Although President Biden’s attempts to offer free community college for all have been stymied, his administration seems to have found another way to offer free college for more individuals — and not just at community colleges.
The problem with the maneuver is that taxpayers will be left holding the bill while encouraging unaccountable colleges to raise their prices. This isn’t making college affordable or valuable for students. It’s merely charging bad investments to the public.
The origins of the administration’s move lie in what’s known as income-driven repayment. Borrowers who avail themselves of this payment plan reduce their debt payments by paying a fixed percentage of their income, not a set monthly payment.
The original idea behind income-driven repayment was to provide a safety net for struggling borrowers who couldn’t get a good job and couldn’t pay down the federal loans they had accumulated. It wasn’t meant as a get-out-of-debt-free card for most.
In the past month, the White House proposed new regulations that would allow more individuals to exempt more of their income under these plans, as well as halve the percentage of their income they pay to 5% from 10%.
Under the proposal, if a student’s payments don’t cover the interest, no big deal. Uncle Sam will forgive it. And borrowers will have their loans themselves forgiven after 20 years—or, even more generously, after 10 years if they borrow less than $12,000.
The net result? According to a Brookings Institution analysis, 85% of borrowers will reduce their payments, and 70% will have a portion of their loan balance forgiven. So much for a targeted safety net.
This may sound like a good deal, especially if you’re hoping Biden’s executive order to forgive student debt is legal. What’s not to like about borrowers unable to get a good job after enrolling in college having their bad debts entirely or partially forgiven?
It may sound like an even better deal if you wished for free community college. After all, according to the administration, community college will now be “free” for 85% of borrowers.
But this is a bad set of regulations—and arguably worse than blanket loan forgiveness. The reason is that many more students will have no incentive not to borrow lots of money for college because they know their payments will be capped.
That will be true regardless of whether they attend a community college, a public four-year school, or even a private university. Given that there will be fewer incentives to curb one’s borrowing, schools, in turn, will have wider latitude to raise their prices.
Not only that, but schools will have free reign to launch programs that don’t help students find good jobs—but do bring in federal largesse with the promise of a free education for students when the government forgives their loans.
That, of course, will create more debt, only now students won’t be on the hook for much of it. Taxpayers will. This isn’t really “free.” As higher interest rates are demonstrating, the public will get stuck with the bill and tradeoffs in the form of higher taxes or spending cuts.
And we know colleges already love to raise prices much faster than inflation. They also love to spend more. Expenditures at public colleges rose 4.1% above inflation from 2009-10 to 2019–20, for example.
What’s more, by effectively gutting the monthly debt payments that students will make relative to their earnings, many programs that shouldn’t be eligible for federal student loans can now escape one of the government’s only accountability mechanisms: monitoring the ratio of a program’s debt-to-earnings.
And that points to the biggest problem in all this. The big winner will be colleges of all stripes, which will be able to bring in far more money with less risk. The Biden administration says it will try to create a list to shame programs that offer little value, but don’t expect that to move the needle.
What would? Tying the ability of college programs to participate in federal student aid programs on the condition that their students get good-paying jobs when they leave and repay their debt.
Or Congress could pass new policy to require that colleges share in the risk with taxpayers when student borrowers don’t repay the full amount they borrow. That would make them think twice before launching worthless programs or raising prices.
Anything that encourages colleges to create value by keeping costs low relative to the earnings of their graduates would be better than this proposed regulation. But simply allowing students to take out more money with no skin in the game for schools is a bad bet.
It’s one that will fuel the continuing increase in college costs, cause students to enroll in schools that won’t give them a good return, and will leave taxpayers holding an ever-rising bill with little to show for it.
This piece was originally published in The Sun here.