How to Reform Student Loans to Save Billions

American taxpayers face growing costs from the federal student loan program: Between 2000 and 2024, the size of the loan portfolio quadrupled from about $400 billion to over $1.6 trillion (in current dollars). Although enrolling in higher education continues to benefit most students, millions of borrowers struggle to repay their student loans, leaving taxpayers to bear a significant part of the cost. 

Congress could reform the student loan program—which has proven significantly more expensive than once estimated—to substantially reduce costs while better protecting taxpayers and students from the consequences of excessive borrowing and better targeting relief to the borrowers who need it the most. 

A range of policy options under consideration could save taxpayers more than $300 billion over the next 10 years and support better outcomes for students and borrowers. Options discussed below include: streamlining and better targeting income-driven repayment (IDR), capping graduate borrowing, reforming Public Service Loan Forgiveness (PSLF), and expanding accountability for programs participating in the federal loan program. Many of these include elements that have received bipartisan support, and some have been offered by members of the Senate and House education committees.  

Reforming Income-Driven Repayment 

The Biden administration’s Saving on a Valuable Education (SAVE) IDR plan, rolled out in 2023, is extremely expensive (potentially costing over $400 billion over 10 years) and not well targeted. It is also now subject to court injunctions and may never reach full implementation. Replacing SAVE with an option based on existing legislative proposals would yield substantial savings for taxpayers and provide relief and certainty to borrowers. 

Existing proposals show that several changes to IDR have received bipartisan support, including: 

• Simplifying the existing maze of IDR options by directing borrowers to a single plan. 

• Automatically enrolling borrowers into IDR when they fall into delinquency.  

• Eliminating interest capitalization. 

• Providing scaled forgiveness for low-balance undergraduates loans, which would help target relief to the low-income, low-balance student loan borrowers who are most likely to struggle with repayment and to default on their loans.  

• Eliminating the standard repayment cap, which is an important step for avoiding excessive IDR forgiveness.  

For example, the Penn Wharton Budget Model estimates that an approach along these lines could cost $276 billion less than SAVE over 10 years.

One drawback to the scaled forgiveness component is that it reduces the potential savings from the plan. Legislators could alternatively or additionally introduce a progressive payment formula to IDR so that high-income borrowers pay a higher percentage of their income, while lower-income borrowers get greater relief. This could be structured either in a cost-neutral way or with rates that generate additional savings.  

Loan Limits for Graduate Borrowers 

Although graduate borrowers account for only 21% of all borrowers, the Congressional Budget Office (CBO) projects that they will account for more than half of the projected cost of new federal student loans over the next 10 years. Uncapped graduate loans have contributed to rising tuition prices at the graduate level and excessive borrowing for programs that do not provide adequate labor market outcomes. 

There is bipartisan support for reforms to graduate lending, including capping graduate borrowing. Congress could consider capping aggregate graduate borrowing, with a lower limit applying to master’s programs and a higher limit applying to professional degree programs. 

The Committee for a Responsible Federal Budget (CRFB) estimates that eliminating Grad PLUS and limiting graduate borrowing to $150,000 would save $30 billion over 10 years, providing a sense of the potential savings from capping graduate loans. 

Limits on federal loans for graduate students would likely lead to more students turning to private lenders. To that end, policymakers could pair caps on graduate lending with measures to enhance consumer protections for private lending. By crafting regulations relating to bankruptcy protection, origination fees, and maximum interest rates, policymakers could help maintain access while protecting borrowers. 

Another potential concern over graduate borrowing limits is that they might impact access for low-income student populations. Policymakers could provide additional grant aid to institutions that effectively serve those students, helping to reduce borrowing while preserving access. Alternatively, an elevated limit could apply to professional degree programs, including medical programs, that demonstrate sufficient labor market or repayment outcomes. If combined with limits on PSLF and IDR reforms, a higher cap for programs with high return on investment could help maintain access to programs with strong labor market outcomes while minimizing budgetary implications. 

Public Service Loan Forgiveness Reform 

Public Service Loan Forgiveness can provide disproportionate subsidies to high-balance borrowers with higher earnings and may contribute to excessive graduate borrowing. The median amount forgiven under PSLF is $64,000 and the average balance forgiven is nearly $100,000. PSLF is especially expensive when it interacts with the generosity of the SAVE plan.  

In 2020, BPC’s Task Force on Higher Education Financing and Student Outcomes recommended restructuring PSLF to provide a flat monthly benefit ($300 a month for up to five years). This translates to a subsidy of $18,000, which would provide substantial relief to borrowers at the beginning of their careers, when incomes are at their lowest, while avoiding excessive forgiveness. This level could be dialed up or down to balance the desire for cost savings with the provision of adequate support for borrowers. 

Restructuring PSLF could result in substantial cost savings, particularly over the long run. A CFRB estimate that capping PSLF forgiveness at $57,500 for new borrowers would save $15 billion over 10 years offers perspective on the scale of potential savings from reforming PSLF.  

Earnings Thresholds and Debt-to-Earnings Metrics 

Expanding accountability in postsecondary education could help direct students and funding to programs that pay off while protecting borrowers and taxpayers from financial harm. Earnings thresholds provide a simple and easily understood gauge of how much students benefit economically from their educational experience. The rationale is clear: Each level of education should, on average, produce a higher return than the preceding.  

The Biden administration enacted gainful employment regulations (including Gainful Employment and Financial Value Transparency provisions) that it estimated would result in net savings of $14 billion over 10 years. These regulations, however, extended meaningful accountability to a limited number of programs. Congress could expand accountability by requiring programs to meet earnings thresholds or debt-to-earnings metrics for participation in the federal loan program. 

One approach would be to require that undergraduate programs meet a high school earnings threshold based on the median earnings of high school graduates ages 25-34 in the institution’s state. Graduate programs would be required to demonstrate that at least half of their former students earn more than the median bachelor’s degree recipient in the state. This threshold may, however, inadvertently affect public service programs, including programs in teacher preparation and mental health. Legislators could adjust the threshold by field of study to address this concern. Congress could also allow programs that predominantly enroll local students and are in low-income regions to appeal for eligibility based on county-level earnings.  

Alternatively or additionally, legislators could consider establishing debt-to-earnings metrics for programs participating in the federal student loan program. Some programs, especially at the graduate level, tend to produce very high debt-to-earnings ratios and result in high levels of forgiveness through IDR. Requiring that programs leave students with manageable debt could help limit excessive borrowing and reduce the amount of student loan debt that goes unpaid. 

Conclusion 

The federal government is holding a ballooning and increasingly costly loan portfolio, which adds to federal budget deficits. At the same time, millions of borrowers are struggling to repay their student debt. As policymakers look to rein in budget deficits, they should consider cost-saving reforms to the student loan program that can produce better educational outcomes, reduce borrower defaults, and save taxpayer dollars.