LOS ANGELES, CALIFORNIA – OCTOBER 04: Democratic U.S. presidential candidate and former Vice … [+] President Joe Biden speaks at the SEIU Unions for All Summit on October 4, 2019 in Los Angeles, California. Eight Democratic Presidential candidates were scheduled to speak today and tomorrow at the summit. The presidential primary in California will be held on March 3, 2020. (Photo by Mario Tama/Getty Images)
Democratic presidential frontrunner Joe Biden laid out his higher education platform today. There’s a lot in there, but I want to focus on one part: his proposal to make the income based-repayment (IBR) program for federal student loans more generous by cutting payments to just 5% of discretionary income.
Income-based repayment allows student borrowers to tie their payments to income, to ensure that payments are always affordable: a fine idea in principle. Under the most generous current version of IBR, borrowers contribute 10% of the income they earn above a certain threshold (about $25,000 for a two-person household) towards their student loans. If any balance remains after 20 years of making payments, that amount is forgiven by taxpayers.
Biden would cut student loan payments under IBR from 10% to 5% of discretionary income. That sounds like a mundane change, but it could end up being the most costly plank of his entire higher-education platform.
Consider a borrower with $50,000 in debt who earns a $50,000 starting salary. Under the current version of IBR, this borrower would pay off her debt in full before reaching the 20-year forgiveness mark. But under Biden’s plan, she would receive more than $40,000 in loan forgiveness, courtesy of taxpayers.
Or imagine a student who borrows $100,000—the typical amount these days for professional degrees—who earns a $75,000 starting salary. This borrower receives partial loan forgiveness worth about $40,000 under the current system. But under Biden’s plan, his payments would be so low relative to his balance that he would never even make a dent in his principal. Taxpayers would grant this borrower almost $130,000 in forgiveness, more than he originally borrowed thanks to accrued interest.
IBR provides an important safety net for low-income borrowers. But in practice, the program’s greatest beneficiaries are borrowers with graduate degrees, who tend to have larger balances and thus benefit more from the loan forgiveness on offer. These borrowers are also richer. Just 3% of loans in IBR are associated with borrowers who earn less than $40,000. Borrowers who earn more than $80,000 account for three-fifths of outstanding loans in IBR.
Source: U.S. Department of Education. “Loans” are defined as student loan originations; “income” is … [+] defined as average adjusted gross income over the lifetime of the loan. Figures reflect borrowers who entered one of the five income-based repayment plans in 2016.
Biden’s IBR expansion, therefore, is poised to dole out government benefits to those who need them least. It’s possible that Biden’s IBR expansion would be even more regressive than an explicit, upfront cancellation of student debt, à la Elizabeth Warren or Bernie Sanders. While Biden has positioned himself as a moderate in the Democratic primary, he’s still proposing mass student loan forgiveness like his left-wing rivals; he just calls it by another name.
Right now, plenty of borrowers who don’t need the benefits of IBR are nonetheless using those plans at taxpayer expense. Meanwhile, many low-income borrowers who do actually need a reduction in their payments are not aware that IBR is an option. Just 45% of undergraduate borrowers know about IBR plans, according to the National Center for Education Statistics.
Rather than spending more money on loan forgiveness for wealthy graduate students, Biden and other Democrats should first focus on closing that information gap. That’s a vision the moderate wing of the Democratic party should get behind. Instead, Biden has proposed yet another loan forgiveness plan, albeit through a convoluted backdoor.