For more than thirty years, college students have been assured that their student loan debts would not follow them forever. The federal government promised that if they paid a portion of their income every month, after a certain number of years any remaining debt would be forgiven. This fundamentally important component of the federal student loan program is currently in danger because of a partisan fight in the courts.
As part of his broader effort to provide loan relief for public servants, seniors, the disabled, and victims of for-profit college scams, President Joe Biden last year created a repayment program called SAVE that offered more generous terms than prior plans. In challenging the SAVE plan in court, plaintiffs are arguing that in establishing an income-contingent loan repayment system in the early 1990s—the authority on which SAVE is based—Congress did not intend for unpaid balances to be forgiven after the period of income-based payments was completed. The problem? It’s simply not true. I should know. I was there, drafting the laws as a Senate committee staff member. (And more recently, I literally wrote the history of income-driven student loans in the United States).
In the period leading up to the 1992 reauthorization of the Higher Education Act, which established income-contingent loans, and the 1993 budget bill that expanded them, committees in both the House and the Senate held hearings specifically about the bipartisan concept of repaying loans based on income. At the hearings, forgiveness was described as a core component of the program, necessary to make it fair.
Fiscal conservatives would be wrong to view the idea of income-contigent repayment as some sort of socialist idea: the first person to propose the idea was none other than the economist Milton Friedman. In a 1955 article, after explaining why private markets underinvest in advanced training, he suggested “equity investments” in human beings, in which the payoff from those who succeed would compensate for the losses from students who are not ultimately able to repay:
A governmental body could offer to finance or help finance the training of any individual who could meet minimum quality standards by making available not more than a limited sum per year for not more than a specified number of years, provided it was spent on securing training at a recognized institution. The individual would agree in return to pay to the government in each future year x per cent of his earnings in excess of y dollars for each $1,000 that he gets in this way.
To be sure, Friedman envisioned a zero net cost approach, which ran into complications long before the Biden administration’s reductions in required payments. Among the missteps, Congress expanded loan size and availability, even establishing a no-limit loan for graduate study, without instituting any type of tuition price caps. And worse, the government has not been vigorous in assuring the quality and integrity of the institutions and programs that were supported, repeatedly repealing laws and regulations aimed at greater accountability. “The really serious problem,” Friedman cautioned, “is how to prevent the scheme from becoming a political football” that ends up costing taxpayers more than intended.
In the Eighth Circuit Court of Appeals, which is considering the legality of the SAVE plan, the court should not throw the baby out with the bathwater. It’s valid for the court to consider whether the Biden administration has gone too far in reducing the amounts that borrowers are expected to repay. In the process, however, the court should not reject the concept of forgiving the remaining debts at the end of the repayment period. The history clearly intended forgiveness; after all, the name of the program established by Congress is income contingent: repaying the loan depends on whether the borrower has adequate income.
State attorneys general in federal court have argued that, since a different program created by Congress in 2007 explicitly says that loans are to be repaid or cancelled by the federal government at the end of the income-based repayment period, the lack of such language twenty-five years earlier means the prior Congress must not have intended the loans to be forgiven. The Eighth Circuit Court of Appeals found the argument compelling, at least on a preliminary basis, but they should know the real reason that the 2007 law included the additional language was that it was not only direct, government-owned loans that were being discharged, but also bank-held loans. A provision was needed for paying off the holders of those loans. Previously, in creating the income-contingent program that was only for federally held loans, ending the period of repayment was all that was needed, since there were no lenders to repay.
In the absence of an income-contingent safety net, the very idea of student loans becomes bad policy. Unlike a car loan or a home loan, which yields the borrower a car or a house, the justification for a student loan is an unknown future outcome. The student may not get a degree—nearly half of students don’t. The degree may not be the one that was intended, and often does not lead to the career that was envisioned. A safety net is needed so that borrowers can confidently pursue college amidst the uncertainty of future earnings levels.
Whether it’s the Trump administration, Congress, or the federal court system that is reviewing student loan policy, it’s important to get the facts right on income-contingent repayment. Undoing the SAVE program or its loan forgiveness components because it was “not the intent of the law” would be irresponsible policy, and a misreading of history and the statute.
