Joe Biden’s proposal to erase $10,000 in student loans per person is on hold at the Supreme Court, but the Education Department is now moving to wipe out more debt via income-based repayment plans. Won’t this give colleges an incentive to raise tuition and offer marginal degrees, and will these policies prove popular, or is there an economic and generational divide?
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Announcer: From the opinion pages of the Wall Street Journal, this is Potomac Watch.
Kyle Peterson: With is student loan forgiveness plan stuck at the Supreme Court, president Biden moves forward with a second piece of his student debt bonanza. Welcome, I'm Kyle Peterson with the Wall Street Journal. We are joined today by my colleagues, columnist Kim Strassel and editorial board member, Collin Levy. Next month the Supreme Court will hear oral arguments in the case against Joe Biden's plan to outright forgive $10,000 per person in student loans across the board for borrowers earning up to $125,000 a year. And the betting now seems to be that the justices will say that the White House lacks the power to spend this money that hasn't been approved by Congress. But on Tuesday, the Biden administration moved forward on a second piece of the President's student debt agenda involving income-based repayment plans. Kim, I wonder if you can just set the table for us and give a sense of what the administration is proposing to do?
Kimberley Strassel: Sure. Something to know, we've had income-based repayment plans in the federal loan system for a long time. They've been around since 1992. The complaint among those who would like them to have these kind of changes is that they claim that it's too much paperwork, even too hard to use. They're not generous enough. So this is a Biden administration as it is a kind of second piece to its own student loan overhaul. And what they're going to do here, there's a number of different provisions, but the big one is that they're going to have the amount percentage wise of discretionary income that you have to pay back every month on your undergraduate loans if you're enrolled in one of these plans. So it had been that you had to pay about 10% of your discretionary income in repayment plans, they're going to lower that to 5%. For certain borrowers who have incomes below 225% of the federal poverty line, you wouldn't have to make any monthly payments on their loans. And then moreover, if you enroll in this and you make your payments, for many people, you will actually have the rest of your loans wiped out after 20 years, or if you borrowed only $12,000 or less to begin with as an original loan balance, that could be wiped out after 10 years of repayments. And we can talk about some of the implications, but that latter provision essentially is something that would make lower costing degrees, in particular community college degrees, maybe essentially free requiring that people only pay very minimal payments over 10 years and then get the rest of it wiped out. And that is interesting to me only because this was something Biden wanted to do as part of his build back better agenda. It didn't come to fruition, so this seems to be a backdoor way that the White House is trying to get it across the line.
Kyle Peterson: According to the journal story on this, about 8 million borrowers are in some kind of income-based repayment program. And the cost estimates for this change in the program, according to analysis by the University of Pennsylvania Wharton School, it could be between 70 billion over 10 years, up to 450 billion over a longer period. And that of course depends on who takes advantage of the program, how many people, whether the program results in increased tuition. And Collin, I guess that's what I worry most about this kind of model. I mean for all the complaints about the first piece of Biden's plan, which is just a blanket forgive $10,000 for every borrower who is under a certain income threshold. I don't think that sends a great signal to borrowers or students about how seriously to think about these numbers when they're signing the loan documents. On the other hand, that kind of one time Jubilee, we're going to do this now and maybe people will hope that it happens again, but there's no guarantee on it, has a sort of limited set of incentives, whereas this kind of a program which is in place and people can count on it, I worry that it's going to only make everyone in the college market more price insensitive than they already are. Because if borrowers think I'm going to get into an income-based repayment program after I graduate from the school, it doesn't really matter how much my total loan debt is when I get out of here because I'm going to get to pay 5% of my discretionary income and then it's all going to go away. By the way, schools are also going to know that, and so I don't see why this is not just going to push tuition, the cost of college, up, up, up, up, which is already the problem.
