Bad Economics: House Democrats Want to Forgive Billions in Student Loans

This all looks like a repeat of Obama-era reforms that led to a budget blowout.

They are at it again. Democrats in Congress have a plan called the Aim Higher Act to make the federal student loan program even more generous, cutting payments and forgiving debts for those who have the means to pay.

From Bad to Worse

This all looks like a repeat of Obama-era reforms that led to a budget blowout in something called the Income-Based Repayment program. In 2010, President Obama announced what seemed like innocuous reforms that have allowed lower monthly payments (10 percent of income instead of 15 percent) and quicker loan forgiveness (20 years of payments instead of 25). Yet these tweaks sent the annual cost of the program from under $1 billion in 2009 to over $13.1 billion in 2017. The Obama administration later acknowledged these changes went too far.

Rather than learning from this lesson, the Democrats’ Aim Higher Act doubles down on the Obama-era changes. Should they take control of the House in November, they will surely advance this plan.

In the current version, borrowers deduct 150 percent of the poverty level from their incomes when figuring monthly payments. The Democrats would increase that to 250 percent, taking it from roughly $18,000 to $30,000 for an unmarried borrower with no children.

Specifically, the proposal would raise the baseline income exemption in the program. In the current version, borrowers deduct 150 percent of the poverty level from their incomes when figuring monthly payments. The Democrats would increase that to 250 percent, taking it from roughly $18,000 to $30,000 for an unmarried borrower with no children.

How big is this change? Remember, lower payments in this program directly translate into the government forgiving more debt after 20 years of repayment.

Democrats Are Making Loan Forgiveness the Primary Way to Pay for College

We show that a borrower with $30,000 in loans and an initial income of $35,000 would start out paying only $39 each month—down from the $140 he would pay under the current policy. Even if his income grew at 4 percent annually, which would increase his payments over time, monthly payments under the Aim Higher Act wouldn't be enough to cover more than the interest on the loan. So after 20 years of payments, all of the original principal balance would be forgiven. This is far more generous than the current policy, where the borrower would fully repay his debt.

How about for graduate students, who can borrow federal loans to cover the full cost of their education under current policy? Even if we assume these borrowers have higher initial incomes in repayment, say starting at $55,000, the changes in the Aim Higher Act deliver a big windfall. A graduate borrower with a debt level of $65,000 would receive almost $35,000 in loan forgiveness at the end of his repayment term. Under current policy, the borrower would fully repay the loan.

Instead of pushing the Aim Higher Act, Democrats should go back to the original version of the program that predates the Obama reforms. Ironically, that version was sponsored by Democrats in 2007.

Instead of pushing the Aim Higher Act, Democrats should go back to the original version of the program that predates the Obama reforms. Ironically, that version was sponsored by Democrats in 2007. They even saw it enacted into law, declaring that it provided terms generous enough to make student debt manageable once and for all. With the proposal in the Aim Higher Act, now it looks like the original program was just the first step in a long-term strategy to make loan forgiveness the primary way students — and taxpayers — pay for college.

This article was reprinted with permission from the American Enterprise Institute.

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