How much will Joe Biden's student loan scheme cost?
It's a simple question that should have a clear answer. But now more than a week after his announcement, President Biden and his team don't have one, even when pressed repeatedly.
Of course, there is a clear answer. The latest Penn-Wharton model shows the Biden plan will add more than half a trillion dollars to the deficit. The National Taxpayer's Union Foundation estimates every taxpayer—most of whom never took out a student loan themselves, and many who faithfully repaid their loans—will effectively be charged $2,500. The so-called forgiveness will cost more as a one-time expense than it has cost to fund the school lunch program since 2000—more than two decades!
The Biden team's responses to the simple question were jarring reminders of the administration's economic ignorance and low regard for taxpayers. Education Secretary Miguel Cardona's "answer" was that cancelling billions of dollars in loans would be "offset" when "loan payments restart" next year—in addition to canceling some loans, the administration extended by four months its pause on requiring student loan repayments.
There are a few glaring problems with that answer. First, the student debt holders Cardona mentioned are "paying back" the money they borrowed themselves, which is already on the U.S. balance sheet, not "paying for" someone else's cancelled loan. Second, the added four-month delay in restarting loan repayments will cost at least another $16 billion, on top of more than $100 billion it has already cost to have loan payments and interest suspended since March 2020, the beginning of the coronavirus pandemic. Third, and most importantly in the larger picture, the federal student loan program was a massive money loser before Biden announced both debt "relief" and new payment plans that will significantly reduce how much will be repaid. The remaining loan balances are now that much less likely to be repaid in full. The program, and thus taxpayers, will lose even more money.
Recall that the complete federal takeover of higher education lending was done to help "pay" for Obamacare and other spending. It was budgeted to produce $58 billion in revenue from 2010-2019. Instead, it had cost American taxpayers billions well before Biden's announcement this week. A recent GAO analysis put the figure at a $197 billion loss. An independent audit commissioned by the Department of Education while I was secretary pegged that number at more than $400 billion.
However you add it all up, it's an unprecedented amount of spending, all brought about by executive fiat. Congress did not appropriate a dime. This brazen and unconstitutional "forgiveness" decree will be challenged and will lose in court, but the truth is that it may not matter to Biden. The move was meant to buy votes, not reform lending or solve a problem. In that sense, the cost is but an annoying detail.
Politicians in Washington don't seem concerned about deficits these days. But American families who are paying in the form of inflation and interest rate hikes are certainly noticing the costs.
None of this is to say we shouldn't continue to expand access to educational options for those who need them. There's just a smarter way to do it.
Not coincidentally, the price of higher education started to skyrocket as every institution learned there was an endless supply of taxpayer-backed loans to pay for it, and as the Obama-Biden administration insisted you wouldn't amount to much if you weren't a college man or woman. More money in the system, plus increased demand, equaled a fat pay day for the higher ed cabal.
While I served as secretary of education, we advanced a comprehensive plan to improve the loan market and address runaway college costs.
First, Federal Student Aid, the higher education lending agency, should be extricated from the U.S. Department of Education. While I believe the federal department is ill-equipped to productively manage much of anything, it is particularly ill-equipped to run one of the nation's largest consumer banks. The agency's presence within the department also makes it subject to political whims. Federal Student Aid should be an autonomous government corporation, like the FDIC. It should have an independent board of directors who hold a fiduciary duty to the U.S. taxpayer.
Second, the federal government should not be the sole lender in the market. A robust private market would offer better terms and shared accountability for repayment. Today, higher education loans have absolutely no underwriting. While that is important to ensure access for those with insufficient credit history, it also needlessly punishes those who could access better terms. I envision a "Lending Tree" model, where following completion of the FAFSA, a student and their family see a menu of available lending options, including the federal government. Getting multiple bids tends to yield a better price.
Third, loans should have better terms. Interest should not be capitalized, and it should wane as students faithfully make payments. Borrowers making payments should always see their balance decreasing. The program's aim should be to incentivize and reward repayment, not make it more difficult. For those who truly cannot repay, loans should be dischargeable in bankruptcy proceedings.
Fourth, universities should be accountable for costs and outcomes. In the current system, universities are guaranteed 100 percent payment from the loan funds. Whether the loan is repaid—or not. Whether students actually derive value from their education—or not. The free flow of cash to fund ever-increasing higher education costs—estimated to be rising five times faster than inflation—must be halted. Federal taxpayer loans should only cover legitimate educational expenses, not ever-expanding DEI offices or lavish lazy rivers or fancy dining options. Schools that provide true value should be rewarded.
Last, but certainly not least, non-college pathways to good careers must be expanded. Despite what Biden claims, the pathway to success in America does not run exclusively through a college campus. Many have started companies, built good careers, and achieved the American dream without a four-year degree. The U.S. must further open these pathways by dramatically expanding apprenticeship programs as well as short-term credential and certificate programs. Corporate America should also end the listless H.R. practice of universally requiring a four-year degree on position descriptions without examining whether it is truly necessary.
Student debt is a big issue. But to borrow a phrase, government isn't the solution; it's the problem. From day one, the federal higher education loan program was built on a lie, and it has fleeced the American taxpayer ever since. President Biden's latest move will only make the house of cards that much more likely to collapse.
Betsy DeVos served as the 11th U.S. secretary of education and is the bestselling author of Hostages No More: The Fight for Education Freedom and the Future of the American Child.
The views expressed in this article are the writer's own.
