Income-Driven Repayment Overhaul: The Backdoor Student Loan “Forgiveness” the Media Isn’t Talking About
This week, the Heritage Foundation hosted a panel discussion about the Department of Education’s proposed income-driven repayment overhaul. Lindsey Burke, Director of the Center for Education Policy at the Heritage Foundation, moderated the discussion. Panel participants included Preston Cooper, Senior Fellow in Higher Education at the Foundation for Research on Equal Opportunity; Jason Delisle, Nonresident Senior Fellow at the Center on Education, Data and Policy at the Urban Institute; Andrew Gillen, Senior Policy Analyst at the Texas Public Policy Foundation; and Paul Zimmerman, Policy Counsel at the Defense of Freedom Institute for Policy Studies.
After a short introduction of the panelists by Dr. Burke, Preston Cooper led off with a comparison of the current IDR with the proposal from President Biden’s team at the Department of Education (see his slide below).
According to Mr. Cooper, the existing IDR program goes to people who don’t need help – people who have attended graduate schools. The new proposal will raise the income level exempt from assessment from 150% to 225% of federal poverty levels and lower the share of income assessed to 5% for undergraduates. The remaining loan balance will be wiped out after 20 or 25 years. Since payments will be so low, the remaining interest will be wiped out. Single people with undergraduate loans who make less than $33,000/year, will see their payments reduced to $0.
In the slide below, Mr. Cooper shows how the proposed changes will slash annual loan payments required.
According to Mr. Cooper, the new plan could cost as much as $490 billion.
Jason Delisle noted that the former IDR plan was intended to be a safety net for borrowers. The proposed changes are basically loan forgiveness instead of a safety net. The main impact of these changes will be for undergraduates, not graduates. Mr. Delisle referenced a paper that he co-authored about the new IDR plan with Matthew Chingos and Jason Cohn.
The proposed changes according to Mr. Delisle fulfill a campaign promise that Mr. Biden made when he ran for the office of president. The design of increasing the level to 225% and decreasing the percentage of income above that level to 5% for undergraduates was done to “ensure community college borrowers are debt free within 10 years.”
Looking at the data for what undergraduates earn when they get out of college as well as what they owe, Mr. Delisle pointed out that few undergraduate borrowers with typical debt levels would repay their loans under the Biden administration’s proposal (see slide below). Certificate and associate degree holders benefit more greatly than bachelor’s degrees holders in the illustration below with the percentage of people who pay nothing more than doubling in the proposed IDR.
Mr. Delisle provided a few individual examples illustrated in the slides below. The first slide shows the total payments and total loan and interest forgiven in the original IDR and the proposed IDR for a person who borrowed $30,000 and has annual income of $50,000. As you can see, the current IDR would forgive $0. The proposed IDR would forgive $19,229.
The second slide (below) illustrates how much a person who borrowed $12,000 and earns $40,000 would repay and be forgiven with the current IDR and the proposed IDR. No payments or loan would be forgiven under the current IDR and $11,584 would be forgiven under the proposed IDR.
In the slide below, the comparison between plans is made for someone who borrowed $5,000 and earns $25,000. No payments would be made with the proposed plan versus $7,100 with the previous plan.
Mr. Delisle transitioned to several examples of borrowers from graduate and professional programs.
In the slide below, with debt of $80,000 and income of $65,000 total payments would increase under the proposed plan from $133,393 to $146,681.
In the slide illustrated below, the person has the same debt and same income but qualifies for public service loan forgiveness. In this case, the proposed plan is more generous forgiving $72,880 versus $56,021 in the current IDR.
Andrew Gillen from the Texas Public Policy Foundation provided a slide that demonstrated the changes to the various income repayment plans that have been implemented since its 1994 inception. The one thing in common with all these plans is that students’ monthly loan payments have decreased successively from over $1,000 in 1994 to just over $250 in the proposed plan.
In the next slide, Mr. Gillen pointed out the comparative differences between different levels of graduates and the repayments required by different plans. In all cases, the proposed Biden plan lowers repayments to an all-time low.
In the slide below, Mr. Gillen illustrates how the federal government made money on loans before the current Biden IDR proposal. The proposed IDR will convert the government profitability on loan programs to losses for all programs except master’s degree programs (where the profitability will increase) and doctoral degree lending (where the profitability will decrease slightly).
In the slide below, Mr. Gillen illustrated the proposed change with previous loan forgiveness programs for a fine arts graduate earning $32,000 per year with a $20,000 loan. The monthly payments as well as the present value of payments is lowest with the proposed plan.
Mr. Gillen’s final slide illustrates the differences between plans for a law school graduate with $79,000 in annual income and $128,000 in debt. The Biden plan lowers the monthly payments as well as the present value of payments by approximately half of the existing IDR.
Paul Zimmerman was the final panelist to speak. He first discussed the Supreme Court case that everyone is awaiting the outcome. Based on the oral arguments, it is his opinion that a clear majority of the Supreme Court was skeptical of the government’s legal ability to cancel the student loans as broadly as they did. The justices’ questions appeared to focus on the merits vs. the standing of the plaintiffs. It’s his belief that there is a good chance that the mass cancelation program will be struck down.
