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The student loan forgiveness plan you haven't heard about
Also: state governments fight credential inflation, and the Biden administration tries to shame low-quality colleges.
Welcome to The Tassel, FREOPP’s newsletter on higher education policy, written by senior fellow Preston Cooper. Each month, The Tassel dives into our latest work on higher education, along with a handpicked selection of research and articles from around the web that we think are worth your time. To manage your subscription preferences, visit your Substack settings.
It’s no secret: President Biden likes to forgive student loans.
According to the American Enterprise Institute’s student debt forgiveness tracker, the Biden administration has already cancelled $201 billion in student debt by executive action, by extending the student loan payment pause (which forgives interest) and expanding Public Service Loan Forgiveness to previously-ineligible borrowers. That total does not include $430 billion in additional cancellation that the administration announced via a one-time executive action last August. The legality of that action comes before the Supreme Court in a couple weeks.
Biden’s quiet student loan forgiveness: income-driven repayment expansion
But that’s not all: last month, the Education Department issued a proposed regulation to overhaul income-driven repayment (IDR) plans for student loans. If finalized as written, the rule would slash payments on undergraduate debt by more than half. Borrowers who earn below 225 percent of the federal poverty line ($32,805 for a single borrower in 2023) would pay nothing towards their loans. All remaining balances would be cancelled after a set period ranging from 10 to 25 years.
IDR plans are already quite generous, particularly for graduate borrowers, and have arguably fueled a bubble in low-quality master’s degrees. Under the administration’s changes, something similar may happen at the undergraduate level.
According to scholars at the Urban Institute, just 22 percent of four-year college graduates will repay their loans in full under the proposed changes. One-fifth of these graduates will never make a single payment towards their loans, and have the entire balance forgiven by taxpayers.
This dynamic will create an odd subsidy for majors of lower financial value. As Lindsey Burke of the Heritage Foundation and I write in Fox News Opinion, “a sociology major who graduates with $30,000 in debt and earns the median salary for her field … will have over $27,000 forgiven—90 percent of what she originally borrowed.” But an engineer who borrows the same about and earns the median salary for her field will have to repay in full.
As I point out in my regulatory comment, a student who earns a credential in a program with a negative return on investment will repay just 21 percent of the amount she originally borrowed. In effect, taxpayers will cover four-fifths of the debt-financed cost of college for students who earn credentials without a financial return.
Biden’s changes will expand the role of debt in higher ed
The Education Department thinks the changes will cost around $138 billion. But that figure assumes that no borrowers switch into income-driven plans from non-IDR plans. This assumption is almost certainly wrong, as one of the proposed rule’s central goals is to increase take-up of IDR plans. Using more reasonable assumptions about take-up, researchers at the University of Pennsylvania figure the true cost will range from $333 billion to $361 billion.
But long-term costs could be even higher. Because most students will not repay their loans in full, those who don’t borrow will be leaving money on the table. The rational thing to do? Borrow as much as possible. Ironically, the administration’s effort to make student debt more bearable could actually make debt a more central feature of our higher education system. A bigger subsidy on federal loans will also make it easier for colleges to hike tuition—encouraging students to borrow even more.
What should be done instead? As I wrote in Forbes last month, the Department of Education should focus on lower-cost interventions to improve the income-driven repayment system, such as automatically enrolling delinquent borrowers who could benefit from payments linked to their income. The IDR plans themselves do not need to be more generous; rather, the Department should work to ensure the current version of IDR is available to borrowers who need it.
Most importantly, Congress should ensure that colleges face incentives to lower tuition prices and improve the quality of their education, so that students earn enough to pay back their loans. Stay tuned for more on that front from FREOPP, coming soon.
What I’m writing
States are fighting credential inflation. Governor Josh Shapiro of Pennsylvania became the latest state leader to announce that bachelor’s degrees will no longer be required for most positions in the state executive branch. At OppBlog, I argue that state and local governments often require prospective employees to hold college degrees, but don’t pay salaries to match. In state governments, 63 percent of middle-income workers have bachelor’s degrees or more, compared to just 25 percent of private-sector workers in the same income range. Heavy education requirements for jobs with modest salaries are one reason that college doesn’t always pay off. Moreover, bachelor’s degree requirements deny job opportunities to the majority of Americans who lack a four-year degree.
Transparency on college outcomes is welcome, but insufficient. Also at OppBlog, I write about the Education Department’s effort to create a “shame list” of programs with “low financial value.” The list is the Biden administration’s answer to charges that its planned expansion of income-driven repayment will simply subsidize low-value degrees, while doing nothing to hold colleges accountable for offering worthless degrees in the first place. Unfortunately, previous attempts at a “shame list” have had little impact on students’ enrollment decisions or on tuition prices. The initiative is wholly inadequate to the scale of the challenge facing policymakers.
What I’m reading
The student loan payment pause disproportionately benefits high-income, white households, according to a team of University of Virginia researchers. The average high-income household faces an annual loan payment of $5,535, compared to just $543 for the average low-income household, write Sarah Turner, Diego Briones, and Eileen Powell in Education Next. Moreover, white households make up 61 percent of borrowers, but contribute 70 percent of annual loan payments. The researchers conclude that “the relief afforded by the payment pause is racially disparate in its absolute impact.”
Racial disparities in college enrollment disappear when controlling for academic preparation, according to Sarah Reber and Ember Smith of the Brookings Institution. While white students are 10 percentage points more likely to enroll in college than Black students, that gap is explained by differences in GPA, AP course-taking, and math test scores. The results imply that closing racial gaps in college enrollment must involve improving the quality of K-12 education.
Selective college admissions “impose an enormous psychic and financial toll on teens and parents, requires teens to devote extraordinary effort to an array of performative roles and activities, subjects applicants to an intrusive and biased interview gauntlet, and grossly distorts the high-school experience,” writes Rick Hess at the James G. Martin Center for Academic Renewal. The solution? Colleges should randomly admit applicants who meet certain qualifications, such as a minimum SAT/ACT score, and allow students to avoid the college brag-sheet arms race.
What I’m doing
Followers of my state highpointing adventures will be glad to know that I summited two more peaks over a long weekend in January (Kentucky’s Black Mountain and Mississippi’s Woodall Mountain). Here I am repping FREOPP at the top of the Bluegrass State:
I’m headed to Austin next month for SXSW EDU (let me know if you’ll be there too!). I don’t know yet if I’ll try to climb Guadalupe Peak, the Texas highpoint. But the mountain isn’t far from the University of Texas-Permian Basin, which features on my ranking of the most valuable degrees at less-selective colleges. The campus also hosts a full-size replica of Stonehenge. I’m not quite sure what to do with this information, but hopefully you will.
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