A smarter way to help students
It’s an election year, and Democrats are loudly decrying the cost of higher education and demanding the government spend more to cut student debt. The Senate on Wednesday rejected one of their less-sensible ideas. But there are better ones that lawmakers should embrace.
The Senate halted a bill from Sen. Elizabeth Warren, D-Mass., that would have allowed students with old government loans to refinance them. Instead of continuing to pay interest at, say, the 6.8 percent rate that prevailed for many years, they could take the 3.86 percent rate the government is offering current borrowers.
Warren’s plan had some appeal, and Democrats will no doubt harp on its rejection in the coming campaign. It seems only fair to let more debtors in on the deal that the government is offering current students. But those paying higher rates already got a good deal, taking loans out at rates and with terms that the private sector would never have matched. And the refinancing scheme would have been expensive, costing some $51 billion over 10 years, according to the Congressional Budget Office. Warren proposed to raise taxes on the wealthy by $72 billion, more than offsetting the cost. Yet if the government is to levy a large amount to make higher education affordable, lowering rates on old student loans is far from the best way.
While he endorsed Warren’s plan, President Barack Obama also brought attention to a much worthier effort: fixing the government’s income-based repayment system. Lowering rates widely doesn’t target aid to the borrowers who need it most. Over time, many professionals can afford to pay higher interest rates to the government that helped them get valuable educations. Carefully adjusting graduates’ monthly payments to their incomes would be a more progressive method.
In an executive order, Obama modestly expanded the existing pay-as-you-earn program, which caps monthly payments at 10 percent of a borrower’s income. The government forgives any remaining balance after 10 years for those in public service and after 20 years for everyone else.
Congress could do much more. Lawmakers should consolidate the many federal income-based repayment programs into one simple deal for all debtors. They need to reduce the incentive for graduate students to take out excessive loans. And they need to make sure that those who deserve and receive debt forgiveness aren’t taxed on the amount forgiven, since the IRS currently counts waived student loan balances as income. Another good idea is bolstering the Pell Grant program to offer year-round grants, so that students can study over the summer, or expanding access to the Pell program to more people.