This month, interest rates on federal student loans began rising, and payments were scheduled to begin in October — about three and a half years after they were initially due. paused by the Trump administration in March 2020. While the pause was applauded as a necessary measure to help supposedly struggling student loan borrowers during the pandemic, the pause not only lasted far longer than the original justification would imply; This left both taxpayers and student loan borrowers behind. borrowers are worse off.
The repayment pause on federal student loans was first implemented just days after the outbreak of the COVID-19 pandemic in the United States. In subsequent years, the break was extended by eight different time. While Education Department officials tried to justify the extensions with legal arguments for the first two extensions, the ministry offered no legal justification at all for the last six. Twice, officials extended so-called “final” extensions of the pause.
But the one from June debt ceiling agreement ordered that the recess would finally end. As part of that plan, interest on federal student loans started at the beginning of the month, with the first payment due in October.
For the past three years, halting federal student loan repayments has been a disastrous policy. In total, the break will have cost taxpayers an amount estimated $200 billion in lost revenue. And for all this money there isn’t much to see. According to a June article from the National Bureau of Economic Research, borrowers now have more debt than they started before the hiatus started, not less.
In addition to the high economic costs of the pause, another expensive program is poised to dominate the federal student loan system.
More than 4 million borrowers have now enrolled in the SAVE plan, a modified version of the most popular income-driven repayment (IDR) plan for student loan borrowers that was introduced along with Biden’s now-defeated forgiveness proposal. Under the old system, borrowers could enroll in a program that capped their monthly loan payments at 10 percent of their discretionary income (calculated on income above 150 percent of the federal poverty level), with loans typically forgiven after 20 or 25 years.
But under the new plan, borrowers will pay much less. Monthly payments are set at just 5 percent of discretionary income (which is now calculated as income above 225 percent of the poverty level), with repayment due within ten years if the borrower’s balance is less than $12,000. And unlike the previous plan, incomplete or late payments will still count toward the borrower’s ten years of required payments. The plan alone will cost taxpayers an estimated $475 billion over the next decade.
The plan is so generous, allowing borrowers to pay back such a small amount of their loans in many cases before being forgiven, that some critics have described it as a way to essentially turn student loans into grants — a step that will encourage students to take out a loan. more student loans, not less.
“The changes mean that most student borrowers expect to pay back only a fraction of the amount they borrow, partially turning student loans into grants.” wrote Adam Looney, a senior fellow at the Brookings Institution, last year. “It’s a plan to reduce the cost of college, not by lowering tuition, but by offering student loans and then allowing them to default on paying them back.”
While restarting federal student loan payments is an important step forward, the damage done by the pause — and other Biden administration student loan policies — will continue to harm taxpayers and do little to actually address the factors contributing to that lead individuals to take on too much. student loans.