Biden’s income-based reimbursement plan will make college much more expensive


Last week, President Joe Biden announced that the federal government would forgive between $10,000 and $20,000 in student loan debt for eligible borrowers who earn less than $125,000 a year. But that was not all: Biden also said he would create a new income-based repayment (IDR) system for college borrowers.

The IDR aspect of Biden’s plan has garnered less attention than the direct pardon aspect, which will cost at least $300 billion (and likely much, much more) in the immediate future. But in the long run, this aggressive move toward an income-driven college loan repayment model is likely to have a bigger impact, and that impact will be catastrophic. In fact, unless the government does something to limit the ability of colleges to set their own prices, the IDR could break the entire higher education funding system and lead to skyrocketing costs for taxpayers. .

Some IDR programs are currently available, but Biden’s approach would greatly expand that option. The existing plans require borrowers to pay 10, 15 or 20% of their income for two decades, after which the rest of the loan is forgiven. Biden would make IDR much more attractive than it is now; according to Biden-Harris Debt Relief Plan, borrowers will only pay 5% of their income (or 10% if they took out graduate student loans) for 10 or 20 years, depending on how much they owe. The income threshold will be raised from 150% above the poverty line to 225%, and punitive interest rates will be eliminated.

Overall, this IDR model will be extremely attractive to a large number of borrowers, and we should expect the percentage of borrowers who repay via IDR to increase significantly in the coming years. But without further changes to the federal student loans program, this is going to be a huge problem.

This is because borrowers and universities will have more incentive to defraud the people who actually make the loan: the taxpayers.

In the current system, a prospective student needs a certain amount of money to pay for college tuition, say $50,000, and borrows that amount from the government (i.e. taxpayers) . Later, the borrower repays it, with interest. University incentives are far from ideal; he might feel free to raise the tuition price to $60,000, convinced that the student really wants the degree, and will therefore borrow more money, and face the consequences afterwards. To the extent that the government’s loan program masks upfront costs, it arguably contributes to higher tuition fees.

Under IDR, this situation gets much worse because the university and borrowers are incentivized to cooperate and fuck taxpayers. For the borrower, it doesn’t matter if the tuition costs $50,000 or $5 million: the borrower will repay the same amount, 5% of income for 10 years, regardless of the amount of the loan or the cost of the tuition. Since it makes no difference to the borrower, the university might as well raise the prices. This way, the university pockets more money and the borrower doesn’t even have to pay it back.

Something close to this pattern already exists in law schools, which have loan repayment assistance programs (LRAPS). According leftist writer Matt Bruenigthe arrangement is very likely to produce an increase in tuition fees as universities and students discover that they can essentially cooperate in this game to beat the house:

Just as schools have new incentives to increase indebtedness in an IDR-dominated world, so do students. Above I say that, for students considering enrolling in IDR, $15,000 in student debt is no different than $100,000 in student debt. But that’s not entirely accurate. A student who plans to enroll in the IDR actually benefits from the reimbursement of the maximum possible debts.

Student loans are initially disbursed to schools to cover tuition and fees. But what is left over after tuition and fees is paid out in cash to students, ostensibly to cover living expenses. In a classic student loan, you have reason to live frugally and take on as little debt as possible. But if you’re considering going IDR, your incentives flip and you’re leaving money on the table if you don’t take out the maximum possible loan.

Even if you don’t want to spend it living lavishly while in college, you can accumulate the excess in a savings account for later use, including making your IDR payments after you graduate. In effect, it is just a student-administered version of the LRAP program discussed above, where student debt is used to pay off student debt.

Bruenig notes that Australia also uses IDR, but in Australia the government prohibits universities from charging obscene tuition fees.

“If we’re going to make the leap to an IDR-dominated college funding system, we may need the government to play a much bigger role in college pricing as well, which it probably should have done. even before Biden’s policy change,” writes Bruenig. “Otherwise, we could very well see more unwanted costs beyond what we already have.”

Bruenig approaches these issues from the left, but he’s not wrong that these policies form a dreaded combination: 1) allowing students to get state-subsidized loans, 2) allowing borrowers to pay a percentage of their income instead of repaying the loan, and 3) allowing universities to charge whatever they want for tuition. The result is that tuition will make no sense as a pricing signal and institutions will have no reason to cut costs; on the contrary, they would be stupid not to raise tuition prices, since the broken loan system would operate as a direct transfer of wealth from taxpayers to university coffers.

One solution would be for the government, at a minimum, to set tuition fees for public state universities – which, after all, are public and paid for by taxpayers. If the state is going to confiscate the wealth of taxpayers in order to maintain public educational institutions, these institutions should be generally affordable for those same taxpayers.

Another idea would be to move to a system in which students take no loans; instead of paying tuition, they agree to contribute a percentage of their earnings to college for a period of time after graduation. It would be like the IDR, but it would eliminate the government as a middleman and thus take taxpayers off the hook. Mitch Daniels, President of Purdue University experimented with such a system, although it was suspended earlier this year due to implementation difficulties.

By encouraging students to take on even more debt, and never expecting them to pay it back, the Biden administration is creating a system in which everyone involved in higher education is incentivized to cheat the people. American.


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