Our work reforming student loans is far from finished
President Joe Biden’s decision to extend the pause on federal student loan repayments and forgive $10,000 of debt for all borrowers will do nothing to repair a seriously flawed higher education financing system. Rather than take piecemeal action, policymakers should reform the system in ways that lower borrowing costs, target relief to the most hard-pressed borrowers and reduce student dependence on loans over the long term.
The repayment pause that began in March 2020 provided important relief to struggling households during the deep, COVID-driven economic downturn but, with conditions improving, there’s no compelling reason to extend it. The $10,000 in debt forgiveness, meanwhile, will provide the most help to high-wealth households while doing nothing for workers who did not attend college. Both policies come at taxpayer expense.
Even before the pandemic, nearly two out of five federal student loans were delinquent or in default. Black and Hispanic borrowers faced more financial problems and defaulted more often than their white peers. Women assumed more student debt and repaid it more slowly than men. Now, inflation is stretching family budgets, especially for low-income households, making it harder for many borrowers to afford monthly payments.
The new measures sidestep the fundamental problems plaguing higher education financing; student debt will remain well above $1 trillion and continue to grow and once repayment resumes, borrowers will continue to suffer from high levels of defaults and large loan balances that grow with compounding interest.
Policymakers should reform the system in two basic ways.
First, they should make college more affordable and reduce or prevent the loans most likely to cause harm.
Policymakers should provide at least $5 billion per year in flexible block grants to states that increase their annual total investment in higher education. These funds would go towards reducing the cost of college enrollment through such measures as tuition cuts, grants, scholarships and “free college” programs.
Policymakers also should invest between $5 billion and $10 billion per year to raise the maximum annual Pell Grant for students and give more middle-income students access to these grants. Along with these reforms, grant funding should be shifted away from high-income families and better targeted to low-income families, reducing their need for student loans.
In addition, policymakers should force higher education institutions — which are now largely unaccountable for the quality of education they provide — to pay penalties based on unpaid student loan balances if they can’t show that their students get a tangible return for attending, such as higher lifetime earnings compared to high school graduates who do not attend college.
And policymakers should reform the PLUS loan programs, which issue the fastest-growing type of debt, by limiting graduate student debt and the debt that low-income parents of undergraduates can assume while increasing financial aid for the students themselves.
Second, policymakers should change how the federal government manages loans and how borrowers repay them.
Policymakers should enroll borrowers automatically in a uniform income-driven repayment plan in which payment amounts are based on family income and size rather than simply on the amount of total borrowing, and a family’s income and size are verified through data sharing among federal agencies.
Policymakers should reform the interest owed on student loans — such as by capping or eliminating interest, especially compound interest, and perhaps replacing it with loan origination fees — in ways that alleviate the burdens on low-income borrowers and do not provide unwarranted help for high-income borrowers.
Policymakers also should update the public service loan forgiveness (PSLF) program for borrowers who work in government or not-for-profit jobs. Specifically, legislation should replace the lump-sum forgiveness after 10 years of qualifying employment with a monthly subsidy that a borrower can tap as soon as they start repaying their loans — that is, when they are early in their careers and probably most need the help. Making PSLF’s benefits more immediate could also improve recruiting in fields struggling with worker shortages, such as teaching and nursing.
Finally, policymakers should codify into law the Biden administration’s prior actions that, together, have streamlined about $25 billion in loan forgiveness and other support for disabled borrowers and for borrowers whose schools closed or committed fraud or who were hurt by Education Department mistakes. Codifying these changes would ensure that future administrations cannot undo them unilaterally.
Together, these reforms could cut college costs, especially for low-income students, enable low- and moderate-income students to borrow less and still attend college and slow if not reverse the growth of both existing and new loan debt.
We need systemic reforms rather than partial or poorly targeted steps that will not meet the long-term needs of current or future borrowers.
Kevin Miller is the associate director of Higher Ed at the Bipartisan Policy Center. Shai Akbas is the director of economic policy at the Bipartisan Policy Center.
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