Collin Levy: Yeah, Kyle, you make several good points here. I mean, the big one is the numbers on this in terms of the federal government spending is enormous. And by the way, all that spending gets paid in taxes. And so it's important to remember here that now you have all these blue collar workers who didn't take out loans and they're going to be the ones who end up absorbing the payments in the form of higher taxes. And I found it really interesting when I looked at the announcement and I saw that the education department under secretary said that for the first time they were going to be creating a student loan safety net in this country. That statement really struck me because I sort of grew up thinking that as this student loan safety net, the safety net was supposed to be a college education, a college degree still confers significant financial benefits. I mean no matter who you're talking to. And so when you look on an annual basis, you see that earnings for college graduates are still about 84% higher than high school graduates. And if you look at people with even higher level degrees, those numbers keep going up to about 300% of the salary of someone with a high school degree. So when we look at this change, this sort of incremental change from 10% down to paying 5%, when financial planners talk to college graduates, recent college graduates, about how to spend their money and how they're going to handle things when they're first out of college, they typically tell them sort of a 50, 30, 20 rule, right? That's 50% of your take home pay is supposed to go to your needs, 30% goes to your wants and 20% goes to savings. I mean, that's now I guess an incredibly old fashioned way to look at the way that people spend money. But just think about that 30% of income that's supposedly the fun budget, we can't give 10% of that 30% to paying for the education that's actually sculpting your life? I mean, I think it just fundamentally changes, as you were saying, the relationship that borrowers have and students have with the value of their education.
Kyle Peterson: Well, let me pick up on the point that Collin makes about the safety net and how the safety net used to be a college degree. And I would commend to people's attention on analysis of this income driven repayment stuff written by Adam Looney. It's at the Brookings Institution, the title is Biden's Income Driven Repayment Plan would turn student loans into untargeted grants. And he makes a lot of real fascinating points. One of them is that when there's no ultimate financial accountability for how graduates are doing in terms of earnings compared to their debt, that also gives colleges an incentive to set up programs that are not really going to give them the education that will allow them to increase their earning power. So here's a line he says, "My belief is that increases in undergraduate financial aid increase college costs primarily by increasing the number of lower quality programs and the students who enroll in them. My fear with regards to overall college costs is that institutions will have an incentive to create valueless programs and aggressively recruit students into those programs with promises they will be free under an IDR plan, an income driven repayment plan." And Kim, there has been some great reporting on examples of that. One that comes to mind, I believe it was one of the New York universities and the Journal had some reporting on people I think in the film school and they were being drawn into these programs and racking up huge amounts of tuition payments and debt in order to pay for the programs, and yet the earnings were nowhere even close to what you would need in order to pay off that debt. And again, I worry that the more that we de-link the paying of college from the underlying economics of what's going on here, the more you're going to get that kind of gaming of the system.
Kimberley Strassel: Right? The way this is set up, it's deliberately set up to most benefit people who leave college and don't earn much money because you qualify most fully if your income is below 225% of the poverty level and that comes out to about $30,000 for an individual, and about $62,000 for a family of four, those are the administration's own estimates of this. So as that very good analysis points out, yeah, that's going to encourage a lot of programs in drama and the liberal arts. Go get your degree in cosmetology because you're going to spend a lot to get it. And by the way, the colleges are likely to charge you a lot to get it because there's not going to be any more guards on inflation. They know that all this money is just going to be sitting there in a federal pot and why shouldn't they benefit from it? And so there's going to be a lot of incentives for people to go into those programs. But if you want to be a nurse or you want to be an engineer or you want to get a major in math or computer science, you are more likely to have to pay a full price because you've been going to the best programs in the field and because you are likely to come out and have a better education. So it really is a bunch of perverse incentives. I would also just go back to my point again too, it's pretty tricky of the administration as well, too. Pretty slick, as Collin noted, the education department is celebrating that they now have a safety net, and that's another way of saying that they've essentially created a program to make college free for certain people that are going into certain types of degrees, and that was something they wanted to do as a part of the Build Back Better Agenda, and it didn't go through in part because it's so costly. The estimates are that this part of the program is going to cost anywhere from 70 billion over 10 years to up to half a trillion dollars in the longer term. Add that to what Biden has already proposed with his student loan debt forgiveness and taxpayers are looking at paying trillions for these programs.
Kyle Peterson: I refreshed my memory here on this New York story while Kim was speaking, and here's the beginning of The Wall Street Journal report. Recent film program, graduates of Columbia University who took out federal student loans, had a median debt, a median debt of $181,000, yet two years after earning their master's degrees, half of the borrowers were making less than $30,000 a year. The headline, if you want to look that up, is Financially Hobbled For Life, the Elite Master's Degrees That Don't Pay Off. Columbia and other top universities push masters programs that failed to generate enough income for graduates to keep up with six figure federal loans. And that's obviously terrible for the students that end up in those situations financially hobbled for life as the headline says. But it's a great money maker for those schools, and I'm sure subsidizes all sorts of other programs, all sorts of other things that the administration and the faculty want to do. Collin, the other thing that jumps out at me of this Brookings Institution report is this author says that there's also a high potential for abuse. And he writes, a large share of student debt is not used to pay tuition but is given to students in cash for rent, food, and other expenses at public colleges and for-profits, living expenses represent more than half the estimated cost of attendance. That's another way that this pushes up cost because it pushes up tuition when colleges are more interested in drawing students by building the fancy facilities that will get people to come to campus and say, wow, this is a place that I want to spend four years or six years or eight years if you're talking about a potential graduate degree. And yet that is something that ends up sometimes on the student loan debt. And here we're talking about a federal taxpayer subsidy that will just ratchet up those costs.
