Republicans Start Reforming Student Loans

Last year’s reconciliation bill put a stop to most student-loan forgiveness, introduced the first meaningful accountability mechanism for colleges since the 1990s, and put a limit on lending for graduate students and parents. The law also overhauled loan-repayment structures, phasing out many legacy plans and replacing them with two options: a mortgage-like plan with fixed payments or an income-driven repayment plan under which monthly payments vary based on income. These plans replaced many of the old ones that President Obama, and Biden even more so, had made too generous.

Trump’s reforms dramatically lowered taxpayers’ projected loss on student loans. Under the Biden administration, taxpayers were expected to lose 18.6 cents for every dollar lent in 2027; under the new plans, that figure is down to 4.6 cents.

Together, these policy changes have resulted in the most radical overhaul of student loans in decades.

Perhaps the most important policy change regarding student loans was the abandonment of the previous administration’s view that student loans ought to be forgiven en masse with the stroke of a pen. Aside from being illegal, mass student-loan forgiveness is a bad idea for any number of reasons, among them that it is too expensive, too poorly targeted, and too regressive to constitute good policy. Although the Supreme Court overturned one of the Biden administration’s $500 billion forgiveness plans, there were many other attempts at forgiveness at various stages of enactment by the time Biden left office.

Only one of them had to make it through legal challenges to result in mass student-loan forgiveness. Even though none of its planned major policy changes came to fruition, the Biden administration was still able to forgive around $180 billion in student-loan debt, a figure that will rise significantly over time because future loan forgiveness has already been baked in (e.g., the Biden administration counted the student-loan payment pause as if payments were being made, which means many borrowers will skip years required to qualify for loan forgiveness under plans that require a set number of years of repayment).

Blocking this drive toward mass student-loan forgiveness is the Trump administration’s most important education policy accomplishment. But this was victory in a battle, not the war. A future Democratic administration could seek to resurrect mass student-loan forgiveness, particularly because the Biden efforts have somewhat normalized the discussion of it. Loan forgiveness is also popular among the key Democratic demographic of college graduates, especially those who are underemployed or downwardly mobile.

But even if a future Democratic president did nothing, there remains too much student-loan forgiveness authorized by current law. For example, the Public Service Loan Forgiveness plan, which forgives the debt of government and nonprofit workers, provides these favored workers with huge windfalls (an average of $74,400 per person). But for now, the threat of mass student-loan forgiveness has largely been quelled.

Ever since the Obama administration nationalized student loans in 2010, the federal government has been the loans’ only lender, exposing taxpayers to losses when students don’t repay. Ideally, student lending would be privatized, but until that is possible, the next best option is to cut off access to loans for the types of education that commonly lead to losses for taxpayers. Since student eligibility is near universal, that leaves limits on which colleges or programs students can use loans to attend as the only way to control lending.

These limits are often described as holding colleges accountable. Colleges have long benefited from weak to nonexistent oversight, a problem that is particularly acute in cases involving student loans that benefit colleges but leave both students and taxpayers worse off. Accountability systems should weed out these programs by ensuring that colleges benefit only when students and taxpayers benefit too.

The Trump administration’s new do-no-harm accountability mechanism cuts off future loan money for programs whose graduates do not earn more than a comparable high school graduate (or, in the case of graduate programs, a comparable bachelor’s degree holder). This policy is a step in the right direction, and it is striking that about 6 percent of college programs are likely to fail even this minimal test. The standard does indeed set a very low bar: Around 31 percent of college programs are negative returns on investment, and because the accountability measure ignores students’ debt burdens, many programs that only marginally increase graduates’ earnings could still qualify for federal aid even if the debt that students are left with outweighs those modest gains.

The Trump administration’s next major accomplishment was limiting the amount that graduate students and parents can borrow. One of the main problems with student loans is that generous borrowing limits allow colleges to inflate their prices. Financial aid fuels higher tuition for a number of reasons, including that when quality is unobservable, price is often used as a proxy for quality, so aid both enables and encourages colleges to raise their prices. There is overwhelming evidence that schools do indeed raise prices when their students can borrow more. One recent analysis found that “sticker prices went up approximately dollar for dollar with increases in federal loans.”

Limiting how much students can borrow doesn’t solve the problem of higher tuition, but it does limit the damage. While undergraduate borrowers were already subject to limits — and those limits didn’t change under Trump’s reforms — new limits were established on another federal loan program, Grad PLUS and Parent PLUS, to which graduate students and parents had access.

Technically, there was an annual limit on PLUS loans, but it was determined by each college; there was no aggregate limit. As a result, it was possible until recently to take out a million dollars in these loans — as some unwise individuals did. The lack of lending limits in the PLUS programs thus provided colleges with a blank check at the expense of students and taxpayers.

Fortunately, the Trump administration imposed caps on graduate and parent borrowing. Grad PLUS is being phased out entirely. Graduate students are now restricted to $20,500 annually and $100,000 in total, though some graduate programs in fields like law and medicine qualify for higher professional loan limits of $50,000 annually and $200,000 in total. Meanwhile, Parent PLUS borrowers are now limited to $20,000 annually and $65,000 in total per student.

While we’ll need to wait a few years for data confirming that the new loan limits placed downward pressure on tuition, the American Enterprise Institute’s Preston Cooper has already tracked a handful of colleges that are lowering their prices in response to the new loan limits.

The Trump administration has made great progress on student loans, including reversing the momentum on mass student-loan forgiveness, introducing a new accountability mechanism, limiting lending, and reforming repayment plans. These reforms address some of the biggest flaws in the existing system: namely, taxpayers absorbing losses while colleges face few consequences for programs that leave students worse off.

But the work is not finished. The new accountability standards remain modest, and existing forgiveness programs still impose large costs on taxpayers. Federal involvement in higher education, of course, continues to contribute to rising prices. The ultimate test of these reforms will be whether they force colleges to offer programs that provide real value to students — rather than simply making it easier to borrow.