Billions From Taxpayers for Student Loans Despite SCOTUS Smackdown

With the Supreme Court’s decision to strike down President Joe Biden’s expansive student loan debt forgiveness plan on Friday, American taxpayers have dodged a $400 billion financial bullet. However, several major changes to the federal student loan program ushered in by Biden have remained legally unchallenged. While student loan forgiveness may be shelved for now, one remaining proposal will likely cause long-term damage.

When Biden announced his massive student loan forgiveness plan last August, he also announced several key changes to the existing federal student loan program—including a revamp of the income-driven repayment (IDR) plan, which allows borrowers with low incomes to pay a monthly amount tied to a portion of their income, with the remaining balance forgiven after a certain amount of on-time payments.

Under the old plan, undergraduate borrowers in an IDR must pay at least 10 percent of their “discretionary income,” defined as earnings above 150 percent of the federal poverty rate, for 20 years in order to have the remaining balance forgiven.

However, under the new plan, borrowers would have a radical reduction in the amount they would be expected to pay each month. Borrowers will only pay 5 percent of their discretionary income, or redefined income above 225 percent of the federal poverty rate, with forgiveness after 10 years if the balance is less than $12,000. Further, under the plan, if a borrower’s monthly payments are insufficient to cover interest, the government will cover the rest, and his balance will not grow.

In all, the new IDR essentially turns student loans into grants, allowing students to pay back far less than they borrowed—with the leftover costs shifted onto taxpayers. One Brookings Institution analysis even predicted that under the new IDR, borrowers can expect to pay back only 50 cents per dollar borrowed.

As Reason’s Robby Soave wrote last August, “In the long-term, this aggressive move toward an income-driven model of repaying college loans will probably have a bigger impact—and that impact will be catastrophic. In fact, unless the government does something to constrain colleges’ ability to set their own prices, IDR could break the entire higher education financing system and lead to skyrocketing costs for taxpayers.”

The biggest effect of the new IDR is likely to be a rapid increase in college tuition, with graduate programs most affected. While dependent undergraduates can only borrow $27,000 over four years in federal student loans, graduate students have no such cap. As a result, the new IDR will encourage many graduate programs to push their costs higher and higher—and schools will likely justify the increase to students by directing them to take out an IDR to cover exorbitant tuition.

Ironically, Biden’s student loan overhaul incentivizes colleges to hike their prices all while claiming to be a solution for too-costly college. The problem is that Biden’s plan views expensive college as an unfortunate yet inevitable evil. Instead of enacting policy solutions that would encourage schools to lower their prices—like restricting the supply of federal student loans—Biden proposes giving payouts to students who purchased an education at a higher price than they should have. And this payout is projected to cost taxpayers up to $360 billion over the next decade.

via reason

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