The Biden administration in January proposed new rules for Income-Driven Repayment (IDR) plans for federal student loans. The proposal would substantially reduce amounts borrowers would be asked to repay by, among other things, capping loan payments at a much lower fraction of borrowers’ income than under current policies, eliminating the accrual of unpaid interest, and reducing the number of loan payments required before loans are forgiven in certain circumstances. It isn’t clear who will benefit from these changes nor what the true cost will be. The Department provided a partial estimate of the cost of the plan ($138 billion over ten years), but other analysts expect the true cost to be several times larger and to exceed $333 billion dollars over the next decade.
That the Department of Education does not know what the true cost of its signature student loan repayment plan will be, who will benefit, or what its economic consequences will be reflects a broken regulatory process. It will result in regulations that are unlikely to achieve the objectives of the 2007 legislation, the College Cost Reduction and Access Act, or the Department’s expressed goals.
When issuing new regulations, regulators are required to assess the costs and benefits of the proposed rule and, for significant rules, to provide an analysis of the economic impact. The purpose is not to rubber stamp an administration’s arbitrary policy choice, but to impose a process guided by evidence and analysis, designed to inform regulators of the consequences of alternative options, and help lead them to the optimal policy. The analysis is necessary to justify that the rule is reasonable, not arbitrary, and represents an improvement over existing law.
The stated purpose of this particular rule is to “make it easier for borrowers to repay their loans,” “ensure that student loan borrowers have greater access to affordable repayment terms,” and better serve “struggling borrowers.” Clearly, Congress intended these loans to be repaid (based, for instance, on the original Congressional Budget Office score which anticipated the combined cost of the existing income-driven plans and the public service loan forgiveness program to be less than $8 billion). So the regulation faces a tradeoff—to balance the goal of promoting affordability for those who struggle while collecting payments from those who aren’t struggling. Even the administration thinks there is a tradeoff; if not, they would have proposed to eliminate loan payments entirely. So the key questions are:
Absent such information, it isn’t possible to arrive at a reasoned analysis for whether the rule is beneficial, justified, or makes most Americans better off.
In a comment to the Department of Education, I argue that the Department’s Notice of Proposed Rule Making (NPRM) failed to produce an accurate analysis of the regulation’s estimated effects, including its budgetary effects, distributional consequences, and behavioral or efficiency consequences, which are required elements of a regulatory analysis (as described in Executive Orders 12866 and 13563, and Office of Management and Budget Circular A-4). As a result, the analysis understates the costs and overstates the net benefits of the proposed rule.
In particular, I argue the proposed rules are costlier to taxpayers than described in the NPRM, that the benefits (in the form of reduced student loan payments) will accrue disproportionately to individuals who already derive substantial value from existing student loan policies and are not experiencing financial hardship, and will have serious unintended effects on the number of student loan borrowers, the amounts they borrow, and the cost and quality of educational opportunities available to students. For example, the likely budget cost of the proposed rule is likely to be several times larger than stated in the NPRM—on the order of $500 billion, rather than the stated $138 billion—and that amount will disproportionately accrue to higher-income and better-educated students, rather than the “struggling borrowers” identified by the Department as the motivation for regulatory change.
The proposed plan is substantially more generous than existing IDR plans. Undergraduate borrowers will pay 5% of any income (down from the current 10%) they earn in excess of about $33,000 per year (225% of the poverty line, up from 150%). If payments are insufficient to cover monthly interest, the government will forgive the remaining interest so balances do not increase. Any remaining loans will be forgiven after 20 years (or 10 years under the Public Service Loan Forgiveness program (PSLF) and for borrowers who borrow $12,000 or less). Borrowers with graduate-school debt are expected to benefit from all of the above, with the exception that they must wait 25 years for loan forgiveness if they don’t qualify for earlier forgiveness under PSLF, and they will pay between 5% and 10% of their income depending on the share of their debt that is from undergraduate or graduate loans. Delinquent students will automatically be enrolled in the plan if they’ve allowed their income data to be used.
These parameters mean that the vast majority of students will be eligible to make reduced payments (roughly 85% of undergraduates aged 25-34) were they to take student loans, and a majority of undergraduate borrowers (perhaps 70%) would expect to have at least some debt forgiven after 20 years. On average, the administration suggests that future borrowers might only expect to repay $0.71 for each dollar they borrow under the new plan, compared to $1.19 under the standard plan—but actual repayments are likely to be even lower. Again, that’s an average; many borrowers can expect never to make a loan payment, while others should expect to repay the full loan amount. At many institutions, the monthly payments of borrowers will be determined by their income rather than by the amount borrowed, which means that institutions can and will (as they have in the past) increase tuition to take advantage of the program.
These consequences are obscured in the NPRM because the Department provides only a partial and biased analysis of the costs and effects of the rule that relies on erroneous and unfounded assumptions. The administration should conduct a complete regulatory impact assessment including accurate estimates of its cost, distribution, and economic effects. Those estimates should be based on reasonable estimates of the likely changes in the behavior of families, students, and institutions regarding choices like whether to enroll in college and which college, whether to finance the cost of attendance with student loans, and what fees and programs institutions should charge or offer. When making these estimates, regulators should assume that students and institutions will make choices that further their own economic interests, such as choosing financing options or repayment plans that save them money. The Department of Education and the Congressional Budget Office routinely produce such estimates in their budget projections, and will do so for this rule if and when it is finalized.
I identify four areas where the Department of Education’s regulatory impact analysis is deficient and recommend changes as follows:
First, I recommend that regulators reassess the budgetary cost of the regulation incorporating the changes in behavior that are likely to occur, such as increased enrollment in IDR; the choices of repayment plan and filing status borrowers will make to reduce payments; increased student borrowing; increases in participation in the federal loan program by students at high-risk schools; and interactions between IDR and other loan forgiveness programs. Incorporating these effects would show that the budget cost is several times larger than stated by the Department.
Second, I suggest that regulators provide so-called “fair value” estimates of the subsidy cost of the regulation (rather than costs estimated using Federal Credit Reform Act (FCRA) rules). The fair value subsidy is the relevant measure of the incentives of individuals and institutions to enroll in IDR, to borrow, or to raise tuition. The fair value subsidy cost of IDR is likely to be several times larger than the FCRA subsidy cost (based on Congressional Budget Office estimates of existing IDR plans).
Third, I suggest that regulators provide a distributional analysis describing the characteristics of individuals who benefit from the rule based on their income, family background, and demographic characteristics. The stated purpose of the regulations is to improve affordability and help struggling borrowers. Hence, it is essential to know which borrowers face unaffordable payments or economic hardship, how much the regulations reduce such hardship, and what share of the aggregate cost of the regulation accrues to such borrowers. The Department does not describe and does not appear to know which borrowers benefit from the proposed changes.
Fourth, the analysis should consider intended and unintended effects of the rule on the economic choices of students and institutions, such as their choice of whether and how much to borrow, the effects of additional borrowing on other outcomes, which programs to attend, or which programs institutions should offer and what tuition to charge.
Despite the dramatic increase in the subsidies available to student loan borrowers, the Department assumes that the rule will have no behavioral or economic consequences that affect the amounts students borrow, the quality of education they pursue, the budgetary cost, or the individuals will benefit from the subsidy. The Department should conduct an accurate and complete assessment of the effects of proposed changes to IDR plans and use that analysis to propose regulations that are more cost effective, better target relief to borrowers experiencing hardship, and avoid unintended negative effects on postsecondary education.
For more details, see the full comment.
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