In April 2021, President Joe Biden announced a grand plan to erase the tuition bill for every community college student in America. It was a Bidenesque spin on the “free college” agenda, targeting community colleges, a cause dear to first lady Jill Biden, and the working class. But that plan was tossed in the dustbin along with much of the “Build Back Better” agenda. A year later, Joe Biden was back with a new plan that would subtract $10,000 from the balance held by nearly all federal student loan borrowers, and up to $20,000 for low-income students. But that plan was met with lawsuits from conservative groups and is currently on hold. The Supreme Court has scheduled arguments in the case for February.
What few people have noticed in all the controversy was the other student loan forgiveness policy that Biden announced in August — one that, unlike Biden’s signature proposal on student loans, doesn’t have any major obstacles standing in its way.
The inattention was understandable. It sounded like some regulatory improvements to an existing loan program that has been widely criticized as an overly complicated and inadequate failure. But a close look at the numbers reveals something very different — something more like the handiwork of Biden’s laser-eyed, Iron Throne-bestriding alter ego, Dark Brandon.
By turning all the dials to 11 on a decades-old loan repayment regulation, Biden has quietly resurrected his free community college initiative. And more: He has created an enormous, permanent new source of college funding, one that could fundamentally change the economics of higher learning.
The Biden plan is an unprecedented attempt to turn the arcane mechanisms of loan forgiveness into a broad solution for college affordability, using executive power to do what Congress would not. But it’s also a gamble that the Department of Education can finally make loan forgiveness work. The financial future of the next generation of college students hangs in the balance.
How it works
Congress created a program called income-driven repayment, or IDR, almost 30 years ago. It has two main components. First, monthly loan payments are limited to a percentage of the borrower’s disposable income, defined as their total income minus the cost of living, instead of a standard plan that requires a predetermined monthly payment. If their total income is less than the cost of living, they don’t have to make a payment at all, and their loan doesn’t go into default, which helps financially struggling borrowers.
But this first component created a problem. Presumably, people would choose IDR only if the monthly payment was less than they owe under the standard plan, where you make the same monthly payment for 10 years and then the loan is fully repaid, like a mortgage. But when the payment is lowered under the IDR plan, the loan still accumulates interest, which then gets added to the original balance. If payments are lower than the interest that accrues, people in IDR see their balances go up, a process called “negative amortization.”
The solution was in the second component of IDR: loan forgiveness. After borrowers made payments under IDR for a certain amount of time, the Department of Education would forgive any remaining balance.
The response was … crickets. Only a small fraction of borrowers signed up.
The problem came down to three key numbers: the cost of living, the percentage of disposable income (that is, total income minus the cost of living) borrowers owe each month and how many years of payments trigger loan forgiveness. Congress left it up to the Education Department to set those values. It decided on the federal poverty line, 20 percent of income and 25 years of payments, respectively.
In the end, the point of IDR is to lower monthly payments. However, in the long term, borrowers often ended up paying more and living with debt longer (as seen in the chart below).
Under those parameters, IDR was stingy — many people with low incomes didn’t benefit. For other borrowers, spreading out payments over 25 years meant paying more on their loan, even with some of the balance forgiven. The IDR plan was a disappointment, and another decade went by, during which colleges relentlessly increased prices and loan balances ballooned.
In 2007, Congress rolled up its sleeves and decided that the best course was the same plan, but with more generous parameters, including cutting the forgiveness period to 10 years for people in public service jobs. Then Barack Obama was elected and proposed making the parameters more generous still. Congress agreed, and the Obama administration used its discretion to set loan forgiveness parameters under the 1993 law to speed up the implementation, increasing the cost of living and cutting the percentage of disposable monthly income owed. It also reduced the number of years before loan forgiveness was triggered.
This still didn’t do much for community college students, who tend to not borrow much because community colleges are generally pretty affordable and their degrees shouldn’t, in theory, take long to complete.
It was, however, a boon for graduate students, who tend to borrow much larger amounts than undergraduates. After 2008, the largest generation of college students in American history looked out into the burning wasteland of the Great Recession labor market and said, “Uh, no thanks, I’ll stay here for a while.” From 2014 to 2020, as the number of graduate students swelled, IDR enrollment more than quadrupled, from 1.9 million to 8 million borrowers, representing over $500 billion in debt.
But all those big loans and low monthly payments meant an explosion of accumulated interest and negative amortization. This problem was supposed to be solved by loan forgiveness. But when all the promised forgiveness timelines started to converge during the Trump Administration in 2018 — 25 years since the original IDR and 10 years for public servants under the newer IDR — the result was an enormous bureaucratic train wreck.
Hundreds of thousands of people applied for loan forgiveness, and more than 99 percent of them were rejected, for a variety of reasons — Congress had made the process far too complicated, the private firms that the Education Department contracts with to service the loans did a bad job, and people didn’t understand that “10 years” actually meant “120 months in which you were employed full time in a qualifying job and made payments on your loans.”
This radicalized the already-pretty-radical student loan forgiveness movement. To them, IDR wasn’t just a failure — it was a trap. Without loan forgiveness, negative amortization meant people would be in debt forever. As soon as Biden was elected, they began pressuring the administration to stop trying to make debt bondage more palatable and instead just wipe it out. Pressure grew after free community college failed, and in August, Biden finally came through.
