Last month, the Education Department published a proposed regulation that would slash the monthly payments of federal student borrowers who repay their loans through income-driven repayment (IDR) plans. Among the most important provisions of the proposed rule:
- Borrowers who earn below 225 percent of the federal poverty line ($32,805 for a single borrower) will have a $0 monthly payment. Currently, this threshold is 150 percent of the poverty line ($21,870).
- Undergraduate borrowers will repay just five percent of their income above the exemption, down from 10 percent currently. Graduate loans will still be subject to payments equal to 10 percent of income above the exemption.
- Students who borrowed less than $12,000 will receive loan forgiveness after just 10 years. Those who borrowed more may receive forgiveness after 20 years (undergraduate borrowers) or 25 years (borrowers with any graduate loans).
The Education Department invites members of the public to comment on the proposed rule. My comment, which is available here, raises three main issues:
- The proposal slashes payments for undergraduate borrowers so much that many will repay only a fraction of what they borrowed. The Urban Institute estimates that just 22 percent of four-year college graduates and 11 percent of two-year college graduates will repay their loans in full. In particular, graduates of programs with a negative return on investment will get large subsidies. More students will find it rational to borrow from the federal government, particularly if they enroll in low-return programs. This will encourage colleges to hike tuition and expand programs of questionable value.
- While graduate loans are not eligible for the lower five percent assessment rate, graduate borrowers will still enjoy the higher income exemption (225 percent of the poverty line). Given that graduate borrowers earn more and are less likely to default on their loans, reducing their payments is a poor use of resources. For instance, a doctor who works for a public or private nonprofit hospital will see his total loan payments slashed by $10,000 under the new plan, even though his peak salary could exceed $200,000.
- The Education Department’s official budget estimate, which pegs the cost of the rule at $138 billion through 2032, is almost certainly too low. The estimate assumes that no borrowers will switch into an IDR plan from a non-IDR plan, even though this is a central goal of the proposed rule. The Government Accountability Office has previously taken the Department to task for assuming absurdly low IDR take-up rates in budget estimates. Using more realistic assumptions regarding take-up, the Penn Wharton Budget Model figures the changes will cost up to $361 billion, and possibly more if the rule encourages additional borrowing.
Because the U.S. government has limited fiscal capacity, new student loan benefits should be targeted towards borrowers most in need. Policymakers should also take care not to subsidize programs which leave students worse off financially. Unfortunately, the proposed IDR rule satisfies neither criterion.
Those who would like to submit comments on the proposed rule have until February 10, 2023 to do so. Interested parties may read the full regulation and offer their comments here.