Mr. Zimmerman stated that it appears that the Biden administration is putting in place a wolf dressed up as a sheep with the new IDR. What will be the potential legal challenges? Congress should have the chance to sign off on this. He stated that there was very broad authority given to the Secretary of Education to craft repayment policies. The only guidance in the statute is for a period of 25 years. Any case filed against the proposed IDR will be an uphill battle and not as easy to win as the mass student loan cancellation. He believes that Congress will have to step up to the plate to limit the Secretary’s discretion to modify the IDR.
Ms. Burke asked Preston Cooper to comment on the long-term impact of the proposed IDR on college attendance. Mr. Cooper stated that most borrowers will be given some type of reduced payment. Currently, 45% of college students do not borrow. Students not borrowing will be leaving money on the table under the proposed plan. This will mean that colleges will have incentives to increase tuition if demand for borrowing increases. The proposed IDR provides community colleges with free college through the backdoor. The federal government will subsidize the entire cost of some degrees. Congress needs to tell colleges that the investment must pay off and students must get increases in earnings. If colleges don’t take responsibility for outcomes, this debt program will continue to subsidize them.
Jason Delisle added that Congress gave the Secretary wide authority to implement income-based repayment plans. The Clinton Administration implemented it initially and said the program was a wash from a cost perspective. People with low earnings will have their loans forgiven. However, a nurse with higher earnings will have to repay the entire loan.
Ms. Burke stated that the median monthly loan repayment for individuals is $222 per month. She asked Andrew Gillen, “How do we bring accountability to higher education pricing using this proposed plan?” Mr. Gillen responded that there are many programs where the school is the only winner. That is a broken system. How do we get to a win/win/win (student/school/government)? The government needs to establish accountability thresholds and metrics where we are not allowing this type of education (low return on investment) to be provided. A risk sharing proposal would require the school to repay student loans if the program did not assist the student in earning livable wages.
Ms. Burke asked Mr. Zimmerman if this proposed IDR violates the major questions doctrine. Mr. Zimmerman responded that to prove standing, you must prove injury. States could try to establish standing by saying that by not individuals not paying student loan interest, states are losing on revenues from that forgiveness since the government’s position is that it is not loan forgiveness if it is not charged. In many instances, states will have a windfall based on forgiveness (more purchases by individuals with more cash to spend). It will be hard for student loan servicers to say that this is an injury because it will be likely that more students will borrow given the forgiveness.
Ms. Burke asked Mr. Zimmerman if a future administration reverse these proposed IDR changes? Mr. Zimmerman responded that he believes that they could. This could be a situation of whoever controls the executive branch playing ping pong with the rules going back and forth.
Mr. Cooper commented that he believes it would be difficult for a new administration to change this. The plan is asymmetrical. Make it more generous for new borrowers and not borrowers under the previous plan. Andrew Gillen added that the Biden administration has waived the taxation under loan forgiveness until 2025. Mr. Delisle commented that much of the debt under the old plans was unpaid accrued interest. The new plan cancels the unpaid accrued interest each month. That’s not taxable because the Secretary never charges the interest. Mr. Zimmerman added that’s another reason for standing to sue the Department. The Secretary doesn’t necessarily have a reason to not charge interest.
Someone from the audience asked, “If you can only change IDR, how do you do that to be a win/win/win?” Mr. Gillen responded that you could set 25 years as the forgiveness period instead of 10 or 20 years. Calculate the differential repayment rate over a 25-year period. Mr. Cooper suggested that you could modify IDR so that your payments are linked to your balance.
Mr. Delisle stated that the administration is making four changes. These changes are increasing income, reducing the share of your income required to be repaid, canceling unpaid interest each month, and reducing the time for income as short as 10 years. Pick any two versus four and you have a more rational approach.
Another member of the audience asked if this proposed IDR plan includes GradPLUS and ParentPLUS loan programs and if those programs shouldn’t be eliminated or changed. Mr. Cooper replied that the IDR plan includes GradPLUS but does not include ParentPLUS. Mr. Gillen responded that he is a fan of getting rid of the PLUS programs in general. ParentPLUS has a large default rate. It’s scandalous. His problem with GradPLUS is that the total borrowings per individual are uncapped. Mr. Delisle responded that if you use this proposed IDR with graduate loans, you can’t get cancellation until 25 years versus 20 years. They took some steps to reduce the increase in benefits to graduate students. Graduate students can choose to use one of the existing plans which cancel after 20 years versus 25 years. He added that higher education should have a Hippocratic Oath that you shouldn’t be worse off afterward than if you hadn’t gone at all. Unfortunately, that’s not the case. If you want access to the loan programs, you have to offer degrees that benefit students.
The last question posed was what are the prospects for winding down the federal student loan program? Mr. Delisle responded that the federal student loan program is not ending anytime soon. Loans offer a lot of college access. Generally, people pay them back. Countries around the world use student loans. The U.S.’s programs for funding higher education are no longer unique.
I enjoyed the hour-long discussion of the Biden proposed IDR program as organized by the Heritage Foundation. The panelists were extremely knowledgeable about the subject. Their responses including their slides were informative. I liked the responses that mentioned the need to develop a system that is a win/win/win (win for the students, win for the taxpayers, and win for the colleges). I learned more about the proposed changes and their impact than I have read thus far in the higher ed press. If you found my overview of the panel interesting, you may want to watch the recording.