Way More Than $10,000 in Student-Debt Forgiveness

The same dynamic has played out in publicly funded institutions. In 1963 Ohio State’s student newspaper was wringing its hands about the jump in “tuition fees” to an unheard-of $375 a year. This year, the university’s annual in-state tuition is $12,485, and, as every parent with a college-age child knows, room and board is a hefty additional sum.

Ohio State is no aberration. In the wake of the Great Recession, most states reduced their appropriations for public higher education, shifting costs from taxpayers to students and their families. Although appropriations per student have recovered somewhat in recent years, they remain lower than they were 15 years ago and cover a smaller share of college costs.

The novels of my youth featured students who “worked their way” through college. Today’s students should do what they can to help their families pay for higher education, but what was possible half a century ago is no longer feasible—even less so for families with several children in college at the same time.

Young people from immigrant and minority backgrounds, many the first in their family to attend college, typically have limited family income and wealth on which to rely. While some receive all-expense-paid scholarships, many have no choice but to incur substantial debt if they want to attend college.

This is the backdrop against which President Biden acted last week. Both the legality and substance of his executive order have proved controversial, even within his own party. Although economists disagree about its effects on inflation, other criticisms have broader resonance.

Some critics insist that the president’s program is unfair to hard-pressed working-class families. Others say it does nothing to curb the soaring costs of higher education. There is merit to these objections, of which the president was well aware during the deliberations that preceded his announcement.

The details of the loan-forgiveness program also can be criticized. A Penn-Wharton analysis confirms the administration’s claim that the bulk of the benefits go to low- and middle-income borrowers. Still, it is hard to defend extending the program to households in the top 10%, earning nearly three times the median family income.

In the long run, however, a largely neglected dimension of Mr. Biden’s order—changes to the program allowing borrowers to repay their loans as a percentage of their income over a fixed period (“income-directed repayment,” or IDR)—might prove even more consequential. The president has increased the amount of annual earnings not counted as income to about $30,000 and reduced monthly payments from 10% to 5% of what does count as income; for borrowers with original loan balances of $12,000 or less, he has reduced the repayment period from 20 years to 10; and for borrowers whose payments are too small to cover interest as well as principal, the unpaid interest will no longer be added to the loan balance.

The results will be dramatic. The average starting salary for students with two years of community college is less than $35,000, which means that loan payments will be based on only $5,000 of earnings—a total of less than $25 a month, including interest. Through the back door, the president will come close to fulfilling his promise to make the first two years of community college free, and almost all borrowers in this category will be debt-free after 10 years.

I don’t object to this outcome, and I suspect that most Americans won’t either. But Mr. Biden’s order also gives higher-income borrowers with larger loan balances an incentive to select IDR. Even after 20 years, the new 5%-of-income cap on repayments guarantees that a much larger share of loans will never be repaid in full. Taking this new incentive into account, the Penn-Wharton model suggests that this feature of the president’s program could cost as much as $450 billion over the next decade. Many taxpayers will wonder why they should subsidize beneficiaries who are likely to enjoy higher lifetime earnings than they themselves can expect.