Collin Levy: No question. Look, money's fungible as you say. Who knows exactly where it goes. To elaborate too. I mean, I think there's something that's really culturally wrong here and potentially distorting in this because it's with our discomfort with anyone having to make any sacrifices to get ahead. I was thinking back as Kim was talking about my own experiences in college. And when you see someone from a low income family who has to borrow heavily to go to college, that's hard. And it seems unfair that a rich kid just graduates from college debt free. But we also seem to have forgotten that sacrificing and working hard for something conveys a sense of value on it. I went to a school that had a lot of heiresses walking around and they didn't really think that much of their college education. It was just another privilege, like the ones that'd had all their lives. And we used to call them the trustafarians, but guess what? Many of them didn't really go out and make much of their degrees. The ones who did were the ones who knew that they'd put a lot into being where they were. And I think you've sort of seen that throughout American history, that meritocracy and that rise from having less and working hard for a new place in society, the children of blue collar workers, children of immigrants who have that fire inside and are just incredibly motivated to go out on education and use it and succeed. So you don't need to forgive the loans for those people. Taking that responsibility away I think is also dangerous.
Kyle Peterson: Hang tight. Will be right back. You're listening to Potomac Watch from the Wall Street Journal. Don't forget, you can reach the latest episode of Potomac Watch anytime. Just ask your smart speaker, play the Opinion Potomac Watch Podcast.
Announcer: From the opinion pages of the Wall Street Journal. This is Potomac watch.
Kyle Peterson: Welcome back. Kim, the other piece of this student loan agenda from President Biden that we have wrangled with is whether he thinks it will be politically popular. And I went to the census data this morning to refresh my memory, but educational attainment in the US as of 2021, 8.9% of people had less than a high school diploma. 27% were high school graduates, 14.9% had some college but no degree. And so you have 51.7%, roughly a little more than half of Americans that have no college degree at all. If you go to the bachelor's degree, it's less than 24% of people and then less than 15% have some sort of advanced degree. So Collin raised the point earlier that what ends up happening here is you have people who may have been successful, very successful in other industries, they bought a truck and then they bought two trucks and suddenly they have a huge trucking company or a plumbing company. There are all sorts of people who are doing really well in the trades, entrepreneurs, and they end up footing the bill for these people who end up with the film degrees and get the student loan forgiveness.
Kimberley Strassel: That is a huge aspect of this. And add to this too, it's not just that a significant number of Americans don't have that kind of educational attainment level that would allow them to take benefit of this program and basically have taxpayers float them, but then add to that, that a large share of student debt is also owed by well-educated and largely white and pretty financially successful students from pretty well to do or at least upper class families. And that really is jarring, especially when you think about this administration's claims that a whole big focus of its time in office is going to be imposing an equity agenda and trying to close the gaps between less and better advantage groups. So that's also going to breed some resentment out there. And in fact, when you do some honest polling on this, a lot of Americans really don't like the idea of this and for all kinds of reasons. One, because it isn't fair in the traditional use of that word and that it is the taxpayer floating a bunch of people that are essentially privileged enough to go to college, and that's just classic redistribution of wealth. So there's that part of it. They don't like it because it's costly and they don't like it because it's essentially a new government benefit. One that the Biden administration is working very, very hard to make permanent and forever. And so I don't see that this necessarily is a winner. And it's also just, I think a lot of Americans don't like the idea that you don't have to work for things anymore. Very much this idea that Collin was expressing that somehow you can just go and someone else will pay off your debts. Debts are meant to be debts. They are something that you sign a contract. And there is something very jarring to people about the notion that if I go sign a contract for a brand new fancy pickup truck, do I somehow now expect somebody else to pay it off for me? No. And education shouldn't be any different in the minds of a lot of Americans. So I don't see this as a political winner. There are some Democrats who suggested that the number of younger people who turned out in the election, which was a little bit higher than some folks had expected for a midterm in particular, somehow had to do with this student loan program, maybe. But you have to balance that against a lot of other voters in older categories who do not like this idea.
