Seth Wenig/AP Photo
Canceling $10,000 of debt will zero out the balances of about 31 percent of student loan borrowers, while cutting the balances of a further 21 percent by at least half.
President Biden will announce today that he is going to cancel $10,000 from every student loan balance owned by the federal government (which is about 80 percent of the outstanding total), subject to an income cap of $125,000 for individuals and $250,000 for families. Pell grant recipients will be eligible for up to $20,000 in forgiveness. My colleague Bob Kuttner has additional details, and you can read the White House fact sheet on this as well.
On balance, this is good news. As Matt Bruenig points out at the People’s Policy Project, canceling $10,000 zeros out the balances of about 31 percent of student loan borrowers, while cutting the balances of a further 21 percent by at least half. Add to that the doubled relief for Pell grant recipients, and the White House estimates that 20 million out of 43 million borrowers will have their full balance extinguished. Such borrowers in turn are more likely to have failed to graduate, or have been ripped off by a for-profit scam college, and thus in most need of help.
A Penn Wharton analysis found that, with $10,000 in forgiveness and the income cap, about 58 percent of the benefit would accrue to people in the bottom 60 percent of incomes, and another 28 percent for the fourth income quintile. It also found that the income cap saves a piddling $15 billion. However, Bruenig points out that the Wharton model is based on the Survey of Consumer Finances, which greatly understates the amount of student debt held by the poorest people. He estimates that the bottom quintile should receive about 20 percent of the benefit, and the bottom three-fifths about 65 percent. The $20,000 for Pell grant recipients (which wasn’t reported until now and thus hasn’t been analyzed yet) will make it even more progressive.
Biden also announced new rules to punish institutions that load up graduates with lots of debt, and new reporting mechanisms to steer prospective students away from them.
As welcome as this news is, it doesn’t do enough to fix the broader system of higher-education financing. Much like the medical system, higher education is badly in need of price regulation. For decades now, the government has been shoveling subsidies into colleges and universities, and (with a few exceptions) they have responded by jacking their prices through the roof. Biden can’t do this by himself, of course, but it’s long since time for the government to start demanding a better deal for itself—and American students.
Kevin Carey recently wrote an excellent piece in Slate about the strategies colleges and universities use to wring the maximum number of pennies out of students and their families. They do this with price discrimination: tailoring an individual price for each person, using demographic and surveillance data, that matches what they are willing to pay as closely as possible. The eye-popping sticker price of $50,000 and up at most colleges today is fake. That’s just a sales gimmick to trick people into thinking they’re getting a great deal with an imaginary “financial aid” package.
A better option would be to simply nationalize financing directly.
One unfortunate consequence is that poorer families often end up paying more than richer ones. Parents “of means who themselves have finished college are often sophisticated consumers of higher education and are able to drive a hard bargain,” Carey writes, “whereas lower-income, less-educated parents feel an enormous obligation to help their children move farther up the socioeconomic ladder and blindly trust that colleges have their best financial interests at heart.”
One reason universities behave like this is neoliberal ideology, which saturated admissions departments and made them behave like businesses instead of schools. But another is federal subsidies of student loans. As I have previously written, the theory behind this practice was that graduates would make more money with their “human capital,” which they could use to pay off the loans—and make a tidy profit for the government in the process that could be put toward the budget deficit.
But this did not happen. Wages remained stagnant, but higher-ed prices kept going up, which inflated a huge balloon of student debt. Millions ended up with preposterously large balances they could not possibly repay.
This prompted Democrats to take several steps. First, they nationalized almost all student debt as part of the Affordable Care Act. Second, the Obama administration cracked down on for-profit colleges, which were the worst offenders in the space. Third, Obama set up an “income-driven repayment” (IDR) scheme in which borrowers would pay 10 percent of their income for a number of years, and then have their loans forgiven.
IDR was a godsend to many borrowers (now about a third of them), but it meant that an increasing proportion of its enrollees are making no progress in paying down their debt balance. It also means that Biden’s cancellation action will not affect people with the highest balances, since the $10,000-to-$20,000 reduction will not reduce their payments down below 10 percent of income.
That said, Biden’s proposed reform of IDR to make it more generous, especially for undergrads, would help. According to the White House fact sheet, the new version of IDR would ensure that those enrolled pay no more than 5 percent of their total income in monthly debt payments, half of the 10 percent that IDR enrollees currently pay. They also increased the amount of income exempt from that calculation: Nobody earning less than 225 percent of the federal poverty level would have to make a monthly payment at all. No interest would capitalize under IDR; as long as borrowers make their required payment, their loan balance will not grow. And balances under $12,000 will be forgiven after 10 years, instead of 20.
It’s a pretty good deal, and the administration should work to get more borrowers enrolled. The new procedures to crack down on super-high-cost schools are also welcome. But the administration could do more.
One option would be attaching even more stiff regulations to federally subsidized student loans—simply requiring institutions to cut down on fancy amenities, administrative bloat, and so forth. The administration has announced that the Department of Education would “hold accountable colleges that have contributed to the student debt crisis,” but this consists of an annual watch list of college programs with high debt levels, and strongly worded letters to colleges asking for “institutional improvement plans.” Obviously, this could be stronger.
A better option would be to simply nationalize financing directly. It’s a remarkable fact that the federal government already spends about 15 percent more on all its various indirect higher-education subsidies than the sum total of all tuition at public colleges and universities. The money is already there.
If tuition spending were directly on the budget, instead of hidden in various loan subsidies and guarantees, it would amount to price controls for public higher ed. Uncle Sam would not want to be paying for exercise palaces or other such nonsense, lower-income students could get a degree without laboring for a decade under a credit-ruining debt burden, and upper-middle-class graduates would feel an obligation to repay society for financing their education. What’s not to like?
