The Biden administration has announced its most ambitious student debt forgiveness plan yet. Along with previous initiatives, these new efforts promise to reduce or eliminate student debt for more than 30 million borrowers. Unfortunately, this debt-cancellation campaign fails to address the underlying issues with student lending and may further accelerate the unraveling of the federal student loan program.
Broken System Acknowledged by Both Sides
Both President Joe Biden and his Republican critics agree that the loan program is broken. Democrats argue that it has buried students under unmanageable debt, while Republicans believe that Biden’s mass-forgiveness efforts have compromised the program’s status as a loan system rather than an entitlement program.
Privatization: A Potential Solution
Many conservatives argue that the government should exit the student loan business entirely. Privatizing federal student loans—allowing the private sector to take over lending—could be a viable solution. Currently, millions of students pursue degrees that do not improve their financial situation because the federal government provides loans with little regard for program quality or projected earnings.
Institutions have little incentive to improve the return on investment for students and every reason to create new programs and raise tuition to capture more federal dollars. Privatization could change this dynamic. When private lenders use their own money, they have a vested interest in ensuring students can repay their loans, which would incentivize colleges to offer more valuable programs at competitive prices.
Financial Incentives and Outcomes
With privatized loans, colleges would need to ensure their programs provide sufficient value for the money spent, leading to better postgraduate economic outcomes for students. This shift is crucial in today’s higher education landscape, where more than one-quarter of bachelor’s degrees leave students worse off financially than when they started.
Potential Taxpayer Savings
The federal government is projected to lend a trillion dollars in new student loans over the next decade, with the Congressional Budget Office estimating a loss of 25 cents on every dollar lent. Privatizing student loans could save taxpayers at least a quarter of a trillion dollars over a decade. Additionally, ending federal lending would prevent future administrations from promising loan cancellations to gain political support. These savings could be used for deficit reduction or expanding financial aid for truly needy students.
Avoiding Pitfalls in Privatization
Lawmakers must avoid several traps when pursuing privatization. Federal guarantees for private student loans should be avoided, as they transfer the risk of default from lenders to taxpayers. Returning to programs like the Federal Family Education Loan (FFEL) program, where the federal government guaranteed private loans, should be discouraged. Such arrangements allow lenders to benefit without bearing the consequences of bad loans, reducing their incentive to ensure loan dollars go to quality education.
Encouraging a Thriving Private Market
Scaling back federal lending alone is insufficient to create a thriving private student loan market. Hostile regulators often block private sector innovation by preventing the use of factors like projected earnings or program return on investment in lending decisions, forcing lenders to rely on less relevant metrics like FICO scores. The Consumer Financial Protection Bureau has argued that using a college’s default rate could violate fair lending laws. Without legal protections for lenders basing decisions on college outcomes, overzealous regulators could stifle the private market.
Conclusion
While Biden’s student debt forgiveness initiatives aim to provide relief, they fail to address the systemic issues of the federal student loan program. Privatization, if carefully implemented, could offer a sustainable solution by aligning financial incentives with educational outcomes, ultimately benefiting students and taxpayers alike.