Panic over a perceived student debt crisis has Republicans and Democrats alike proposing more help from the government. Republicans want to give borrowers tax breaks to help them repay their debt, while progressives, like Senators Bernie Sanders and Elizabeth Warren, just want to forgive it. They say this is all to help students afford two- and four-year degrees, but that’s not who is benefiting most from the last round of solutions out of Washington.
A new Congressional Budget Office report illustrates how borrowers with graduate degrees are often the prime beneficiaries of more generous loans, even when they earn high incomes. According to the nonpartisan CBO, nearly 80 percent of the money spent on the 2007 income-based repayment program, which was supposed to be a modest safety net for undergraduates, is flowing instead to borrowers with graduate and professional degrees.
The program was designed to help borrowers afford their loans by capping monthly payments according to their incomes. The government then forgives any remaining balances after 20 years of payments (or just 10 years for government and nonprofit workers). But don’t let the name of this program fool you. Income-based repayment isn’t limited to a narrow group of low-income borrowers.
The new CBO report reveals that more than half of all debt that graduate and professional students took out in recent years is being repaid through the program, and Education Department statistics show that very little of it is held by low earners. More graduate school debt in the program is held by borrowers with expected earnings over $150,000 than by those with expected earnings under $40,000.
Much of the blame for this state of affairs lies with the Obama administration and congressional Democrats. In the name of helping students afford a college education (see here, here and here), they slashed minimum monthly payments in the program by a third and cut the maximum amount of time borrowers would need to repay before forgiveness is triggered from 25 years to 20.
Graduate students have been the big winners under these reforms because they take on the most debt and are not subject to annual and lifetime borrowing limits. According to the new report, debt among graduate students using the program averages $92,000, well over three times that of their undergraduate peers. And the CBO expects loan forgiveness for these borrowers to average $52,000 each, at a cost to taxpayers of $97 billion over the next decade. In contrast, undergraduates are expected to have $5,000 forgiven on average.
Were these lopsided benefits an accident? It doesn’t look like it.
A number of Democrats want to double down on the Obama-era reforms, further increasing loan forgiveness for graduate students. Former vice president Joe Biden recently proposed cutting payments in the program again, this time in half. And Democrats on the House education committee approved a bill last year that would have a similar effect if enacted. The bill also would allow a new group of borrowers to become eligible: parents who borrow through the federal Parent PLUS program for their undergraduate children. These parent loans, like federal loans for graduate school, are not subject to borrowing limits. Parents also have a much better sense of their future earnings than students do, so they could more accurately gauge their chances to qualify for loan forgiveness and then borrow accordingly.
Rather than make the problem worse, policy makers should return the income-based repayment program to its pre-Obama terms, which were enacted with bipartisan support. All borrowers could still use the program’s safety-net features, but loan forgiveness benefits would be substantially reduced for high-debt borrowers.
Another solution would be to adopt President Trump’s proposal. His budget request to Congress would reduce benefits even further than the original program, but only for graduate students, by requiring that they make payments for 30 years before receiving any loan forgiveness. Some of the budget savings would then be redirected to undergraduates to cancel their debts after 15 years of payments instead of 20.
Up until now, concerns about graduate students earning windfall benefits in the income-based repayment program were dismissed as hypothetical. Skeptics said these fears were baseless or that they made too much of anecdotes and outliers. The CBO analysis puts those rebuttals to rest. Income-based repayment absolutely is providing the largest benefits to those who need them least.