Since his victory last November, President Biden has faced persistent calls from the left to forgive student loan debt for the 45 million Americans who collectively owe close to $1.6 trillion in loans. The case for some relief is strong: relative to those who pay out of pocket, people who have borrowed for degrees are more likely to be lower-income, Black, and have less family wealth. These factors make some borrowers especially likely to default, which can lead to further worsening of poverty and the racial wealth gap. But many student debt relief proposals are poorly targeted, regressive, and expensive.
Sens. Elizabeth Warren and Chuck Schumer, along with other Democratic lawmakers, have urged Biden to take executive action to forgive $50,000 of student loan debt per borrower. The president likely does not have the authority to spend hundreds of billions of dollars without Congressional approval, but even if he did, enacting this misguided proposal would be deeply regressive. Approximately 48 percent of outstanding student loans are held by people with graduate degrees, which is twice the share of loans held by those who earned an Associate’s degree or less. In fact, more than a third of student loan debt is concentrated among households with annual incomes over $97,000. Absent better targeting, broad debt relief would mostly benefit high-income households that already have ability to pay off their debts.
When a student asked President Biden at a townhall last week what he would do to forgive at least $50,000 in debt for every borrower, the president admirably and forcefully responded “I will not make that happen.” Instead, Biden said that he would be willing to sign a bill offering up to $10,000 of debt relief to individuals with annual incomes below $125,000 if Congress sent him a bill to do so. Biden’s approach is far more sensible and progressive than that of the left. However, one-time debt cancellation of any size would still be a short-sighted and ineffective fix for the crisis of out-of-control higher education costs.
The best way to administer the student debt relief Biden has called for is through an expansion of income-driven repayment (IDR) programs, an idea he endorsed during his presidential campaign. Such programs calculate a borrower’s monthly payment based on their income and other factors, such as family size and location, instead of being based solely on the outstanding balance of loans. Unfortunately, borrowers must opt into one of several IDR programs with complicated terms through a lengthy process. They can also be faced with a hefty tax bill at the end of the repayment period, as any outstanding debt forgiven is considered taxable income. As a result, less than one third of student borrowers are taking advantage of the benefits of an IDR plan.
Policymakers should replace the existing medley of IDR programs with one new simplified IDR program that allows borrowers to have their debt forgiven tax-free after paying up to 10 percent of their income for 20 years. Payments should also be paused for people who are either unemployed or make less than $25,000 per year. Switching to this progressive system would fulfill Biden’s campaign promise to help distressed borrowers while ensuring that the wealthy pay their fair share. In fact, low-income borrowers with high loan balances could see even more relief under this approach than they would from a one-time $10,000 debt cancellation.
Borrowers who have already entered into existing repayment plans should be given the option to enroll in the new, streamlined plan with minimal administrative burden. Moving forward, new borrowers should be automatically enrolled into the simplified IDR plan and given an option to opt out rather than having to go through a cumbersome process to opt in. Making enrollment automatic for borrowers and simplifying the terms would increase on-time payments and reduce default rates.
But relieving student debt is an incomplete solution. Policymakers must simultaneously take concrete steps to control the skyrocketing cost of higher education, lest the burden of these costs simply moves from students to taxpayers (almost two thirds of whom do not have the benefit of a college degree to enhance their income). Making community college free, as President Biden has proposed, and expanding aid programs to cover occupational training and apprenticeships would better help students pursuing careers in which a traditional four-year degree isn’t necessary to earn a living wage. Another way to control costs would be to promote three-year degree programs or require greater acceptance of AP/IB credits to reduce the number of courses students need to pay for. Policymakers could also tighten accreditation standards and impose limits on tuition increases for schools receiving federal aid to ensure the students it supports are getting a good return on their investment from high-quality programs.
There are no shortage of good ideas to control future costs, but none of them will help the millions of low-income borrowers who have already incurred crushing debt from our broken higher-education system. Expanding IDR programs and making them work better for borrowers will make repayment affordable for everyone, negating the need for a costly and poorly targeted one-time debt forgiveness. The solution is clear: policymakers should pair an expansion of IDR with cost controls to help both past and future students.
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