Back Door Attempts to Expand Student Loan Forgiveness Are a Bad Idea

President Biden campaigned on a promise to provide $10,000 in student loan debt relief for all student borrowers. Last week the President went a step further, canceling $10,000 of debt for most students and $20,000 for those who previously received Federal Pell Grants. The cancellation of student loan debt is estimated to cost roughly half a trillion dollars over a decade — akin to a bailout of high-income graduates, paid for by lower income workers. 

With many commentators still distracted by this latest policy move, the administration now plans to use regulatory changes to the Borrower Defense to Repayment program as a backdoor means of broadening the share of those eligible for loan forgiveness.

If implemented, these changes will shift the cost of higher education funding from high income college graduates to hard-pressed tax payers, many of whom didn’t even go to college. 

Current policy of pausing loan repayment has already inadvertently canceled $8,500 of debt repayments for a typical bachelor's degree recipient, assuming the administration continues this policy into 2023. The largest beneficiaries of the loan repayment pause are high income individuals, with the top 40% of earners receiving three quarters of the total benefit. Now the Biden Administration wants to use the Department of Education to implement changes that will expand these benefits.

Submitted to the Federal Register on July 13, the proposed regulatory changes would loosen the eligibility requirements to forgive the loans of more borrowers.

A key program that these changes would affect is the Borrowers Defense to Repayment (BDR) program, which allows borrowers of Federal student loans to have their debts canceled if they can prove they were misled by the college that they attended. Borrowers can claim substantial misrepresentation to receive partial or full debt cancellation.

By broadening the definition of “substantial misrepresentation” to include false, erroneous, or misleading statements concerning acceptance rates or college rankings, the changes would pave the way for a larger number of borrowers to claim they were misled by their colleges.

Eligibility requirements for BDR would also be loosened under proposed changes. Currently borrowers have to prove that their college deliberately misled them and that these misrepresentations caused the borrower financial harm. Under proposed changes, both of these eligibility requirements are dropped — borrowers wouldn’t need to prove that their college deliberately misled them or that they were caused financial harm as a result.

If these changes are approved, we can expect to see a substantial expansion in student loan forgiveness. BDR is already rife with fraudulent claims and perverse incentives, creating loopholes for massive amounts of student debt to be forgiven.

A second existing program the changes would alter is the Public Student Loan Forgiveness (PSLF) program. Currently, under the existing PSLF program, borrowers can have their outstanding debt forgiven if they work full-time for the government or non-profit, are enrolled in an income-driven enrollment plan, and have made 120 monthly repayments.

Under proposed regulatory changes, however, the definition of qualifying employer would be expanded to include public health workers, non-governmental public service workers, and public library workers to name a few. For public health workers alone, this would add millions of workers to the eligible list of borrowers — there are currently over 16 million health care workers in the U.S., many of whom have outstanding student loan debt.

The Department of Education also proposes implementing a broader definition of “full-time” worker for those who seek to qualify for PSLF. Under proposed regulatory changes, a full-time worker is defined as working at least 30 hours per week, which could also be made up of several part-time jobs combined.

These looser definitions fly in the face of traditional definitions. For example, the Bureau of Labor Statistics defines a full-time worker as working 35 hours or more per week.

Newly proposed changes would also allow every month that a borrower is in forbearance or deferment to count towards the 120 monthly payments requirement.

While these regulatory changes to Federal student loan forgiveness programs represent a back door route towards broader loan forgiveness, these changes will only worsen the problem of bad incentives in the higher education marketplace.

Looser eligibility requirements for loan cancellation programs will persuade more students to enroll in college programs they can’t afford, while doing nothing to improve the cost or quality that higher education institutions offer to prospective students.

Ultimately, the cost of bailing out high income college-educated workers will fall on the average American worker. The two-thirds of Americans who chose not to go to college will be forced to pay for the education of those that earn 67 percent more than they do.

And all this from an administration that prides itself in being “progressive”.

Jack Salmon is an economic analyst at a university-based research center. His research focuses on the US economy, the federal budget, higher education, and institutions and economic growth. Jack has published research on these topics in academic publications including the Journal of School Choice and the Cato Journal. His commentary has been featured in a variety of outlets, including the Hill, Business Insider, RealClearPolicy, and National Review Online.