Student debt is undoubtedly a problem facing higher education, but an op-ed at National Review argues that the Democrats’ plan to fix it would let borrowers who can afford to repay the loans off the hook, and stick taxpayers with the bill.
Jason Delisle and Cody Christensen, two researchers at the American Enterprise Institute, analyze the “Aim Higher Act,” which seems “minor and harmless” at first and could be mistaken for “a benefit restricted to low-income borrowers.”
However, this is not the case, they write:
Under the existing “Income-Based Repayment” program for federal loans, borrowers may cap their payments at 10 percent of income above a base amount — meaning they pay nothing at all if their income is below that base threshold. Both Democratic proposals would increase this exemption from 150 percent to 250 percent of the poverty line, or from about $18,000 to $30,000 for an unmarried individual with no dependents. Any remaining debt would be forgiven after 20 years of payments, consistent with the current version of the program.
The larger exemption means that many borrowers would have their monthly payments cut in half, or more. The two explain that “a typical borrower enrolled in Income-Based Repayment has an income of approximately $35,000.” This means that the borrower would pay $140 per month on their loan.
Under the assumption that a borrower’s income is $35,000 and increases 4 percent each year, these payments “would be sufficient to repay a typical amount of debt among those who take out loans and earn bachelor’s degrees, about $30,000.”
But under the Aim Higher Act, the income exception is raised to 250 percent of the poverty line, meaning that a borrower’s initial payments would be just $39. The two explain that “the payments would still be so low that they would barely cover the interest on the $30,000 loan,” and that “all of the original principal balance would have to be forgiven after 20 years of payments.”
These generous borrowing policies would “transform federal loans almost into grants, signaling that borrowing more is better than borrowing less.” The two also claim that “the Aim Higher Act would turn the loan program into a veritable ATM that dispenses taxpayer dollars,” and would drastically increase the cost of the Income-Based Repayment program.
Today, the annual budget is $13 billion after factoring in the effects of Obama-era policies to forgive unpaid program balances sooner and reduce monthly payments. Those policies have made the program so expensive that the cost of forgiving loans now greatly exceeds the $4 billion that the government expects to lose via loan defaults each year. And it is not as if borrowers find the current terms of Income-Based Repayment unattractive.
The continued expansion of the program would double-down on the Obama Administration’s mistakes, not learn from them.
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