Earlier this month, Republican Representatives Virginia Foxx (R-NC), Elise Stefanik (R-NY) and Jim Banks (R-IN) released a sweeping bill to overhaul the federal student loan system. The Responsible Education Assistance through Loan Reforms Act (REAL Reforms Act) would currently limit unlimited graduate student loans and change loan repayment schedules to prevent excessive interest build-up. The bill would also restrict some loan-forgiveness programs and end the Department of Education’s ability to spend taxpayers’ money without congressional approval.
Though the Congressional Budget Office has yet to evaluate the bill, it will likely save taxpayers a bundle. The federal student loan program, currently bleeding at least $200 billion, requires a serious course correction. The bill could go further in some areas, but it is a significant step in the right direction.
Reasonable limits on college graduate borrowing
Under current law, students in graduate programs can borrow virtually unlimited amounts from taxpayers. After graduation, graduates can then enroll in income-based repayment plans that allow them to forgive much of their debt. Colleges participating in the graduate loan program have little accountability; As a result, over 40% of government-funded master’s programs do not increase student income enough to justify the cost of attendance.
The result of these policies—unlimited credit, forgiveness, and few guard rails—is an explosion of substandard graduate programs, many of them at prestigious schools like Columbia University. Students are in deep debt and taxpayers must bail them out if they can’t pay them back in full. Colleges have jumped at the opportunity to add thousands of new graduate programs, many of questionable merit, and increase tuition on existing ones. All of this fuels a wasteful arms race in education and pushes the next generation of students even deeper into debt.
The solution of the REAL Reform Act is a graduate borrowing cap of $25,000 per year with a total cap of $100,000. While these caps are still fairly high, any sort of graduate borrowing limit is an improvement over the status quo. Taxpayers are on track to forgive more than $160 billion in student loans over the next decade; If enacted, the REAL Reforms Act would significantly reduce that amount.
However, tax savings are only part of the benefit. Graduate lending caps will also deflate some of the current graduate degree bubble. During the pandemic, enrollment in graduate programs has increased by 4%, although undergraduate enrollments have fallen by almost 10%. Since 2006, the number of master’s degrees awarded annually has increased by 41%. More college-educated workers mean more jobs that require them; this in turn will result in more students pursuing graduate degrees in the future. Limiting government subsidies to higher education can break this vicious cycle and reduce the borrowing needs of future generations.
Control the runaway interest
Federal student loans can place their loans into income-based repayment plans that cap loan payments as a percentage of income and cancel any remaining balances after 20 or 25 years. While lower monthly payments can help borrowers who are struggling to pay off their loans, they also mean borrowers are making less progress on paying down their principal. In some cases, the low monthly payment on an income-contingent plan isn’t enough to cover the interest.
Many borrowers on income-based plans see their balances growing year after year. A skyrocketing credit balance is psychologically stressful, even if there is a promise of later termination of the loan. The prospect of rising balances is enough to deter some struggling borrowers from signing up for income-based plans. This is a problem as many low-income borrowers would benefit from the reduced monthly payments these plans offer.
The Republic plan offers a new perk to address this issue. Borrowers who enroll in income-related repayment are not required to pay more than they would pay under the ten-year income-related repayment plan. For example, a borrower who owes $30,000 and signs up for the 10-year plan will pay $38,200 over the life of the loan. Under the REAL Reforms Act, borrowers who elect an income-based plan pay no more than $38,200 in total.
For borrowers concerned about spiraling interest charges, this Republican plan will be of great solace. However, it costs the government money to offer this benefit. Essentially, borrowers are only allowed to pay interest for ten years on a loan that could stretch to 15 or 20 years.
To recoup the cost of this new benefit, the REAL Reforms Act increases the percentage of discretionary income that borrowers in earnings-related plans must pay from 10% to 15%. The plan also has a minimum monthly payment of $25. (Only new borrowers are subject to these terms, although current borrowers can opt-out if they wish.) While the changes require borrowers to pay more each month, it’s a progressive way to increase revenue for the new interest rate cap. For higher-income borrowers, the jump from 10% to 15% of discretionary income means a much larger monthly payment in absolute terms, while for lower-income borrowers the increase may be just a few dollars a month.
It is crucial that the new interest rate cap remains coupled with the REAL Reforms Act’s restrictions on borrowing to keep costs low. Multi-year interest waiver on a $200,000 loan is far more expensive than interest waiver on a $30,000 loan. In order to make the program tax defensible, graduate borrowing caps are essential.
More cost savings
The Biden administration has pushed its executive powers to the limit by expanding existing executive order loan forgiveness programs. Most recently, the Department of Education proposed an executive order that would forgive $85 billion in new loans — all without a vote in Congress. There’s also the specter of Biden issuing an executive order to foreclose student loans en masse, at a tremendous cost to taxpayers.
The Republican plan would prohibit the Department of Education from issuing new regulations or executive actions that increase the tax cost of the student loan program. The ban would prevent the department from changing the terms of repayment plans or suspending loan payments altogether without word from Congress. Most importantly, the bill would clarify that the president does not have the power to forgive student debt himself.
These are important steps in restoring Congressional authority. Properly elected officials, not the Department of Education, should decide how generous the federal student loan program should be.
Another big cost saving in the bill is the elimination of the Public Service Loan Forgiveness (PSLF) program, which allows government and nonprofit employees to receive loan forfeits after ten years of service. (Only new borrowers are not eligible for PSLF; current borrowers are not affected.) Recently I have argued that PSLF is not the best way to support public servants; The program is poorly targeted and creates incentives for excessive borrowing. In addition, PSLF exacerbates the acute problem of entitlement inflation in the public sector. If Congress wants to support government employees, it should do so with direct aid that is not dependent on education or debt.
House Republicans could go further
While the REAL Reforms Act is a clear step in the right direction, certain elements of the bill could go further. In particular, the graduate borrowing cap ($25,000 per year) is likely too high to produce the large positive impact on tuition and taxpayer costs that the bill’s authors want. While I have argued that a complete end to federal graduate credit is warranted, the drafters of the bill could consider lowering the annual graduate credit limit to $12,500, which is currently the maximum allowable amount for independent undergraduate students. It makes little sense that graduate students enjoy higher federal loan limits than undergraduate students, even though they have more access to credit in the private market.
The bill also lacks a comprehensive accountability system for college programs that depend on federal student loans. While lending caps will curb the worst excesses of the graduate degree machine, many low-quality programs will continue to be funded under the proposed framework. To complement their credit reforms, Republicans should consider adding penalties for federal programs with poor academic performance.
Overall, Republicans have offered a promising alternative to the Biden administration’s fiscally imprudent student loan policies and leftist calls for mass debt forgiveness. While the REAL Reforms Act might be bolder, it would change the federal role in higher education for the better.