White House severely underestimates the cost of changes to student loan program

Later this month, the Supreme Court will hear arguments in the case challenging the legality of the student loan cancellation plan that President Biden announced last summer. The decision, expected to come by early summer 2023, will determine whether the broad student loan cancellation plan is legal and can be carried out. With this effort caught up in the courts, the Biden administration has turned its effort toward moving ahead with some proposed regulatory changes to the student loan repayment system that were announced alongside the cancellation plan but were often overlooked by commentators. 

Despite these proposed changes having massive implications for the lending program and the federal budget, media attention focused on the headline plan to cancel student debt altogether for millions of borrowers. But the regulatory changes, if enacted, would turn a safety net program that was initially designed to aid those who are struggling economically into a widespread giveaway program — and would cost taxpayers far more than the White House is letting on.

The changes, which would revise the program parameters of a student loan repayment program known as Income Driven Repayment, would effectively subsidize college for most who borrow — while also mangling the incentives in the broader higher education system in a way that likely will only exacerbate existing challenges with student debt and lead to the inevitable dismantling of the federal student loan program.

Not surprisingly, these changes will have huge implications for student lending more broadly, but also on the cost of operation. And unfortunately, it seems that the White House is being less than forthcoming about how exactly the changes will affect the bottom line for taxpayers.

While the headline program, student loan cancellation, sits in limbo waiting for the Supreme Court to rule on its legality, the White House is moving ahead with this under-the-radar effort. Last month, the White House released the details of their plan, with official notice in the Federal Register.

The announcement detailed the four key changes they plan to implement. First, a cutting in half of the amount borrowers are expected to repay on their balances each month. Second, raising the level of income below which borrowers are exempted from having to make any payments. Third, shortening, by half, the number of years that borrowers need to make payments on their debt before they become eligible to have the remaining balance forgiven. And lastly, stopping interest from accumulating on debts when borrowers make less than their scheduled monthly payments.

The White House has estimated that these efforts to overhaul student loan repayment will cost an additional $138 billion over the next 10 years. That’s an enormous sum of money that probably could be better spent elsewhere (on increasing the Pell Grant, for example.) But that’s only the beginning of the problem with it. Recent studies indicate that this assessment severely underestimates the true cost of the proposed regulatory reform.

Analysis from the Penn Wharton Budget Model, published by the University of Pennsylvania, suggests that the total cost will exceed White House estimates by a factor of two; coming in with costs estimated to be between $333 billion and $361 billion over the 10-year budget window.

The administration’s estimates come in short because of a few dubious assumptions in their modeling. Despite their student loan cancellation plan being stalled by challenges and awaiting review by the Supreme Court, the White House assumes that this cancellation will have gone through by the time these changes take effect. So, the increased generosity of the program applies to a smaller pool of loans. Their modeling also assumes that just a small share of borrowers will apply. It’s tough to know exactly how many borrowers would take up the new repayment plan being proposed — but it is likely far more than the White House is assuming. They’ve assumed that the same share of borrowers who use the existing income-driven repayment program would utilize the expanded program. But that’s inconsistent with the new program offering a much greater benefit, which will likely motivate higher participation among borrowers.

Their model also doesn’t take into account the fact that the increased generosity of the student loan program will encourage more borrowing and possibly drive further tuition inflation. Either or both of those factors would cause the proposed changes to be still more costly.

The changes the White House has proposed will be seriously problematic for the federal lending program. Borrowers will have more incentive to borrow than ever before and colleges will have no reason to keep the prices they charge in line with the value they offer, the combination of which will only exacerbate the challenges with college affordability that we already face. The exorbitant fiscal cost of the proposed changes is just the tip of the iceberg. And it’s a shame that the White House isn’t being forthcoming even on that aspect of the plan.

Beth Akers, Ph.D., is a resident fellow at the American Enterprise Institute and former staff economist with the Council of Economic Advisers during the George W. Bush administration. Follow her on Twitter @DrBethAkers.