Discussion about whether President Biden will forgive $10,000 in student loans for all borrowers dominates headlines. But behind the scenes, Biden’s Department of Education has canceled tens of billions of dollars by turbocharging existing loan forgiveness programs. A set of proposed regulations released on Wednesday would expand those avenues for forgiveness even further.
The proposed regulations would loosen the requirements for a number of loan cancelation programs such as borrower defense to repayment and Public Service Loan Forgiveness. According to the Department’s estimates, these expansions of cancelation authority would cost taxpayers $85 billion, including $46 billion for cancelation of outstanding loans and $39 billion for cancelation of loans to be issued over the coming decade.
Key components of the proposed regulations
The proposed rule would modify several existing loan forgiveness programs to make them more generous. In each of these cases, Congress has authorized a specific avenue for loan forgiveness and left the details to the Department of Education. Below are several of the highlights of the proposed changes.
Borrower Defense to Repayment: Currently, student borrowers can receive discharges of their federal loans if their college defrauds them in some way. The proposed regulations would expand this program to allow discharges when the Department “determines an institution engaged in substantial misrepresentations or substantial omissions of fact, breached a loan contract, engaged in aggressive academic recruitment, or was subject to a judgment based on Federal or State law in a court or administrative tribunal.” While it is important to hold institutions accountable for fraud, there is a good case that the proposed regulations are too lenient and will result in unjustified loan discharges. “Omissions of fact” and “aggressive academic recruitment” are broad and subjective classes of conduct, and they could open the floodgates for a wave of borrower defense discharges. The changes to borrower defense will cost taxpayers $20 billion.
Closed School Discharge: Students are eligible for loan cancelations if their school closes and they cannot transfer their credits and complete a “comparable program.” The proposed rule would automatically implement closed school discharges for all eligible borrowers one year after their school’s closure. More importantly, the regulation narrows the definition of a “comparable program.” Only students who complete their studies through an approved teach-out program arranged by the closing institution will be ineligible for discharges. If a student transfers her credits to another institution outside the teach-out arrangement and completes her studies there, she will still be eligible for a discharge. But students should not be eligible for loan cancelations if they were able to earn the credential they originally sought. The changes to closed school discharges will cost taxpayers $6.5 billion.
Public Service Loan Forgiveness: PSL
F cancels loans for borrowers who work in public service and make at least ten years’ worth of loan payments while doing so. The proposed regulation would relax these rules so that late or installment payments count towards PSLF, along with certain periods of deferment or forbearance when the borrower may not be making payments at all. The Department pegs the cost of these changes at $26 billion, but this estimate is uncertain: if take-up of PSLF rises, the cost of the changes could soar above $59 billion.
Interest Capitalization: Interest “capitalizes,” or is added to borrowers’ loan principal, under certain circumstances. Future interest then accrues on a new, higher level of principal, increasing lifetime loan payments. The proposed regulations would eliminate interest capitalization except where explicitly required by law, reducing interest charges. This would have a small effect on monthly payments for most borrowers but would reduce interest considerably for those with high balances. These changes will increase taxpayer costs by $12.4 billion.
Total and Permanent Disability: Borrowers with a “total and permanent disability” are eligible to have their federal loans forgiven. The proposed rules would expand the number of disability statuses considered “total and permanent” for the purposes of loan forgiveness, as well as relax some monitoring requirements. These changes would cost $20 billion.
More proactive policy is necessary
The Education Department’s proposed expansion of loan forgiveness represent an enormous expenditure of taxpayer dollars without Congressional approval. The estimated $46 billion cancelation of outstanding loans represents nearly 3% of the federal student loan portfolio. The spending will probably not be well-targeted, given that student debt tends to skew towards high-earning people.
Undoubtedly, some of the borrowers who will benefit from the proposed regulations deserve relief, particularly some of those defrauded by their colleges and those who attended closed schools. However, the Biden administration seems to have thought very little about how to prevent making these bad loans in the first place. Almost half the estimated cost of the proposed rule comes from forgiveness of loans that have not yet been made.
One idea to mitigate these costs in the future is a requirement that federally-dependent colleges and universities purchase insurance against the risk of future discharges. An insurance requirement would shift the cost from taxpayers to schools, who must pay insurance premiums to cover the risk of discharges. An insurance requirement would also force low-quality, uninsurable institutions out of the loan program altogether. The long-term sustainability of the student loan program depends on more proactive thinking from policymakers.