Tags: SAVE, student loans, student loan forgiveness
In a Key Student Debt Case, a Federal Court Is Making a Serious Factual Error
For more than thirty years, college students have been assured that their student loan debts would not follow them forever. The federal government promised that if they paid a portion of their income every month, after a certain number of years any remaining debt would be forgiven. This fundamentally important component of the federal student loan program is currently in danger because of a partisan fight in the courts.
As part of his broader effort to provide loan relief for public servants, seniors, the disabled, and victims of for-profit college scams, President Joe Biden last year created a repayment program called SAVE that offered more generous terms than prior plans. In challenging the SAVE plan in court, plaintiffs are arguing that in establishing an income-contingent loan repayment system in the early 1990s—the authority on which SAVE is based—Congress did not intend for unpaid balances to be forgiven after the period of income-based payments was completed. The problem? It’s simply not true. I should know. I was there, drafting the laws as a Senate committee staff member. (And more recently, I literally wrote the history of income-driven student loans in the United States).
In the period leading up to the 1992 reauthorization of the Higher Education Act, which established income-contingent loans, and the 1993 budget bill that expanded them, committees in both the House and the Senate held hearings specifically about the bipartisan concept of repaying loans based on income. At the hearings, forgiveness was described as a core component of the program, necessary to make it fair.
Fiscal conservatives would be wrong to view the idea of income-contigent repayment as some sort of socialist idea: the first person to propose the idea was none other than the economist Milton Friedman. In a 1955 article, after explaining why private markets underinvest in advanced training, he suggested “equity investments” in human beings, in which the payoff from those who succeed would compensate for the losses from students who are not ultimately able to repay:
A governmental body could offer to finance or help finance the training of any individual who could meet minimum quality standards by making available not more than a limited sum per year for not more than a specified number of years, provided it was spent on securing training at a recognized institution. The individual would agree in return to pay to the government in each future year x per cent of his earnings in excess of y dollars for each $1,000 that he gets in this way.1
To be sure, Friedman envisioned a zero net cost approach, which ran into complications long before the Biden administration’s reductions in required payments. Among the missteps, Congress expanded loan size and availability, even establishing a no-limit loan for graduate study, without instituting any type of tuition price caps. And worse, the government has not been vigorous in assuring the quality and integrity of the institutions and programs that were supported, repeatedly repealing laws and regulations aimed at greater accountability. “The really serious problem,” Friedman cautioned, “is how to prevent the scheme from becoming a political football” that ends up costing taxpayers more than intended.
In the Eighth Circuit Court of Appeals, which is considering the legality of the SAVE plan, the court should not throw the baby out with the bathwater. It’s valid for the court to consider whether the Biden administration has gone too far in reducing the amounts that borrowers are expected to repay. In the process, however, the court should not reject the concept of forgiving the remaining debts at the end of the repayment period. The history clearly intended forgiveness; after all, the name of the program established by Congress is income contingent: repaying the loan depends on whether the borrower has adequate income.
State attorneys general in federal court have argued that, since a different program created by Congress in 2007 explicitly says that loans are to be repaid or cancelled by the federal government at the end of the income-based repayment period, the lack of such language twenty-five years earlier means the prior Congress must not have intended the loans to be forgiven. The Eighth Circuit Court of Appeals found the argument compelling, at least on a preliminary basis, but they should know the real reason that the 2007 law included the additional language was that it was not only direct, government-owned loans that were being discharged, but also bank-held loans. A provision was needed for paying off the holders of those loans. Previously, in creating the income-contingent program that was only for federally held loans, ending the period of repayment was all that was needed, since there were no lenders to repay.
In the absence of an income-contingent safety net, the very idea of student loans becomes bad policy. Unlike a car loan or a home loan, which yields the borrower a car or a house, the justification for a student loan is an unknown future outcome. The student may not get a degree—nearly half of students don’t. The degree may not be the one that was intended, and often does not lead to the career that was envisioned. A safety net is needed so that borrowers can confidently pursue college amidst the uncertainty of future earnings levels.
Whether it’s the Trump administration, Congress, or the federal court system that is reviewing student loan policy, it’s important to get the facts right on income-contingent repayment. Undoing the SAVE program or its loan forgiveness components because it was “not the intent of the law” would be irresponsible policy, and a misreading of history and the statute.
Notes
Tags: SAVE, student loans, student loan forgiveness