The discussion of whether President Biden will forgive $10,000 in student loans to all borrowers is making headlines. But behind the scenes, Biden’s Department of Education has written off tens of billions of dollars by turbocharging existing loan forgiveness programs. A set of proposed regulations released Wednesday would expand those forgiveness opportunities even further.
The proposed settlement would relax the requirements of a number of loan forgiveness programs, such as borrower defense against repayment and forgiveness of public service loans. According to the department’s estimates, these extensions of the cancellation power would cost taxpayers $85 billion, including $46 billion for the cancellation of outstanding loans and $39 billion for the cancellation of loans to be issued during the next decade.
Key Elements of the Proposed Settlement
The proposed rule would modify several existing loan forgiveness programs to make them more generous. In each of these cases, Congress authorized a specific path for loan forgiveness and left the details to the Department of Education. Here are some of the highlights of the proposed changes.
Defense of the borrower until reimbursement: Currently, student borrowers can get a discharge from their federal loans if their college scams them in some way. The proposed regulations would expand that program to authorize discharges when the Department “determines that an institution has engaged in material misrepresentation or material omission of facts, breached a loan agreement, engaged in a recruiting academically aggressive or has been the subject of a judgment based on federal or state law before a court or administrative tribunal.” While it is important to hold institutions accountable for fraud, there are good reason to believe that the proposed regulations are too lenient and will result in unwarranted loan releases.“Omissions of fact” and “aggressive academic recruitment” are broad and subjective categories of conduct, and they could open the floodgates to a wave Rejections of the Borrower Defense Changes to the Borrower Defense will cost taxpayers $20 billion.
Leaving the closed school: Students are eligible for loan cancellations if their school closes and they cannot transfer their credits and complete a “comparable program.” The proposed rule would automatically implement closed school landfills for all eligible borrowers one year after their school closes. More importantly, the regulations restrict the definition of a “comparable program”. Only students who graduate from an approved educational program organized by the closing institution will not be eligible for discharges. If a student transfers her credits to another institution outside of the teaching arrangement and completes her studies there, she will still be eligible for a discharge. But students shouldn’t be eligible for loan forgiveness if they were able to get the credential they originally sought. Changes to closed school holidays will cost taxpayers $6.5 billion.
Public service loan forgiveness: LSP
Capitalization of interest: Interest “capitalizes” or adds to borrowers’ loan principal, in certain circumstances. Future interest then accrues on a new, higher level of principal, increasing the lifetime repayments of the loan. The proposed regulation would eliminate the capitalization of interest, except where explicitly required by law, which would reduce interest costs. This would have a slight effect on monthly payments for most borrowers, but would significantly reduce interest for those with high balances. These changes will increase costs to taxpayers by $12.4 billion.
Total and Permanent Disability: Borrowers with “total and permanent disability” are eligible to have their federal loans forgiven. The proposed rules would increase the number of disability statuses considered “total and permanent” for the purposes of loan cancellation, as well as relaxing some monitoring requirements. These changes would cost $20 billion.
A more proactive policy is needed
The Department of Education’s proposed expansion of loan forgiveness represents a huge outlay of taxpayers’ money without congressional approval. The estimated $46 billion in outstanding loan forgiveness represents nearly 3% of the federal student loan portfolio. Spending will likely not be well targeted, given that student debt tends to favor high-income earners.
Undoubtedly, some of the borrowers who will benefit from the proposed regulations deserve relief, especially some of those who were defrauded by their colleges and those who attended closed schools. However, the Biden administration appears to have given very little thought to how to avoid taking out these bad loans in the first place. Nearly half of the estimated cost of the proposed rule comes from canceling loans that have not yet been issued.
One idea to mitigate these costs in the future is to require federally-dependent colleges and universities to purchase insurance against the risk of future rejections. An insurance requirement would shift the cost from taxpayers to schools, which must pay insurance premiums to cover the risk of rejections. An insurance requirement would also force low-quality and uninsurable institutions to withdraw from the lending program altogether. The long-term viability of the student loan program depends on more proactive thinking by policy makers.