Why Biden’s backdoor student-debt bailout is a hot mess
What’s a president to do when courts keep blocking his plans for being flagrantly unconstitutional? Try to quietly backdoor the same agenda in through another channel, of course.
At least, that’s the approach President Joe Biden is taking with student loans. His plan to “cancel” (read: transfer to taxpayers) up to $20,000 in student debt per graduate is tied up in court because it clearly exceeds his constitutional power to do so without Congress passing legislation. So his Department of Education just announced an income-driven repayment plan that would effectively “cancel” huge sums of student debt, at taxpayer expense, via another mechanism.
The idea behind an income-driven repayment system is that you pay back what you can based on your income and eventually the rest gets forgiven. A much less sweeping program, Revised Pay As You Earn, has been in place since 2015.
The White House’s new version is far more generous: It would require borrowers to pay at most just 5% of their discretionary income in monthly payments — and many borrowers wouldn’t have to pay anything at all. Then, in many cases, if you make those small (or in some cases nonexistent) payments for 10 years, taxpayers absorb the rest of your loan.
It’s kind of complicated, but in practice, it means many borrowers will get thousands and thousands of dollars in debt paid off by the taxpayer instead of having to repay what they owe. You don’t have to take my word for it. Policy scholar Adam Looney of the left-leaning Brookings Institution reports that while it will vary, the typical borrower will only have to pay back 50 cents for every dollar he owes — getting half his student debt “canceled” over time.
In a rare moment of candor, Biden Education Department officials called this plan a “student loan safety net.” That’s exactly what it is: a new welfare program, this time helping a relatively well-off demographic in college and professional graduates, paid for by us working taxpayers.
And it wouldn’t be cheap! The nonpartisan Committee for a Responsible Federal Budget says the plan, combined with Biden’s previous proposals, will cost $600 billion — or more — over a decade. That averages out to more than $4,000 per federal income taxpayer.
But there are far more problems just the cost. Ironically, this plan would actually make the student debt problem worse. How?
Well, it’ll make borrowing money via government loans to pay for college an even more attractive option than it already is because future borrowers will know they’re only going to have to repay a fraction of what they borrow. Unlike Biden’s “cancellation” tied up in court, this isn’t a supposedly one-time deal: It changes student-loan regulations for good.
There’s more money available in loans each year than is actually taken out. So we’ll almost certainly see students taking out tens of billions more in student loans every year if this plan goes into effect — not fixing the problem but instead only blowing more air into the student-loan bubble.
Oh, and don’t be surprised if colleges jack up tuition prices to even more absurdly high levels in response.
The Biden plan would also seriously warp student incentives. It effectively rewards lower-earning graduates and punishes high earners, as you’re going to get more forgiveness if your income is lower. As a result, the most-subsidized degrees would include, per Brookings, music, fine arts, drama and cosmetology. (Not exactly degrees in hot demand, if starting salaries are anything to go by.)
The least-subsidized majors? Engineering, computer science and business. You know, all those areas with high starting salaries because they’re in most need in our economy right now.
That’s right: Biden’s policy would distort market incentives and actively push students toward less productive, lower-paying degrees by offering them more in taxpayer bailouts if they go down those paths. Isn’t that, well, the opposite of what we should be trying to do?
Of course, Biden’s move makes more sense when you consider it as a political maneuver. It will effectively accomplish his goal of funneling tax dollars to a constituency — young, highly educated people — that overwhelmingly vote for the Democratic Party (and possibly saved Dems in the midterms). But shrewd politics don’t change the fact it’s a foolish policy with awful implications — and a raw deal for taxpayers.
Brad Polumbo is a Robert Novak journalism fellow and the co-founder of BASEDPolitics.