Republicans unveil bill to limit federal student loans

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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 cap currently unlimited graduate student loans and modify loan repayment plans to avoid excessive interest accrual. The bill would also reduce some loan forgiveness programs and end the Department of Education’s ability to spend taxpayers’ money without congressional approval.

Although the Congressional Budget Office has yet to flag the bill, it is likely to save taxpayers a lot. The federal student loans program, currently hemorrhaging at least $200 billion, needs a serious course correction. The bill could go further in some areas, but is an important step in the right direction.

Reasonable ceilings for graduate loans

Under current law, students in graduate programs can borrow effectively unlimited amounts from taxpayers. After completing their education, graduating borrowers can then enroll in income-based repayment plans that allow for much of their debt to be forgiven. There is little accountability for universities participating in the graduate loan program; as a result, more than 40% of federally funded master’s degree programs do not raise student earnings enough to justify the cost of attendance.

The result of these policies—unlimited loans, opportunities for forgiveness, and few safeguards—is an explosion of shoddy graduate programs, many at prestigious schools like Columbia University. Students end up in deep debt and taxpayers have to bail them out when they can’t repay in full. Colleges have seized the opportunity to add thousands of new graduate programs, many of which are of questionable value, and to increase the tuition of existing programs. All of this fuels a needless educational arms race and ensures that the next generation of students will find themselves in even deeper debt.

The REAL Reform Act solution is to cap graduate borrowing at $25,000 per year, with an overall cap of $100,000. While these caps are still quite high, any sort of limitation on graduate borrowing is an improvement over the status quo. Taxpayers are on track to forgive more than $160 billion in graduate loans over the next decade; if enacted, the REAL Reforms Act would reduce that total significantly.

But budget savings are only part of the benefit. Caps on graduate loans will also eliminate some of the current graduate degree bubble. During the pandemic, enrollment in graduate programs increased by 4% even as undergraduate enrollment decreased by almost 10%. Since 2006, the number of Masters awarded annually has increased by 41%. More workers with advanced degrees mean more jobs that require them; this will in turn lead to more students pursuing higher education in the future. Limiting federal grants to higher education can stop this vicious cycle and reduce future generations’ need to borrow.

Control the galloping interest

Federal student borrowers can put their loans into income-based repayment plans, which cap loan payments as a percentage of income and cancel any remaining balance after 20 or 25 years. While lower monthly payments can help borrowers who are struggling to repay their loans, it also means borrowers are making less progress in repaying their principal. In some cases, the low monthly payment from an income-tested plan is not enough to cover the interest.

Many borrowers on income-tested plans see their balances increase year after year. A skyrocketing loan balance is psychologically distressing, even if there is the promise of loan cancellation later. The prospect of rising balances is enough to deter some distressed borrowers from entering income-tested plans. This is a problem because many low-income borrowers would benefit from the lower monthly payments these plans offer.

The Republican plan offers a new benefit to address this problem. Borrowers who enroll in the income-based repayment will not be required to pay more than they would under the non-income-based 10-year repayment plan. For example, a borrower who owes $30,000 and enrolls in the 10-year plan will pay $38,200 over the life of the loan. Under the REAL Reforms Act, borrowers who choose an income-based plan will pay no more than $38,200 in total.

For borrowers worried about runaway interest charges, this plank of the Republican plan will be a great comfort. However, it will cost the government money to provide this benefit. Essentially, borrowers will only be allowed to pay ten years of interest on a loan that could extend to 15 or 20 years.

To recoup the costs of this new benefit, the REAL Reforms Act increases the portion of discretionary income that borrowers in income-based plans are required to pay from 10% to 15%. The plan also imposes a minimum monthly payment of $25. (Only new borrowers will be subject to these terms, although current borrowers can opt in if they wish.) Although the changes require borrowers to pay more on a monthly basis, it is a incremental way to increase revenue for the new interest cap. . For high-income borrowers, the 10% to 15% jump in discretionary income means a much higher monthly payment in absolute terms, while for low-income borrowers the increase may be only a few dollars per month. month.

It is essential that the new interest cap remain coupled with the REAL Reforms Act limitations on new borrowing to reduce costs. Forgiving several years of interest on a $200,000 loan is much more expensive than forgiving interest on a $30,000 loan. To make the scheme financially sustainable, caps on graduate borrowing are essential.

Other savings

The Biden administration has stretched its executive authority to the limit by expanding existing loan forgiveness programs by executive order. More recently, the Department of Education proposed a settlement that would grant $85 billion in new loan forgiveness, all without a vote in Congress. There’s also the specter of Biden issuing an executive order to cancel student loans en masse, at huge cost to taxpayers.

The Republican plan would prohibit the Department of Education from issuing new regulations or executive actions that would increase the fiscal cost of the student loan program. The ban would prevent the Department from changing the terms of repayment plans or suspending loan repayments altogether without congressional approval. More importantly, the bill would clarify that the president does not have the power to cancel student debt himself.

These are important steps toward reasserting the authority of Congress. Duly elected officials, not the Department of Education, should decide the generosity of the federal student loan program.

Another major savings in the bill is the elimination of the Public Service Loan Forgiveness Program (PSLF), which allows government and nonprofit employees to receive loan forgiveness after ten years of service. (Only new borrowers will not be eligible for the PSLF; current borrowers will not be affected.) Recently, I argued that the PSLF is not the best way to support civil servants; the program is poorly targeted and creates incentives for excessive borrowing. In addition, the PSLF aggravates the acute problem of inflation of diplomas in the public sector. If Congress wishes to support civil servants, it must do so with direct aid that is not conditional on level of education or debt.

House Republicans could go further

While the REAL Reforms Act is a clear step in the right direction, there are elements of the bill that could go further. In particular, the graduate borrowing limit ($25,000 per year) is likely too high to have the major beneficial impact on tuition and taxpayer costs that the bill’s sponsors desire. While I’ve argued that a complete end to federal graduate loans is warranted, the bill’s sponsors could consider lowering the annual graduate loan cap to $12,500, which is currently the maximum amount allowed. for independent undergraduate students. It doesn’t make sense that graduate students would have higher federal loan limits than undergraduates despite better access to credit in the private market.

The bill also lacks a comprehensive accountability system for higher education programs that rely on federal student loans. While caps on loans will curb the worst excesses of the graduate degree machine, many low-quality programs will continue to receive funding under the proposed framework. To complement their loan reforms, Republicans should consider adding penalties for federally dependent programs with poor student outcomes.

Overall, Republicans have offered a promising alternative to the Biden administration’s fiscally reckless student loan policies and calls from the left for massive debt cancellation. Although the REAL Reforms Act may be bolder, it would change the role of the federal government in higher education for the better.

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