But even if mass loan forgiveness happens — the six-member conservative majority on the Supreme Court has recently been very skeptical of broad new assertions of federal authority — it applies only to current debtors. The problem of future debt remains unsolved, and Democrats don’t have enough votes in Congress to reform the system legislatively. So Biden turned to the broad and uncontested authority Congress granted the president back in 1993 to create new IDR plans, and proposed yet another one — this time, with a different set of students in mind.
The Biden administration and IDR 3.0
The parameters for the latest, greatest IDR are still being finalized by the Department of Education, but the top-line numbers take the Obama-era changes even further, again increasing the cost of living, slashing the percentage of monthly income owed for undergraduates, and cutting the number of years before loan forgiveness in half — but only for people who borrow less than $12,000. Importantly, the Biden plan also lists a fourth change: eliminating negative amortization.
In a fact sheet, the White House said these changes would “allow nearly all community college borrowers to be debt-free within 10 years.” That’s actually a huge understatement. Based on how much typical community college students pay for college and earn after graduation, it would allow a great many of them to be payment-free for 10 years, or close to it.
The typical community college student earns just over $36,000 10 years after starting school. According to an IDR calculator developed by the Urban Institute, a student who borrows less than $12,000 and earns that amount would owe exactly $0 on their loan. The would be required to make no payments for 10 years, and then the loan would disappear.
The Biden administration has taken the benefit parameters of IDR and dropped them squarely onto the fat middle of the community college student income curve. Safety net for the unfortunate few has become subsidy for the everyday many, and the number of people who could benefit is enormous. There are currently 6.3 million students enrolled in community college, and many multiples of that who will be enrolled in coming decades. For 96 percent of them, two years of tuition is less than $12,000 — and that’s before applying Pell Grants and G.I. Bill scholarships, at least one of which nearly half of community college students receive.
Some people also pay more than $12,000 to attend community college. But only 15 percent of community college students currently take out federal loans at all. Many students with above-average costs could borrow the maximum $12,000 amount — money they would probably have otherwise paid out of pocket — and pay little or none of it back.
In low-tuition states like California, the Biden IDR plan will be much more generous than the doomed Biden free community college plan. $12,000 won’t just cover tuition but also offset the cost of books and room and board. The Biden plan also has the advantage of progressivity — it wouldn’t subsidize tuition for the relatively small number of community college graduates who earn large sums of money after graduation.
By taking advantage of 1990s regulatory authority to make IDR far more generous than Congress originally envisioned, Biden has developed a free community college plan at a long-term cost to the Treasury of hundreds of billions of dollars. The question now is what happens once students, colleges and Biden’s political opponents realize what he’s done.
To implement Biden’s proposed IDR plan, the Department of Education has to issue new regulations. That hasn’t happened yet, so the department hasn’t published an official estimate of how much the plan will cost. But the consensus among analysts is that $200 billion over 10 years is a reasonable guess. (In a recent letter to the Biden administration about policies she describes as a “student loan giveaway to the wealthy,” Rep. Virginia Foxx of North Carolina, the ranking Republican on the House Education Committee, noted that “some experts have estimated the administration’s new IDR plan could cost taxpayers an additional $450 billion over the next decade.”)
To put $20 billion a year in perspective, it’s about twice the current cost of the G.I. Bill and two-thirds the cost of the Pell Grant program, which serves nearly 7 million people. It is arguably the biggest new college aid program in half a century and immune from the whims of the annual congressional budget process.
The amount is so large because the new IDR doesn’t apply only to community college students. In fact, most of the benefits will likely go elsewhere. All undergraduates may qualify for the reduced 5 percent payment, and people with bachelor’s degrees who borrow typically leave school with nearly $30,000 in debt. Graduate students, who make up a vastly disproportionate share of borrowers with high loan balances who are currently enrolled in IDR, could benefit from the higher cost of living allowance and the elimination of negative amortization.
There will be challenges in getting students to sign up. The best way to make community college free is to not charge tuition up front. That’s why Biden tried that approach first. Creating free college through the student loan apparatus involves pumping tens of billions of dollars backward into the system, from the wrong end, rendering tuition free retroactively, but only after requiring students to successfully perform a pantomime of indebtedness for 10 years without missing a step.
Research shows that a significant number of community college students are “loan averse,” which means they are unwilling to take on educational debt even when it might be in their long-term financial interest. Some community colleges don’t participate in the federal student loan program at all, and many direct their students away from loans as the first option for paying for college. David Baime, senior vice president for government relations at the American Association of Community Colleges, said, “It would take a complete reorientation of our whole outlook and perspective on financing our students to broadly encourage them to go into debt.”
There’s also the issue of whether $20 billion in new subsidies might induce colleges and universities to raise their prices. There is a contested literature on this question in terms of college subsidies and prices in general, in part because college markets are complicated — people usually decide whether and where to go to college and how to pay for it, then complete their studies with a diploma (or drop out), and then figure out how to pay back their loans. The loan repayment scheme isn’t usually part of the initial decision. The new IDR is, in some ways, a grand experiment to see just how many billions of federal dollars are enough to change that.
The new IDR was created in response to a political movement that defined student debt as a terrible burden that must be expunged by any means necessary. If the Biden administration plan for mass debt forgiveness is struck down by a conservative Supreme Court, the principal legacy of that response may be a program that induces millions of new students to take out loans they would have otherwise forgone. That puts the burden on colleges, students and the Department of Education to make sure this bold but risky plan actually works.
A previous version of this article used different compounding periods for calculating interest on loans for 10-year and IDR plans. This version has been corrected to use the same compounding periods.
Thanks to Lillian Barkley for copy editing this article.