Student Loans

Biden's Latest Round of Student Loan Debt Forgiveness Is an Indictment of Federal Higher Education Subsidies

Thirty-five years after Bill Bennett sounded the alarm about student loan defaults, we still haven't learned a damn thing.

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President Joe Biden announced Wednesday that the Department of Education is forgiving $500 million in Federal Direct Loan debt owed by 18,000 former students of the for-profit higher education chain ITT Technical Institute. The chain closed all 140 of its locations and fired most of its 8,000 employees in 2016, following a legal battle with various state attorneys general and the U.S. Department of Education.

"These borrowers will receive 100 percent loan discharges," according to a Department of Education press release. "This brings total loan cancellation under borrower defense by the Biden-Harris Administration to $1.5 billion for approximately 90,000 borrowers." In March, the Education Department forgave $1 billion in student loan debt held by 73,000 other borrowers who attended for-profit colleges found to have engaged in deceptive marketing practices.

This latest announcement is yet another expensive reminder that federal subsidies for higher education creates incentives for garbage people to start garbage programs for clueless borrowers who stand little chance of ever repaying their student loans.

The "borrower defense" concept says that students are able to apply for loan forgiveness of their Federal Direct Loans if the students "were misled" by the schools they attended or if their "schools engaged in other misconduct in violation of certain laws." In this case, the Education Department says its investigation "found that ITT made repeated and significant misrepresentations to students related to how much they could expect to earn and the jobs they could obtain after graduation between 2005 and the institution's closure in 2016. In reality, borrowers repeatedly stated that including ITT attendance on resumes made it harder for them to find employment, and their job prospects were not improved by attending ITT."

In the last administration, the federal government had much stricter rules about who could benefit from the borrower defense rule and how much forgiveness they could receive. A major sticking point with loan forgiveness advocates was then–Education Secretary Betsy DeVos' use of a formula that granted borrower defense applicants only partial forgiveness of Federal Direct Loans. Education Secretary Miguel Cardona has tossed that formula and replaced it with 100 percent forgiveness, which will be retroactively available to anyone who previously qualified for partial forgiveness.

Is the new borrower defense policy a roundabout way of executing mass student loan forgiveness without going through Congress? Probably. Do many of the criteria for borrower defense also apply to nonprofit liberal arts colleges? Absolutely. Is it troubling that the new application for borrower defense loan forgiveness does not require applicants to submit a W-2? It absolutely should be.

But what I find most concerning is that American policy makers continue to ignore a larger lesson of the last 40 years: Federal lending for higher education has been a disaster for many low-income borrowers.

A lot of journalism about for-profit higher education shenanigans—which are real and heinous—dates back to Occupy Wall Street. It tends to imply that President Barack Obama's Education Department was the first to stand up to the worst grifters, and that this is a relatively recent problem. But it was William Bennett, President Ronald Reagan's education secretary, who first sounded the alarm, way back in 1985.

Congress had loosened lending criteria in the 1970s, which allowed unprepared students to borrow federally guaranteed money to attend fly-by-night schools. As a result, the student loan default rate skyrocketed in the 1980s. Bennett called for and secured a tightening of the higher ed credit market, which reduced the number of these schools and also the student loan default rate. A few years later, these restrictions were lifted, and the process repeated itself two more times: Defaults went up, lending tightened, defaults went down, lending loosened, etc. Wash the argument, rinse the taxpayers, repeat.

While inducing low-income people to borrow money they can't repay for an education they can't use is likely the worst consequence of federal higher ed subsidies, we also know now that easy lending has inflated the cost of "good" colleges and universities, which compete with each other by upping costs in order to suck up subsidies that they can invest in prestige points rather than workforce preparation: nicer buildings, fancier dining services, more extracurriculars, and an abundance of non-academic staff to make attendees—particularly those at nonprofit liberal arts colleges, which progressives seldom criticize for their ever-increasing sticker prices—feel like they're staying at a resort with the occasional class.

Despite the most recent spat between DeVos and progressives, the history of this cycle is not entirely partisan. The late Rep. Alcee Hastings (D–Fla.) stanned hard for this awful system while raising campaign funds from crappy schools that mooched off taxpayers and ripped off poor students of color. His partners across the aisle were conservatives like Rep. John Kline (R–Minn.)*, who claimed funneling taxpayer money to unaccountable firms was a form of "deregulation" that advanced "academic freedom."

None of this comports with the original intent of federally subsidized student loans, which was that students would borrow money to attend good schools, graduate to good jobs, and repay their loans in full—with interest—so that future students could then do the same. Whether that was ever a reasonable expectation (I submit that it was not) is almost moot. Today, the Education Department uses pretzel logic to spend money that was never appropriated while Congress repeats the worst mistakes of the previous decade, all while ignoring promising (but undertested) models like income share agreements.

There is so much else we should be doing differently. Many for-profit programs would likely not exist without occupational licensing requirements, such as those for the cosmetology industry; other for-profit programs, such as those that train students for administrative roles in medicine, are the result of the American health care system's metastatic need for paper-pushers who can manage labyrinthine billing operations and regulatory compliance.

Instead of confronting any of these issues, federal lawmakers have created an increasingly large and disillusioned population of student borrowers and paved the way for endless cycles of unpayable debt followed by occasional bursts of loan forgiveness.

*Correction: This story originally misidentified the state in which former Rep. Kline was elected. It has been updated. 

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