Meaning. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.) have received plenty of praise and criticism, depending on who you ask, for their plans to cancel federal student loan debt. But a close look at the platform put forward by supposedly ‘moderate’ Democratic presidential nominee Joe Biden shows it comes at a high cost. its own debt cancellation plan.
Unlike many plans proposed by Biden’s challengers, the former vice president’s proposal appears to have been deliberately crafted in such a way that most would not realize its extreme, far-reaching effects.
Instead of immediately canceling debt, Biden’s proposal would modify existing student loan forgiveness programs to eliminate billions in student loan debt over the coming decades, potentially affecting millions of borrowers.
Here’s how it would work: Under current law, borrowers with federal student loans (most current students and recent graduates) who are enrolled in income-based repayment plans receive student loan forgiveness after 20 25 years of payments. The number of years required varies by repayment plan.
Since the monthly payment amounts of these borrowers are tied to their income, those with very high debts and low or moderate incomes would not repay their student loans because their monthly payments will never match the full value of the loan. plus interest charged. .
For example, a single borrower in New York earning $40,000 a year with $100,000 in graduate student loan debt would end up receiving over $157,000 in loan forgiveness after making 20 years of payments while enrolled. at the federal level Pay as You Earn.
Moreover, you might be surprised to learn that the current system allows borrowers with little or no income to pay nothing in monthly payments and still receive student loan forgiveness – regardless of how much they owe.
There is however a catch. Current law requires borrowers who receive loan forgiveness to pay taxes on the amount of forgiven debt, which is treated as income.
Under Biden’s proposal, titled “The Biden Plan for Education Beyond High School”, most students would be automatically enrolled in an income-based repayment plan and wouldn’t have to pay tax on undergraduate student loan debt canceled after two decades of payments – even if those “payments” are $0 per month.
Additionally, the maximum monthly payment would be reduced by more than half for income-tested repayment plans, and those with incomes of $25,000 or less would pay nothing each month until their income exceeds $25,000. $ or they reach the 20-year discount threshold. Undergraduate loans would also be interest free.
When you add all of these changes together, the result is that many more borrowers would be allowed to forgive huge amounts of student loan debt. This would be true not only for those with little or no income, but also for millions of middle-income and heavily indebted students. Since monthly payments for people with moderate incomes would be significantly reduced, they are less likely to be able to repay their student loans over the 20-year period of the Biden plan, making many people eligible. to loan forgiveness that otherwise would not be.
Biden’s plan would not only cost countless hundreds of billions of dollars over the long term — at a minimum — it would also encourage borrowers to ignore the costs associated with attending an undergraduate college. .
Worse, it would reward those who take out large student loans but choose not to work or take low-paying jobs by offering them student loan forgiveness without requiring them to pay taxes on the amount of the forgiven loans.
This is exactly the opposite approach that policy makers should take. Rather than incentivizing bad economic choices, reforms are needed to reward students who limit their debt load and progress through college.
Perhaps more importantly, because institutions of higher learning know that students can get virtually any amount of money they need in the form of federal student loans, the current system encourages colleges to continually increase the cost of attendance, although advances in technology have made providing a high-quality education easier and more affordable than ever. The Biden plan would make this problem even worse and more widespread.
The only way to solve this problem is to create more competition and strengthen market forces within the higher education and student loan sectors. A good place to start would be to gradually reduce the maximum amount of money students can borrow from the federal government, a reform that would pressure colleges to reduce tuition increases and provide alternative, more cost-effective ways to dispense. education.
Local and state governments should also develop many more job training and skilled labor programs, starting at the high school level. Every year, hundreds of thousands, if not millions, of students attend college and, frankly, waste their time and money. Good, well-paying jobs are available in a variety of industries. But most high school students don’t know about them, because they’ve been wrongly told all their lives that their only chance for success lies in attending a four-year college.
So far, Biden has been given a free pass for his reckless policy proposals. While he may not be a full-fledged socialist like some of his Democratic Party competitors, a close look at Biden’s platform reveals that his presidency would also be incredibly destructive — not just for student loans, but for the entire US economy.
If Americans take the time to examine what Biden is actually proposing, they will see that the “common sense Joe” routine is little more than carefully orchestrated political theater.
Justin Haskins ([email protected]) is the editorial director and fellow at Heartland Institute, a conservative-libertarian think tank. Follow him on Twitter @JustinTHaskins.