Rethinking Student Loan Forgiveness: Encouraging University Accountability and Responsible Lending Practices

Undergraduate student loan debt is a hefty burden for millions of Americans, increasing by more than 300% over the last 25 years [1]. With that being said, student loan debt has recently moved to the forefront of educational policy issues, making it a highly debated topic in this year’s presidential election. Multiple administrations and politicians have suggested potential remedies; however, many are often unrealistic or fail to recognize basic economic principles. 

The Biden-Harris Administration has canceled nearly $138 billion in student debt for around 3.9 million borrowers through a series of executive actions [2]. When federal student loan debt is canceled, it means the Department of Education forgives the loans, and the borrowers no longer need to make payments on those loans. The government essentially writes off the debt from its books and does not expect to recover it. The universities were already paid when the loans were initially disbursed, so they do not receive any additional money.

Biden’s relief program targets borrowers qualifying for programs like Saving on A Valuable Education (SAVE), Public Student Loan Forgiveness (PSLF), closed school discharge, and other federal forgiveness programs, eliminating the need for an application [3].

According to the most recent data from the College Board, 54% of bachelor’s degree recipients graduated with student debt in 2020-21 [4]. Among these graduates, the average student debt burden was $29,100. SAVE, a revamped version of the old REPAYE plan, allows borrowers with original loan balances of $12,000 or less to receive loan forgiveness after 10 years of payments (instead of the typical 20 or 25 years required under other plans). For every additional $1,000 borrowed above $12,000, an extra year is added until forgiveness is granted [5].

Some of Biden’s proposals have been met with legal blowback. Still, as recently as October 3rd of this year, a federal judge ruled that Biden can move forward with a much more aggressive, expensive portion of his student loan forgiveness plan. This plan allows borrowers to eliminate up to $20,000 in accrued interest, regardless of income. Single borrowers earning below $120,000 and couples earning under $240,000 can qualify for full interest forgiveness if enrolled in an income-driven repayment plan. The White House estimates this would cost a staggering $147 billion over 10 years [6].

While wholesale student loan forgiveness may seem appealing to U.S. citizens — the middle class in particular — it is inflationary, regressive, and unfair to the millions of Americans who never went to college or those who paid their college loans in full. There are very real economic consequences and effective, alternative solutions to those typically suggested by politicians. 

How do we bend the cost curve of tuition, stimulate alternative school formats, and make loan payments more manageable for those who do borrow to attend school? The answer may lie in recoursing a portion of a student's loan to the institution of attendance. Furthermore, if the student does not repay their loan, the school is responsible for that portion. 

One of the biggest problems with student loan forgiveness is the misaligned incentives it creates for universities. When students don’t have to pay back the loans they took out to go to college, colleges don’t have any reason to keep prices low or improve their students’ outcomes. Additionally, there are few regulations that prevent taking out loans to pursue low-quality or excessively costly programs. Students are led to take out loans they won’t be able to pay back, and the institutions that enroll these students and set the cost of attendance don’t bear any responsibility for the expenses they set [7]. Biden’s loan forgiveness plan appears to be helping middle-class citizens, but it only makes higher education more expensive and exclusionary than before. 

The government largely subsidizes most universities because of their unreasonable prices, and loan forgiveness will only further contribute to this issue. It encourages excessive borrowing from students, confident they won't have to repay the total amount due to forgiveness. This, in turn, could lead to even higher college costs, as the institutions wouldn't feel pressure to control prices. 

If universities bear responsibility for their students’ loans, they are incentivized to lower student loan costs [8]. Lowering costs may force schools to look for inefficiencies in their business model, such as bloated administrative costs, underutilized facilities, or outdated resource allocation methods. Each of these drives up expenses without contributing meaningfully to the quality of education. Schools might be prompted to streamline operations, cut excess spending, and focus on their core mission of providing quality education.

Additionally, universities desire better student outcomes to ensure that their students will repay their loans on time. They are incentivized to offer more value in their education so that their students receive good job prospects, increasing the likelihood of students being able to pay back their debt on time.

Citizens should have the opportunity to pursue higher education if they desire, regardless of their financial situation. While federal loan cancellation may seem appealing, it will raise the costs of college and make it even more exclusionary than before. Additionally, the policy enables a cycle where students are encouraged to take out loans they cannot pay in full. 

By making schools partly responsible for student loans, we can encourage them to lower costs, improve student outcomes, and focus on providing valuable education that leads to successful careers. This approach would reduce the financial burden on students and help make higher education more accessible and affordable in the long term.

All content is the intellectual property of the Virginia Undergraduate Business Review.

REFERENCES

[1] Looney, A., & Yannelis, C. (2024, September 23). What went wrong with federal student loans? Brookings. https://www.brookings.edu/articles/what-went-wrong-with-federal-student-loans/

[2] The White House. (2024, September 29). FACT SHEET: President Biden cancels student debt for more than 150,000 student loan borrowers ahead of schedule. https://www.whitehouse.gov/briefing-room/statements-releases/2024/02/21/fact-sheet-president-biden-cancels-student-debt-for-more-than-150000-student-loan-borrowers-ahead-of-schedule/

[3] The White House. (2024).

[4] Haverstock, E. (2024, September 23). Student loan debt statistics: 2024. NerdWallet. https://www.nerdwallet.com/article/loans/student-loans/student-loan-debt

[5] The White House. (2024).

[6] Popli, N. (2024, October 3). Biden can move forward with student loan forgiveness. What happens next? Time. https://time.com/7034708/biden-student-loan-forgiveness-plan/

[7] Looney, A., & Yannelis, C. (2024).

[8] Watkins, S. (2017, June). Colleges allowed to limit students’ federal loans. James G. Martin Center. https://www.jamesgmartin.center/2017/06/colleges-allowed-limit-students-federal-loans/?gad_source=1&gclid=Cj0KCQjw99e4BhDiARIsAISE7P9bq0TJ7Sw0VdDTZEaUgkhgwaMR68C7LXiftsNf0SBNpdavl_CUnzEaAktUEALw_wcB

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