The case of price controls in higher education

President Biden’s recent student loan reform package has several parts. Canceling $10,000 in student loans for people earning less than $125,000, or $250,000 for families (and $20,000 for Pell grant recipients), got the most media attention – and caused an epic meltdown among Austere deficit paranoids – but the reimbursement changes are arguably more significant.

Concretely, the system of “reimbursement according to income” (IDR) is now much more generous. Once enrolled, borrowers with undergraduate debt will now be limited to paying only 5% of their Discretionary Income, while those with graduate debt will be limited to 10%. Unpaid interest will no longer be capitalized into the loan (thus preventing the bloated debt balances so common today), and those with debt below $12,000 will have it written off after just ten years.

As far as students are concerned, so much the better, even if, as David Dayen points out, there will be administrative problems if this is done according to current practices. It would be much better if all students were automatically enrolled in IDR with minimal hassle.

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But the new IDR system creates the wrong incentive for colleges and universities. If students can take out loans of any size and not have to worry about paying them back, then schools have every reason to raise their prices to the moon. This was a conservative argument about the student loan program in general, but it is more acute if the student debt burden is not so heavy.

Fortunately, the government can and should prevent this by requiring any school that accepts federal student loans (that is, almost all of them) to keep their tuition below a modest cap.

Imagine a high school student thinking about which college to enroll in. One school offers mind-blowing amenities — a fitness center like something out of an oligarch’s resort, ultra-luxurious dorms, a team of in-house chefs, weekly yachting expeditions, and more. – with tuition fees of $150,000. But don’t worry, admissions staff say, while she’ll rack up $600,000 in debt over four years, the school has a program that will cost her zero. The school will cover the 5% IDR payments from its federal silver dragon treasury, and when those payments expire after 20 years, the debt will be forgiven.

As Matt Bruenig at the People’s Policy Project points out, many law schools already have a system like this, called Loan Repayment Assistance Programs (LRAPs), which involves covering the cost of payments if graduates become advocates. public or other profession eligible for the Public Service Loan Forgiveness Program (PSLF), where borrowers pay 10% of their Discretionary Income for student loans for just ten years and then are forgiven the balance. (In theory.)

Now, a PSLF-like program for undergraduate loans has even better monthly payment terms, with only a 5% revenue share, regardless of their debt balance. Colleges can create a fund to pay for this for graduates, while collecting ever-increasing amounts from the government on loans. It really is a way for colleges to cheat the system and extract a fortune from the public purse.

Under the current regulatory status quo, the Department of Education arguably already has the authority to add at least a facsimile of a tuition cap.

Now there will be limits to how fast this will happen. Most students cannot simply choose the most expensive university they want, as there is always a selective admissions process. And some institutions may worry about sticker shock for incoming students. But once the IDR system is in place, schools will surely catch on quickly. The example is already there, and there is an entire industry of consultants whose goal is to help colleges and universities raise their prices as high as possible. There’s no way they’re missing such a juicy opportunity.

As Bruenig notes, one solution is obvious: simply cap the amount of tuition fees schools are allowed to charge. Australia funds its colleges with an IDR-like system, but tightly controls prices so the government doesn’t get ripped off.

Fortunately, there is already a mechanism available for this: the Program Participation Agreement (PPA), which all schools accepting federal student loans must sign. There are already many requirements for institutions to comply with Title IV of the Higher Education Act, follow rules regarding “financial responsibility”, and so on. The Secretary of Education has broad legal authority to add conditions to these agreements, which we have already seen in action. For example, stricter enforcement of PPAs is how the Obama administration shut down several predatory, for-profit colleges.

Under the current regulatory status quo, the Department of Education arguably already has the power to add at least a facsimile of a tuition fee cap, which grants many “limitation” powers, including including “such other terms as the Secretary may determine to be reasonable and appropriate.” It might also be necessary to limit administrative expenses or create unnecessary new buildings, which have eaten up an ever-increasing proportion of school expenditure over the years.

But if that is too burdensome for the Biden administration, Congress can and should step in with new, explicit powers. If the IDR program is going to be the way higher education operates in the future, there is no reason for it to include a blank check for schools. Even Republicans should agree with this one.

In many ways, this is not an ideal way to fund higher education. In my opinion, it would be better and easier to pay for public school tuition directly from tax revenue, which would actually be cheaper than all the various indirect subsidies already in place. But it would be a big improvement over the status quo. If students won’t have to worry too much about student debt in the future thanks to the government, let’s make sure America gets what it pays for.

James V. Hayes