Last week, the White House released proposed regulations for a change to the student loan repayment program that will cut many borrowers’ payments in half—passing the hat to taxpayers who will now be on the hook to pick up an even bigger part of the bill.
Currently, all student borrowers are eligible to make reduced payments on their federal loans when their income is low relative to their scheduled payment. The proposed change will reduce the percentage of income borrowers are required to pay toward their loans—ultimately lowering the total amount borrowers will pay before having their balance forgiven. The change also means that borrowers who were previously earning too much to be eligible for reduced payments will now be included.
Back in August of 2022, when the White House proposed the student loan forgiveness plan that is currently awaiting consideration by the Supreme Court, they also announced the intention of making changes to student loan repayment. The forgiveness plan captured most of the attention that day, perhaps because the impacts on borrowers were the largest and easiest to understand, but these changes to repayment—if enacted—will be hugely consequential both to individual borrowers and also to taxpayers.
Initial
analysis
by Adam Looney at the Brookings Institution suggests, unsurprisingly, that implementing this option for student loan repayment would dramatically reduce the share of loan dollars that get repaid. He estimates that borrowers would repay, on average, just $0.50 for every dollar they borrow. In the current system, borrowers will repay $1 for every dollar they borrow, on average.
Looney also estimates that the vast majority of borrowers (85%) would be eligible to make reduced payments under this policy and that the majority (70%) of borrowers would have at least some of their loan balance forgiven after 20 years of repayment.
Messaging from the
administration
and much of the popular
media
coverage
of these proposed regulations have focused on the fact that these steps will make it easier for borrowers to repay their loans. But these proposed regulations are not magic: Borrowers who “repay” their loans with this new system do so because they’re no longer required to pay their tab in full. And since those funds will never be returned to the treasury as intended, taxpayers will be on the hook to pay for the shortfall—either through higher taxes or by enduring cuts to other spending programs that provide public benefit.
The administration will defend this move as necessary to ensure that the borrowers who are actually struggling with unaffordable burdens get the help they need. But that’s not true. These regulations could easily have been written in a way to further support the lowest income Americans while leaving middle and higher earners on the hook to repay their debt to taxpayers.
Today’s news probably won’t get the attention it deserves, as the complexity of student loan repayment will make it challenging for most voters to reckon the consequences—which will no doubt be immense. This is truly a case of “the devil” being in the details.
The takeaway, however, is actually quite simple. If the White House moves ahead with this plan, they’ll be undermining the entire system of federal student borrowing—replacing it with a convoluted, opaque system of subsidies that benefit many middle and high earners; incentivizing people to borrow more than ever before; and putting the burden of paying for all of it onto taxpayers.
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This article originally appeared in the AEIdeas blog and is reprinted with kind permission from the American Enterprise Institute.
