On Wednesday, the Biden administration announced it was proposing new regulations for student loans owned by the Department of Education. The proposed rules call for an $85 billion expansion of existing federal student loan forgiveness programs. They would expand eligibility for programs created under Presidents George W. Bush and Barack Obama and end the capitalization of interest on federal student loans in some circumstances.
President Joe Biden's new rules would broaden eligibility for student loan debt relief for borrowers who were defrauded by their institutions, borrowers whose institutions closed, permanently disabled borrowers, and borrowers who take "public service" jobs after graduation.
The administration also intends to ban interest capitalization in some circumstances. Capitalizing interest allows the Education Department to add unpaid interest on student loans to the borrower's loan balance. This increases the size of the debt and future interest payments.
The Obama administration's "borrower defense" program is a loan forgiveness process that addresses the federal student loan debt of people who were allegedly defrauded by their schools. The current policy would be amended to create a "broader and clearer standard for what kinds of misconduct could lead to borrower defense discharges," reads a fact sheet from the Department of Education. The Biden administration's rules would create two new categories of school misconduct that would qualify a student borrower for debt forgiveness: "substantial omissions of fact" by the institution and "aggressive and deceptive recruitment."
The new borrower defense policy language also includes "a presumption that borrowers reasonably relied upon misrepresentations or omissions," and broadens the appeal process for student borrowers whose forgiveness requests are denied. It also states that loan forgiveness will not be contingent on the Department of Education recouping student loan disbursements from institutions that defraud students.
The proposed regulations would also discharge debt held by students whose institutions closed while they were enrolled. According to the Department of Education, the new rules "provide automatic discharges to any borrower who was enrolled within 180 days prior to the closure and who didn't complete their education at the school or via an approved teach-out agreement at another school within one year after the closure of their original school."
Under the Biden administration's plan, a larger number of borrowers would also receive loan cancellation under the Total and Permanent Disability (TPD) discharge. Borrowers who have total and permanent disabilities would no longer be subject to a three-year income-monitoring period, which allows the Department of Education to reinstate loans for borrowers who return to work. The new rules would also "widen the types of documentation and signatures borrowers may submit to demonstrate they are eligible for relief" and allow more types of disability to be subject to TPD discharges.
The Public Service Loan Forgiveness (PSLF) program is the fourth program receiving substantial changes. Signed into law by Bush in 2007, it allows borrowers who make 120 monthly payments while directly employed full time by a government agency or 501(c)3 nonprofit to have their remaining federal loan balance forgiven. The new rules would require the Department of Education to count payments that were late or larger than the minimum payment and issue a "time-limited waiver so that student borrowers can count payments from all federal loan programs or repayment plans toward forgiveness," including "loan types and payment plans that were not previously eligible."
These proposed changes come in the wake of increasing demands by progressive activists and members of Congress to forgive federal student loan debt. In May, White House officials seemed poised to announce up to $10,000 in debt forgiveness per borrower for millions of Americans. The proposals announced on Wednesday simply expand existing forgiveness programs.
At first glance, all of these loan forgiveness programs may seem to have merit. But they are all trying to paper over problems that the federal government created and that will continue to exist after the new rules go into effect. Forgiving billions of dollars in student loans means billions of federal dollars went to poorly run schools and students who were, in many cases, unprepared for college. While those students may deserve some kind of debt relief—and which very few of them can receive through bankruptcy—the Education Department continues to issue loans to unprepared students in order to attend poorly run schools.
The expansion of benefits offered by the PSLF program spells unique problems for taxpayers and future borrowers alike. Expanding eligibility to more kinds of "public service" workers, including employees of private companies and private contractors, is expected to cost over $13 billion in the next 10 years.
As with debt forgiveness for borrowers who are misled by their schools, PSLF on its face sounds like a good idea. If a student decides to take a career in public service—an essential but presumably low-paying job—then, after 10 years of payments, that student will be rewarded for his service by having a set amount of his remaining loan balance paid. However, those who work in the public sector often have the best job security, health care, and pensions among America's middle-class workers.
What's more, many professions counted as "public service" are some of the highest-paying positions in the entire job market. Physicians employed by nonprofit hospitals, for example, are eligible for PSLF. However, whether a cardiologist works for a nonprofit or a for-profit hospital, his yearly salary will likely top $400,000. Thus, prospective physicians can take on hundreds of thousands of dollars in debt for medical school, and only pay a fraction of the amount borrowed, while accruing millions of dollars in income over the course of their careers.
When academic deans can assure students that a large debt burden can be discharged by working for a nonprofit or the government after graduation, they can more easily justify exorbitant tuition costs. After all, why worry about borrowing a massive sum if you won't have to repay it? The PSLF solution to high debt burdens for public sector workers has only aggravated the problem and will continue to. Once the government pours funding in the form of debt relief into the market for specific degrees, schools end up using these funds to justify hiking prices, thus generating a bigger student debt crisis. In turn, this enlarged crisis cries out for more government funding.
The solution to runaway student debt inflation is for the government to stop subsidizing tuition hikes. While limited debt relief for defrauded or disabled borrowers makes sense, the federal government needs to start making policy proposals that will attack the student debt crisis at its source—the cost of college attendance.
Student loan debt is a real and pressing problem for America's poorest borrowers, but it is merely an inconvenience for millions of others, including many beneficiaries of PSLF. Solving the college cost problem in the long term requires getting the government out of the lending business.