Student Loan Subsidies Unintended Perilous Side Effects

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Experts are wary that facets of President Biden’s student loan relief plan may entice unscrupulous schools and unknowing students. The new subsidies could get manipulated by for-profit colleges, persuading people to take on large amounts of debt for degrees that inevitably fail to provide the kind of earnings boost that the schools market.

President Biden’s Student Loan Relief Strategy

The most critical element of President Biden’s plan to help students pay off their student loans, announced last month, is that he will forgive up to $20,000 in federal loans per borrower. However, the aspect of the president’s plan that would have the most impact and cost the most, in the long run, is his plan for a new income-linked repayment plan. For many borrowers, this plan would make significantly lower monthly payments.

It could, however, have unintended consequences. For a long time, untrustworthy schools, including for-profit schools, have used high-pressure sales tactics or outright fraud and deception to convince students to take on more debt than they can ever hope to pay.

Giving more money to schools and students for education may create a perverse incentive for both schools and borrowers, who may begin to care less about how much their education costs, leaving taxpayers to pay more.

“Taxpayers bear the brunt of it if people take out the same or more debt and pay back less of it,” said Daniel Zibel, chief counsel at the National Student Legal Defense Network, an advocacy group.

For example, the University of Phoenix has long been a target of watchdogs due to what they claim is a pattern of false claims. Over the last two decades, the University of Phoenix had paid more than $127 million to settle government lawsuits alleging illegal practices such as paying recruiters based on how many students they signed up and running deceptive marketing campaigns claiming partnerships with large corporations when they didn’t.

The University of Phoenix is one of 150 schools identified by the Education Department as having “significant misconduct.” (The list is part of a legal agreement reached by the department in June. If the deal is made official, it will erase $6 billion in federal student loan debt for 200,000 borrowers, including Ms. Arnold.) The school is one of more than a dozen on the list that is still in operation. However, it is still eligible for federal student loans and receives nearly all its money from them.

Andrea Smiley, the spokeswoman for the University of Phoenix, stated that the school is proud of all its one million graduates. The school provides:

  • A tuition price guarantee.
  • Academic and career coaches.
  • Lifelong career services.
  • Online support.

24 hours a day, 7 days a week

She also stated that the school “adamantly” denied any wrongdoing. The University of Phoenix said nothing about the Biden administration’s plan to cancel loan loans.

Student loan
Student Loan Borrowers Celebrate President Biden Cancelling Student Debt [Paul MorigiGetty Images]

What to Know About Student Loan Debt Relief

According to experts, Mr. Biden’s new plan may give schools more reasons to burden students with excessive debt.

“Debt cancellation and income-driven repayment cannot stand alone,” said Sarah Sattelmeyer, higher-education project director at the think tank New America. “We need a strong accountability system to go along with these things.”

Attempts to control institutions that don’t work well have been thwarted in the past by lobbying, lawsuits, and shifting political winds. Betsy DeVos, President Donald J. Trump’s education secretary, repealed the government’s most powerful tool, the “gainful employment” rule. This rule, implemented during the Obama administration, threatened to cut off federal aid to for-profit schools whose students did not earn enough to repay their loans.

Students may also be less concerned about incurring large amounts of debt if new subsidies are available. For example, the Education Department has not yet released the details of Mr. Biden’s new repayment plan. Still, the outline that the president provided last month could change how higher education is paid for, particularly for undergraduate degrees, by shifting the costs from borrowers to taxpayers.

“As several economists have said, the new repayment plan could drive up costs in all parts of higher education and encourage students to take on more debt,” said Jason Altmire, the head of the Career Education Colleges and Universities trade group for-profit colleges and universities. He claimed that the Biden administration’s proposal for an income-based plan would “create more confusion and do nothing to reduce college costs.”

The government is owed $1.6 trillion in student loans to approximately 45 million people, with an average balance of around $37,670. Borrowers who choose an income-linked payment plan must currently pay 10% of their discretionary income, which is all income above 150 percent of the poverty line.

Mr. Biden wants to raise that floor and protect incomes up to 225 percent of the poverty line. He also wants to cut the rate of repayment for undergraduate loans to 5% of income and stop charging interest to borrowers who make their monthly payments. As with existing income-based plans, any remaining balance would be forgiven after 20 years of payments.

Student loan
Student Loan Borrowers Celebrate President Biden Cancelling Student Debt [Paul MorigiGetty Images]

More on Student Loan Debt Relief

The changes will make millions more borrowers pay little or no interest on their loans. However, the government will take care of whatever is not paid, which is a risky move in an already troubled system.

Schools accused of wrongdoing are likely to fight back, and it can take years to cut off even the worst offenders. Instead, the government relies on independent accrediting agencies to vouch for a school’s quality. Schools that have lost their accreditation, which is supposed to be a death sentence, have been able to continue receiving federal funds in some cases.

According to Jonathan Glater, a law professor at the University of California, Berkeley, the government’s options for dealing with bad behavior in schools have “never been preventative; they work after the fact.”

He also stated, “It would be great to have a regulatory system that could stop bad behavior, and, surprisingly, more people aren’t asking for that.”

The Education Department stated in a written statement that the Biden administration is “committed to preventing a future student debt crisis by holding colleges and universities accountable if they leave students with significant debt or no good jobs.”

The department recently stated that it was reassembling the enforcement team for its Federal Student Aid unit, which Ms. DeVos had disbanded, and that it would keep a closer eye on accreditors.

Aaron Ament, who worked on enforcement issues at the Education Department during the Obama administration, says it’s a start, but the agency needs to move faster. He specifically requests that the gainful employment rule, which Ms. DeVos removed, be reinstated.

According to Mr. Ament, the rule is one of the best ways for the US to eliminate failing programs as soon as possible.

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