By Tirzah Duren, American Consumer Institute
President Biden’s student loan forgiveness plan was met with vocal responses from proponents and opponents alike. Some believe the action is essential to raise living standards and help those struggling to make ends meet. On the other hand, critics contend that forgiving loans will only fuel inflation and provide a handout to the rich. What is missing from the conversation is the reality that student loan forgiveness treats the symptoms without treating the actual disease of sky-high tuition.
The primary aspect of President Biden’s plan is the proposed forgiveness of between $10,000 and $20,000 dollars for eligible borrowers. However, the plan also includes restructuring how the federal government calculates monthly payments, which is currently calculated by taking 10 percent of non-discretionary income—earnings minus necessary spending. The Department of Education proposed raising the non-discretionary income limit and Biden took this one step further by slashing the monthly payments from 10 percent to 5 percent of non-discretionary income. Combined, these actions would lower the monthly payments for federal loans.
Biden’s plan also includes making changes to the Public Service Loan Forgiveness by easing the stringent requirements for qualifying payments, so that the federal government can forgive qualifying loans quicker. Lastly, Biden announced that he plans to “protect future students and taxpayers by reducing the cost of college and holding schools accountable when they hike up prices.” However, his proposed course of action involves increasing funding for Pell grants, which would further drive the debt cycle.
While Pell grants permeate the student debt forgiveness plan, what’s missing are reforms that could stop the cycle of debt. Under Biden’s plan, Pell grant recipients will receive an extra $10,000 in loan relief, which Biden justifies by arguing that Pell grant recipients are from lower-income families—93 percent of funds went to students from families earning less than $60,000 in 2019-20. Biden further argues that Pell grant maximum funding—currently $6,895 for 2022–23—should increase as tuition costs have far outpaced these grants.
However, posing Pell grant increases as the solution to high college costs does nothing to address the problem, and could add more fuel to the fire. Started in 1965, the Pell grant program has not made college more affordable. For example, when measured in 2021 dollars, the average student debt for a graduating student with a bachelor’s degree went from $7,458 in 1970 to $31,100 in 2021.
There is a direct link between federal funding and the increase in costs. In 1987 the then Secretary of Education William J. Bennett developed the Bennet Hypothesis which argues that increases in financial aid allows colleges to increase tuition because the funding separates the student from the cost. Numerous academic studies have supported this hypothesis by finding that federal subsidies impact the price of higher education to varying extents.
Since federal funds are at least partially to blame for increased tuition costs, there could be an argument made for the federal government to accept some of the responsibility and some of the consequences, but Biden’s plan doesn’t do that. Instead, he pushes to increase Pell grants without other reforms.
Pell grants—and other forms of federal funding—have helped inflate the cost of tuition because it separates the consumer from the product at least until after graduation. Federal funding also means that while prices generally communicate differences in value or quality, these connections are obscured in higher education, making it harder to be an informed consumer.
Additionally, there is evidence that some colleges are less than honest with the career and earnings their students should expect. For example, multiple lawsuits have accused colleges of using misleading post-graduation employment data. With some schools using statistics that count non-degree related jobs such as waitressing to improve their numbers. In fact, along with Biden’s forgiveness plan, the Department of Education has forgiven $6 billion in loans for students defrauded by universities.
Despite the shortcomings of higher education, a blanket forgiveness of student loans without serious changes to how schools are funded and held accountable to their students doesn’t address any of the problems. Furthermore, loan forgiveness doesn’t prevent the following generation from falling into the same cycle of debt. Before forgiving student debt, President Biden should first look at the policies—such as Pell grants—that have helped drive the high tuition costs in the first place. Otherwise, we will be doomed to repeat the same mistakes.
Tirzah Duren is a policy analyst at the American Consumer Institute, a nonprofit educational and research organization. You can follow her on Twitter @ConsumerPal.