What’s In Senate Republicans’ Student Loan Reform Package

With the Supreme Court set to rule on the legality of President Biden’s student loan cancellation plan any day now, policymakers are beginning to turn their attention to what comes next. Regardless of loan cancellation’s fate, the federal government is due to make nearly $1 trillion in new student loans over the coming decade. Outstanding debt will return to its current levels in just five years even if loan cancellation goes through.

To prevent a repeat of the problems that led to political demand for mass loan cancellation, the federal student loan program requires serious reform. That is the intention of the Lowering Education Costs and Debt Act, a higher-education reform bill introduced Wednesday by Senator Bill Cassidy (R-LA) and four Republican colleagues. The bill would address runaway costs and debt by limiting new loan disbursements and defunding degree programs with little financial value, but could go farther to address the scale of the problems in the student loan system.

What’s in the bill

The comprehensive bill reforms many aspects of the student loan system. Among the major provisions:

• Caps graduate student lending: Currently, students pursuing graduate degrees may borrow effectively unlimited amounts from the federal government. The Republican proposal caps borrowing for most graduate students at $20,500 annually ($65,000 in aggregate); students in professional programs such as medicine may borrow up to $40,500 annually ($130,000 in aggregate). There are no changes to loan limits for undergraduates or parents of undergraduates.
• Streamlines repayment plans: Borrowers can choose from nearly a dozen student loan repayment plans today; the bill would simplify those options down to two. Borrowers may choose between a standard “mortgage-style” ten-year repayment plan or an income-driven plan. The latter plan would set student loan payments at 10% of annual income above 150% of the federal poverty line ($21,870 for a single person in 2023). Most borrowers will receive forgiveness of unpaid balances after 20 years (for undergraduates) or 25 years (for graduate students), but borrowers with low balances may receive forgiveness in as little as 10 years. Borrowers who are more than 75 days delinquent will be automatically enrolled in the income-driven plan.
• Imposes new accountability rules on colleges. Colleges will no longer be allowed to offer certain degree programs using federal student loans if former students’ earnings are too low. Specifically, the median earnings of students six years after entry (for associate degrees and undergraduate certificates) or 10 years after entry (for bachelor’s degrees) must exceed the median earnings of working adults ages 25 to 34 with only a high school diploma in the same state as the institution. For graduate programs, the median earnings of students six years after entry (for master’s degrees) or 10 years after entry (for doctoral and professional degrees) must exceed the median earnings of working adults ages 25 to 34 with only a bachelor’s degree, also in the same state.
• Standardizes disclosures: The legislation directs the Department of Education to develop a standardized form for colleges to disclose information about costs and aid to prospective students. The form must clearly list tuition and fees, other expenses, grants and scholarships, and net price before loans. Loans must be labeled as “loans” and listed under a separate heading.
• Expands data collection and dissemination: The legislation incorporates the bipartisan College Transparency Act, which would collect much more comprehensive data on college costs, completion rates, transfer rates, and students’ post-college outcomes. Anonymized, aggregated data would be available to students and other stakeholders through a user-friendly website.

Commonsense loan limits

The new loan limits for graduate student borrowers are a step in the right direction. The status quo of effectively unlimited graduate lending has been a disaster. One recent study found that universities hiked tuition in response to unlimited lending, but did not expand enrollment or improve student diversity. Debt burdens for graduate students have exploded over the past two decades, and graduate students now account for nearly half of newly originated loans.

Many of those graduate programs leave students with debt entirely out of proportion to the labor market value of their degrees. Students are stuck with debt they cannot afford, while taxpayers must pick up the tab for unpaid balances. Graduate lending is a major factor in the student loan program’s transformation from a moneymaker to a drag on the federal budget.

The proposed caps on graduate lending are welcome. But the bill could go further. Indeed, there is little case for the federal government to be involved in graduate student lending at all. The private sector could easily handle the credit needs of students pursuing high-return graduate degrees such as law of medicine; federal intervention mainly serves to subsize low-quality programs that could not survive otherwise.

Simplified repayment plans

The confusing array of loan repayment plans is long overdue for simplification. The bill would create just one income-driven repayment plan for new borrowers (down from four currently) based largely on today’s REPAYE plan, which the Obama administration introduce in 2015. While that plan is already extremely generous towards borrowers with large loan balances, capping new loans on the front end should lower the overall burden on taxpayers.

The Republican proposal reverses the most costly provisions of the new income-driven repayment plan that the Biden administration proposed earlier this year. That plan would dramatically reduce payments for all borrowers. Millions would never pay a single cent towards their loans, turning the student loan program into a de facto free college program. The Congressional Budget Office figures the Biden plan would cost $230 billion—almost as much as mass loan cancellation itself—and cause increases in tuition and future borrowing.