Kyle Peterson: That's a good point because the polling has shown the student loan forgiveness plan, at least to be less unpopular than I suspected it might have been. On the other hand, Collin, maybe it's one of these issues that really animates a share of people on both sides of the aisle. Obviously the former students who are getting the loan forgiveness are probably generally in favor of that. On the other hand, every time we talk about the student forgiveness plan on the podcast, we get a pretty good amount of emails coming in from people who have paid off their loans or paid off their kids loans are saying, what am I doing putting all of this money into a 529 savings account for my kids in the future when that seems to be the chumps way now of paying for college? Collin, I don't know, maybe this is one of those issue that fires up both sides and then it nets out in the middle.
Collin Levy: Well, it does for sure, and no question. The people who have finished paying off their student loans feel really good about that, and they'll tell you that in retrospect, it felt like a really good valuable exercise every minute that they were doing it, which probably it didn't. Probably, it was really hard. But these are the kind of experiences actually that shape our lives, that shape what it means to sort of raise children and have a family and go out and prepare to sort of confront the world and its challenges. And I think that we really do take away from this generation of students who already, many people would say that they're the generation that's coddled in so many ways, and we take away from them having these experiences. Yeah, of course they're in favor of taking away their student loans. Of course, they support democratic proposals because guess what? It's scary to graduate from college and it's scary to go out and have to pay your own bills and take on adult responsibilities. And it's nice if you get to just stay on campus and have all of the luxury that's there. So I think there is a generational split there. It's a natural one, but I think the older ones who've been all the way through the process probably have the more reasonable position
Kyle Peterson: Kim, we'll give you the last word, but is there any prospect, do you suspect of a challenge, a legal challenge to this portion of President Biden's student loan agenda? As we've said, the forgiveness plan is now going to be heard in February by the Supreme Court. The legal terms of these two pieces of his plan are different. On the other hand, the big problem for the student loan litigation seem to have been standing, who has an injury, who is injured by debt forgiveness, and it does seem like the plaintiffs who have gotten to the Supreme Court have solved that problem.
Kimberley Strassel: Yeah, that's definitely true. I don't know if you can come up with a situation where the same types of plaintiffs are able to bring a suit, challenging this piece of the puzzle. What we've had getting through has been some states who have operated their own quasi-state student loan processing organizations who argue that they will be financially harmed by debt forgiveness. You've also had some people who claimed that because they didn't qualify for certain provisions of this particular plan that they would be harmed. You may be able to get something equivalent to that to challenge this portion of it. Again, the problem overall is people in their minds think, well, I mean obviously wouldn't any average taxpayer have standing to say, Hey, I didn't go to school and I didn't get a college degree, so this isn't right, and I have been financially injured as a result? No, unfortunately, the courts have made very clear that you can't just generally complain that somebody got something from government when you didn't. The injury has to be far more specific, but given the various complexities of this and the parameters of the program in that some people qualify, but some people do not, there may be an opportunity for standing. People have been waiting. This was broadly announced that it was going to happen back in August when the administration announced a student loan forgiveness. But it's taken a while for them to really get out the kind of rules, proposed rules. We're now going into a comment period, but now would probably be the moment that people begin to look at that in terms of a legal challenge.
Kyle Peterson: Thank you, Kim and Collin, thank you all for listening. You can email us at pwpodcast@wsj.com. If you like the show, please hit that subscribe button and we'll be back tomorrow with another edition of Potomac Watch.
Paul Gigot is the editorial page editor and vice president of The Wall Street Journal, a position he has held since 2001. He is responsible for the newspaper’s editorials, op-ed articles and Leisure & Arts criticism and directs the editorial pages of the Journal’s Asian and European editions and the OpinionJournal.com Web site. He is also the host of the weekly half-hour news program, the Journal Editorial Report, on the Fox News Channel.
Mr. Gigot joined the Journal in 1980 as a reporter in Chicago, and in 1982 he became the Journal’s Asia correspondent, based in Hong Kong. He won an Overseas Press Club award for his reporting on the Philippines. In 1984, he was named the first editorial page editor of The Asian Wall Street Journal, based in Hong Kong. In 1987, he was assigned to Washington, where he contributed editorials and a weekly column on politics, "Potomac Watch," which won the 2000 Pulitzer Prize for commentary.
Mr. Gigot is a summa cum laude graduate of Dartmouth College, where he was chairman of the daily student newspaper.
