How ROI-based student loan reform can increase the value of higher ed
Rather than forgiving student debt, the federal government should stop subsidizing degrees with a negative return on investment.
Much of the debate over President Biden’s efforts to forgive student debt revolves around the fact that the debts don’t simply disappear: they’re paid by other taxpayers. But an oft-ignored consequence of debt forgiveness is that it incentivizes universities to raise prices even further, knowing that doing so increases revenues for them at the expense of taxpayers and future student borrowers.
FREOPP’s pioneering work on the return on investment of higher education shows that many bachelor's and master’s degrees have a negative return on investment: 23 percent and 43 percent, respectively. Our federal student loan system subsidizes degree programs irrespective of their ROI. So why does President Biden keep pursuing the policy?
In the 2023 case Biden v. Nebraska, the U.S. Supreme Court blocked the Biden administration’s plan to forgive federal student loans through executive order because its scope was so large it required Congressional authorization. Despite the ruling, the administration continues to pursue forgiveness through executive action and keeps fighting in federal court. In April of this year, the administration unveiled a new more targeted plan that would still cancel hundreds of billions of dollars of loans for tens of millions of borrowers.
The White House initially employed a two-tiered legal strategy to forgiveness, which largely skews toward those with higher incomes, a strategy one could hardly consider conducive to economic mobility.
The administration’s first strategy pursued student-debt cancellation through the HEROES Act, a George W. Bush administration-era law that grants the education secretary emergency powers. During the COVID pandemic, the Trump and Biden administrations had used the law to pause student loan payments. In October 2021, the Biden administration used it to modify a student debt forgiveness program for public workers and, in August 2022, used the act again to expand student debt cancellation of up to $20,000. This was the expansion declared unconstitutional in Biden v. Nebraska.
Undeterred, the Biden Administration tried to forgive student debt through SAVE, the Student Loan Accountability Verification and Education plan. This forgives loans by significantly modifying repayment terms to reduce student debt payments over time.
In addition, the latest Biden plan eliminates student debt for borrowers who currently have been in repayment 20 years or more, which amounts to a taxpayer-funded giveaway to wealthier Americans. Older recipients of forgiveness have already advanced in the workforce to higher paying jobs, thereby giving relief to people who probably need it less than those just starting out in the workforce.
In July, the U.S. Court of Appeals for the Eighth Circuit prohibited the Biden administration from implementing some parts of the SAVE plan.
Uncertainty still surrounds further legal challenges. If the challenges fail, scores of borrowers—many with higher incomes—could start to see forgiveness as early as October.
Successful higher education policy reform involves a permanent solution, not one-time forgiveness that creates bad incentives for schools to increase tuition and students get backed by government loans to enter negative ROI degree programs.
Published research in the Review of Financial Studies by New York Fed economists David O. Lucca, Taylor Nadauld, and Karen Shen finds that expanded federal student-aid programs cause college tuition hikes. Schools have every incentive to take advantage of charging more tuition when such funding comes through the federal government with no accountability.
Taxpayers should not subsidize degrees from negative ROI programs which hurt such borrowers by dimming their job prospects.
The appropriate policy to provide economic opportunity for Americans, especially poorer students trying to move up the economic ladder, should make quality education more accessible and affordable, not saddle people with debt for degrees that are not worth the cost. True reform would create institutional accountability, by subsidizing student loans for positive ROI programs and limiting subsidies for negative ones.
For example, Congress could enact reforms that restrict eligibility for student loans to degree programs that have a positive ROI, or render ineligible for those loans programs that are in the bottom quartile of ROI. Such a reform would force colleges to reduce tuition for those programs, and/or improve the economic prospects for graduates of those programs, in order to generate a positive ROI. Gone would be the days in which universities raised prices irrespective of the debt burden those prices impose on their students.
I’ll explore this concept in more detail in a future post.
 | A guest post by
|