The Republican bill does preserve two provisions of the Biden plan which would help distressed borrowers for a relatively modest cost. First, the bill automatically enrolls delinquent borrowers in the income-driven repayment plan, reducing paperwork burdens. Second, it offers earlier forgiveness for borrowers with low balances, who make up the majority of those defaulting on their loans. The early forgiveness provides an extra incentive for these borrowers to get out of default and start repaying their loans, and the fiscal cost is low due to the fact that many are not going to repay their loans anyways under the status quo.

New accountability rules for colleges

One of the most pressing problems in higher education is the abundance of federally-funded programs that do not leave students with a positive return on investment. The legislation would cut off federal loan funding to programs where former students’ earnings are below a certain threshold. Low earnings leave students unable to repay their debts, which is the root of much student loan distress. Institutions such as Columbia University would no longer be able to offer $180,000 master’s degrees that lead to earnings of just $30,000.

I have previously criticized the use of earnings thresholds as a tool for accountability in higher education. The mechanism is blunt and does not consider the costs associated with college: tuition and opportunity cost. Consider two programs: a nine-month medical assisting program costing $5,000, and a four-year theater program costing $100,000. Even if the two programs both produce earnings of $25,000, policy should be more forgiving towards the cheaper program.

As an alternative, I have proposed holding schools financially responsible for unpaid student loans. While student loan repayment outcomes are dependent on earnings, they also consider whether costs are commensurate with earnings, and reflect the direct burden on taxpayers.

Still, the accountability provisions of the bill are a clear net positive. Most low-value programs will find it impossible to continue operating without federal loan dollars; the closure of these programs will protect students. Students will shift towards programs that provide better financial returns and enable faster loan repayment. The result is a net win for both students and taxpayers.

Standardized disclosures

Students often have difficulty understanding the true cost of college because schools have every incentive to obfuscate it. A Government Accountability Office (GAO) investigation showed that most colleges do not provide students with an accurate net price (college costs after grant and scholarship aid, but before loan “aid”). GAO found that 24% of colleges do not distinguish between grant and loan aid; many never even use the word “loan” on financial aid offer letters. One offer listed a “net price” of $350 that included $40,000 worth of loans.

The result of this chicanery by universities is that most students underestimate how much they have borrowed. Some don’t even know they have loans. The deliberate misreporting of student loans and net price by colleges contributes to a feeling that students have been scammed by the higher education system and feeds political pressure for loan forgiveness.

The standardized financial aid award letter in the Republican bill is an important step forward. Prospective homeowners receive a standardized form disclosing the details of their mortgage; it should be no different for prospective students. The bill could even go further by requiring colleges to disclose estimated monthly loan payments and expected earnings after graduation as well.

Transparency

Data on college costs and outcomes have improved significantly in recent years. Partially as a result of that increased transparency, students have begun shifting enrollment towards college majors that pay better, and colleges have cut tuition in real terms. But there is still work to be done. The College Transparency Act (CTA), a bipartisan bill included in the Republicans’ package, would collect, aggregate, and publish more data so students can make better decisions.

For instance, CTA will collect data on net tuition prices so students can comparison-shop between colleges before filling out an application. CTA will also produce more comprehensive data on students’ earnings after graduation, giving students a broader array of information about expected outcomes and whether they can repay their loans. Moreover, while many students are interested in starting at a community college and transferring to a four-year school, this pathway often doesn’t work out. CTA will collect better data on transfer students’ outcomes so students can better understand whether such a strategy might work for them.

The data will also be useful for policymakers, as it will allow more research to inform policy choices. Consider the study I cited earlier, showing the link between unlimited federal lending and tuition hikes. That research was only possible with student-level data on tuition and debt burdens, which currently does not exist at the federal level (the authors used a state dataset from Texas). CTA will allow much more research into the effectiveness (or, in many cases, the lack thereof) of federal higher education programs.

A strong bill which could go farther

Senate Republicans’ higher education overhaul would be a major improvement on the status quo. The loan limits and accountability provisions would protect students from low-quality programs, while the changes to repayment would simplify the system and save taxpayers money. Standardized disclosures and better-quality data are long overdue.

If the bill lacks for anything, it is boldness. Rather than capping federal graduate loans, policymakers could comfortably abolish them entirely. Stricter accountability for high-cost degrees that barely clear the stated earnings thresholds may also be necessary, as the financial value of college depends on both benefits and costs. But while there is always room for improvement, the bill in its current form would unquestionably create a saner, sounder student loan system.