Adam Looney of the Brookings Institution has a long, must-read piece about the changes to “income-driven repayment.” This is an existing program that allows undergrad borrowers to pay 10 percent of their discretionary income for 20 years and have any remaining balance forgiven. Biden plans to drop the payments to 5 percent — and exclude income up to 225 percent of the poverty line, instead of 150 percent, as not “discretionary.” Roughly $33,000 in earnings won’t even count for purposes of calculating each borrower’s 5 percent payment.
These changes make the program extremely attractive:
The vast majority of college students will be eligible to make reduced payments (roughly 85% of undergraduates age 25-34) were they to take student loans, and a majority of undergraduate borrowers (perhaps 70%) would expect to have at least some debt forgiven after 20 years. On average, borrowers (current and future) might only expect to repay approximately $0.50 for each dollar they borrow.
As Looney notes, this turns the student-loan program — which used to be profitable, or at least close enough to be arguably profitable, to the government — into a grant program that doesn’t do a particularly good job of targeting the most needy borrowers for aid. This will increase borrowing and taxpayer costs, subsidize low-quality colleges whose alumni don’t earn much, and enable schemes where colleges lure students by giving large sums of loan money back to them as cash for “living expenses.”