Student loan fix is easy
The Biden administration is reviewing its options to secure student loan forgiveness after the Supreme Court blocked its last attempt. Before embarking on what will likely become yet another long court battle, it should turn to a program that already exists and, if tweaked, could legally accomplish just about everything one could want from a loan forgiveness policy.
We’re talking about income-driven repayment plans, which allow student loan borrowers to pay what they can afford. For the poorest Americans, that could be nothing at all.
Such plans have been around for decades, but bureaucratic hassles create needless barriers to access them. If the administration really wants the public to see debt relief, the easiest way forward would be to knock down those barriers. Specifically, the administration could automatically enroll every eligible borrower into the Saving on a Valuable Education (SAVE) program.
The Biden administration developed SAVE, which begins to roll out this summer, to replace another repayment program for federal student loans known as Revised Pay as You Earn (REPAYE). Like some of the other plans, SAVE will calculate student loan payments based on a person’s income and family size but on more generous terms. It will exempt any borrowers making up to 225% of the federal poverty level, up from 150% under REPAYE.
Undergraduate loan borrowers would also pay only 5% of their incomes above the exemption threshold, down from 10% under prior programs. This new rate combined with the increased exemption amount means many borrowers could see payments cut by more than half.
These changes translate into immediate relief for the families who need help the most. A family of four with an income of up to $67,500 would owe nothing in most states. And typically, after 20 years of making income-based payments, students would see their remaining debt canceled. Many of those debt cancellations materialized this past Friday, when the Biden administration said it would clear $39 billion of student loan debt for borrowers who have paid their dues through income-driven programs such as SAVE. While many of these cancellations should have come sooner, it nevertheless proves the power these programs could have if the administration gave them more attention.
Of the 32 million federal borrowers in repayment or default, only about one-third — 9 million people — are enrolled in repayment plans that adjust for income such as SAVE. The barrier to entry, once more, is the hassle. Because payments can change each year, the Education Department requires borrowers to first prove their eligibility, then provide loan servicers with annual information about their earnings and their family size. It’s a process similar to applying for financial aid or doing your taxes, which people must do again and again.
Experts and advocates argue that the complexity and administrative burdens keep many borrowers from taking advantage of the program. While the SAVE program automatically enrolls borrowers who are in default or long delinquency, it does so only if borrowers have agreed to share their tax returns with the Education Department before going into default.
Automatic enrollment is a good idea for all borrowers. It’s now widely understood that even well-intentioned limits on eligibility for other safety-net programs create needless barriers to access. Opponents of these other programs have urged new “work requirements” that, in practice, would serve as red-tape obstacle courses.
The Biden administration should go in the opposite direction. To reduce the burden on borrowers, the Education Department can verify their incomes with the Internal Revenue Service if the borrower agrees. The Education Department can also mimic the IRS’s exploration of pre-filed tax returns, as many other countries do, and potentially apply a similar version to the student loan repayment program. Then recertification would be as simple as confirming that the presented information is accurate.
This is not the only step the administration can take to reduce the nearly $1.8 trillion student debt. Further plans such as eliminating interest, instituting payroll withholding and shoring up the poor work of the for-profit loan servicers who administer similar programs, as well as making SAVE the only repayment program available to borrowers, would also help simplify the program and save borrowers money, though some of these changes might need congressional action.
Automatically enrolling all borrowers in SAVE, by contrast, can be done with the same existing statutory authority the Education Department relied on to automatically enroll delinquent borrowers in SAVE. For example, it already has the power to set “the terms and conditions” for plan changes, so it could switch borrowers to SAVE unless they opt out.
For households that are overburdened with student loan debt, this approach would be a potential lifeline. We shouldn’t make them work so hard to grasp it.