Yesterday in The American, I argued that the current Income-Based Repayment (IBR) plan for student loans may well chew up a larger and larger portion of the federal budget in the years to come. Under the newest iteration, nicknamed Pay-As-You-Earn, eligible borrowers can cap their payments at 10% of their annual incomes and have outstanding debt forgiven after 20 years. As I noted:
[There] are legitimate questions about how the expanded IBR will impact the federal budget going forward. The very trends that IBR was meant to counteract — the massive growth in college tuition coupled with stagnant incomes — could transform the policy into an albatross around the neck of tomorrow’s taxpayers.
. . .
That’s because the long-term cost of the plan depends on a quantity that is likely to grow over time: the debt-to-income ratio of graduates. If college costs and student loan debt continue their ascent while incomes lag behind, increasing numbers will qualify for the new version of IBR. And the more people that sign up, the more money the government will likely have to forgive 20 years later.
In addition to creating a metastasizing budgetary problem, IBR also changes the incentives of both consumers and providers in the higher education market, perhaps reinforcing troubling trends in college costs and student debt.
1. IBR removes whatever weak incentive may have been left to contain tuition costs (especially for graduate schools).
If payments are capped and outstanding debt is forgiven, the average college or graduate program has little reason to be concerned with their tuition, provided it is within loan limits. And if students can write most of the debt off, there is less reason to worry about tuition costs in their decision about where to attend.
Over at New America, the enterprising Jason Delisle and Alex Holt found an advertisement (see page 1; ad has since been taken down) from a student loan-counseling firm that admonishes borrowers from a high-priced private law school “STOP WASTING YOUR MONEY ON STUDENT LOAN PAYMENTS.” The ad goes on to say that under the Obama administration’s Pay-As-You-Earn plan, graduates with a starting salary of $70,000 and $145,000 in debt can reduce their monthly payment from $1,690 to $448 a month and have $100,000 forgiven.
Sounds like a pretty good deal, right? After reading that, why would a prospective law student have incentive to be a cost-conscious consumer? And with that kind of consumer, why would a law school feel compelled to contain its prices?
2. IBR dampens the drive of one potential constituency for higher education reform: Frustrated student borrowers.
One of the more frustrating aspects of the Occupy movement was how the anger about student debt did not seem to implicate colleges and universities’ role in all of this. The debt itself, and the banks that service it, became the villains, not the institutions that students paid all that money. To be sure, the for-profits have been put through the ringer on this front, but traditional higher education has not borne the brunt of indebted graduates’ frustrations.
Because the new IBR delivers real benefits to high-debt borrowers, these potential activists may be even less interested in pushing for policies that improve the quality and value of higher education. Political activism typically springs from grievances. When the immediate concerns of the aggrieved are addressed in a way that does not solve the underlying problem, you wind up in the worst of all worlds: An appeased constituency and a public problem that’s left to fester (in this case, the continued rise in the price of postsecondary education).
This was clearly not the intent of the IBR program, which was designed to address the very real struggles of young graduates. But these unanticipated consequences, along with the real implications for the federal budget, must be addressed.