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Sept. 12, 2023

How the Biden Administration’s SAVE Plan Provides New Urgency to Protect Students and Taxpayers

By Nathan Arnold

On September 1, interest began accruing for tens of millions of federal student loan borrowers, and in October, bills will be due for the first time in more than three years. As borrowers reenter repayment, the Biden Administration is rolling out a new income-driven repayment plan, the Saving on a Valuable Education (SAVE) plan, by far the most generous income driven repayment (IDR) plan for struggling borrowers that has ever existed. This new plan will provide significant financial benefits for low-income borrowers and is a critical federal support for borrowers of color and Black women in particular, who are disproportionately burdened by student loan debt. 

People are taking notice, including 1.6 million borrowers who proactively signed up in the first week. And the Administration is working with advocates, student loan servicers, and community organizations to get the word out to more people. The Administration and its partners are right to encourage struggling borrowers to enroll in this new plan: If a borrower makes less than $15 per hour, their payment on SAVE is likely to be $0 per month, with their outstanding balance not growing and with credit earned toward forgiveness in 10 to 20 years (25 with graduate loans), depending on how much they originally borrowed. Those who instead choose not to make their payments in October will see interest on their loans accrue and their balance grow.

The robust safety net that income-driven repayment provides must be a part of our student loan programs. But it can't operate in isolation. We need to not only protect borrowers while they’re in repayment, but also ensure they aren’t being saddled with unrepayable debt at low-quality programs from the beginning.  To provide an analogy from my life: If your children are smashing wine glasses all over your living room floor, cleaning up the glass is only part of the solution. The root issue—the ongoing smashing of the stemware (and why your children have access to it)—is perhaps even more important to address. 

When there are generous federal student aid benefits, unscrupulous actors across higher education will capitalize on those opportunities to capture additional aid as revenue to the school, often disregarding the impact on those who are saddled with the debt. We have seen this story again (Pell grant fraud rings) and again (Senate Committee investigation found widespread harms in for-profit education), and again (Georgetown law dean recorded acknowledging that Public Service Loan Forgiveness makes marginal debt costless), and again (Corinthian colleges precipitously closing after defrauding students for years). Any plan as generous as SAVE will inevitably become a beacon for exploitation by unscrupulous providers that typically target people like veterans and students of color. As a significant new federal entitlement, the SAVE plan makes it more important than ever that we have strong rules keeping low-quality and overpriced providers out of the federal student aid programs and new statutory requirements that push schools to improve or wind down programs that persistently fail to provide value to students and taxpayers.

The U.S. Department of Education must move quickly to finalize its Gainful Employment and financial value transparency regulations that would ensure career training programs provide minimum financial outcomes for their students and that all programs provide good information to students before they enroll. And Congress must create a robust suite of long-term legislative solutions that protect students and taxpayers no matter what higher education program they attend. For example, the Senate Republicans' Lowering Education Costs and Debt Act proposal would require institutions to demonstrate their programs produce minimum student earnings, similar to the Department’s Gainful Employment proposal for career programs. 

In addition, the design of the SAVE plan creates incentives that we aren’t sure how will play out, like decreasing the marginal cost of borrowing to the point where it may be irrational for students to forgo borrowing up to either $12,000 (the level at which forgiveness under SAVE starts as early as 10 years) or $57,500 (the aggregate maximum borrowers can receive in undergraduate loans). Most likely, it means students will borrow more, and more often. It also creates an incentive for institutions that previously declined to participate in the student loan programs, particularly community colleges, to begin offering loans to their students for the first time. And if there is reduced marginal cost of borrowing, that means incentives for institutions to figure out new approaches to capturing the additional revenue, in the parlance of the industry—typically, keeping the additional loan dollars in the form of increased tuition. There is a real potential for this new repayment plan to significantly impact the landscape of affordability policy in ways we still can’t predict. 

Stakeholders in the higher education field—including funders, policy organizations, and researchers—must start to account for how a further drift towards debt-financed higher education could impact priorities relating to access, affordability, basic needs, institutional pricing behaviors, completion, and the way policymakers examine the costs and benefits of the student loan programs.

The fact that accountability and student protections are already in need of critical strengthening, given that higher education accountability is basically nonexistent, creates urgency for strong front-end protections. At the end of the day, minimizing the risk that students attend a program that does not result in a return on their higher education investment will also reduce the number of borrowers who need to turn to the SAVE safety net. That way, we’re not just putting a band aid on the problem, we’re solving the source of the issue: who keeps giving my kids wine glasses?