows their progress toward full repayment considerably. Second, they half the term over which borrowers are required to make payments before becoming eligible to have their balances forgiven (from 20 to 10 years.) Third, they increase the threshold of earnings below which borrowers aren’t expected to make any payments at all. Currently, individual borrowers earning less than about $20,000 aren’t expected to make payments. That would increase to about $30,000 under the proposed changes. And lastly, they excuse borrowers from paying the additional interest that accrues while they make reduced payments.
Any one of these changes would have a significant impact on the share of borrowed student loan dollars that ever get repaid to taxpayers. And combined, these changes interact with each other to have catastrophic effects on the financial viability of federal student lending.
The administration clearly has an interest in dismantling the federal student loan system as we know it. That was made clear on the day that President Biden announced his intention to cancel up to $10,000 or $20,000 of debt per student borrower. That plan, however, is legally dubious and may be struck down by the Supreme Court as early as this summer. The White House may not get the wholesale dismantling of the federal student loan program that they were aiming for, but even the mere implementation of these regulations, which have largely slid under the radar of watchdogs, would go pretty far toward achieving that goal.
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This article originally appeared in the AEIdeas blog and is reprinted with kind permission from the American Enterprise Institute.