A Republican’s Debt-Forgiveness Plan Sounds Great. But What Comes Next?

A. Wayne Johnson, a high-ranking official in the U.S. Department of Education, got a lot of attention on Thursday for his campaign proposal to forgive up to $50,000 per person in federal student-loan debt. The plan, announced as Johnson resigned his position to seek appointment to a soon-vacant U.S. Senate seat from Georgia, would also award a grant of that amount to future students to pay for various kinds of postsecondary education.

The story carried the shock value of an administration official seemingly clashing with his boss, Education Secretary Betsy DeVos, and siding instead with Democratic presidential candidates such as Sen. Elizabeth A. Warren and Sen. Bernie Sanders. In an interview, Johnson said that his plan is far different from the Democrats’ and that DeVos, who has criticized other debt-forgiveness plans, had only just been informed of the proposal.

More important, the news signals that the idea of forgiving student debt is moving into the mainstream and garnering some bipartisan support among politicians.

Since the 2008 recession, mounting student debt has gotten more attention as the number of borrowers has grown along with the average amount that they borrow. Outstanding student-loan debt now stands at some $1.5 trillion, and nearly a fifth of borrowers who are not enrolled in college are at least 90 days delinquent in their payments. In a presidential-election season, some Democratic candidates have been eager to put forth plans to erase much of students’ accumulated debt.

What many have not focused on, however, is a deeper discussion of the limits and unintended consequences of such proposals: What happens after the initial debt is dismissed? Even if billions in debt are wiped away, students may borrow more, said Beth Akers, an economist with the Manhattan Institute, a free-market think tank. “Do we call for another round of forgiveness in five years?” she asked.

In the case of Johnson’s plan, the “what next?” includes an end to the federal student-loan program and shifting the market for loans entirely to private lenders — a long-term goal of conservative politicians seeking to limit or eliminate the federal government’s spending on higher education.

“He is saying the government should not be in the business of giving loans; that’s not going to work,” said Justin Draeger, president and chief executive of the National Association of Student Financial Aid Administrators, or Nasfaa. “There’s a clear market failure if we expect private lenders to give unsecured assets to people who have no credit.”

A Loan Advocate Changes Course?

Johnson’s rogue proposal stirred debate on Thursday, after the The Wall Street Journal and other news organizations reported that the former head of the Office of Federal Student Aid had called the student-loan system “fundamentally broken.”

Johnson also announced he was stepping down immediately from his job as chief strategy and transformation officer at the department, where he has sought to modernize the student-aid programs. The Education Department did not respond to a request for comment.

In addition to forgiving about $925 billion of outstanding student debt, Johnson’s plan would allow a $50,000 tax credit for those who have repaid their student loans within the past decade. The grant of that amount, for future college students, could be supplemented with Pell Grants for low-income students as well as specific subsidies for those pursuing degrees in science, mathematics, or education — so-called STEAM degrees.

Johnson would pay for his proposal with a 1-percent tax on “revenue generated by all employers, including corporations and nonprofit organizations.”

The idea that a Republican candidate was picking up the rallying cry of the populist left caught many by surprise.

Polling shows that the idea of student-loan forgiveness is starting to gain popularity with a wider public, said Akers, of the Manhattan Institute. But that the proposal is coming from Johnson “definitely shows a shift and a big change in the political stances on this issue.”

The left-leaning student-advocacy group Young Invincibles praised the spirit of Johnson’s proposal. “Mr. Johnson has recognized what advocates have been saying for years: We need to act now to ensure that every borrower can afford the education they need and graduate without staggering debt that will follow them for years to come,” Kyle Southern, the group’s policy and advocacy director for higher education, said in a news release.

In an interview, Southern said he was not familiar with the measure’s specifics: “I would just say we welcome anyone bringing attention to the student-debt crisis and that we need to keep our focus on a comprehensive solution that tackles the way this administration has exacerbated the student-debt crisis.”

Johnson’s plan has elements that are consistent with proposals from other conservative politicians. For example, the $50,000 grant was inspired, in part, by the higher-education plan of the former Republican presidential candidate Jeb Bush, Johnson said. In 2016, Bush proposed a $50,000 line of credit for college students to be repaid over 25 years, based on their income, but without charging any interest.

Draeger, of Nasfaa, said Johnson’s recommendations are the approach people should expect from someone with a background in private business: Declare bankruptcy, close the business, and start over.

New Solutions or Just Different Problems?

Akers, the economist, agreed that the government should get out of the student-loan business. Private lenders, she said, are in a better place than in the past to fill the need for student loans with reasonable interest rates. In addition, she said, other options, such as income-share agreements, are developing to allow students to pay for college debt-free.

But the $50,000 grant that Johnson proposes would almost certainly drive up the price of most academic programs, Akers said. That’s because it’s a voucher program, which means that institutions would be competing for students. “But why,” she asked, “would any institution price its program less than $50,000 if they know every student gets this?”

Johnson responded that students would get better information to choose programs with an appropriate price and outcomes. In addition, institutions would have to submit some sort of audit to ensure they weren’t inflating their cost of delivery.

Robert Kelchen, an associate professor of higher education at Seton Hall University, said the plan could still cause graduate students to accumulate a lot of debt through private lenders. The $50,000 grant would most likely not pay for the price of advanced degrees, he said. And it’s not clear if private lenders would be willing to take on the risk of lending for degree programs that provide social value but lower earning potential.

If a bank is not willing to lend to students in certain degree programs, Johnson said, then maybe the market is signaling that there is not enough demand for that area of study.

Aside from concerns about the involvement of private banks, Johnson’s plan runs into the same criticisms that have followed the loan-forgiveness plans of some Democratic candidates. Blanket loan-forgiveness plans have been criticized, in particular, for providing the most benefit to students who need it the least and not holding low-quality colleges or academic programs accountable for poor student outcomes.

“Most people know that debt-forgiveness proposals are expensive, often regressive, and can do more to exacerbate inequality than solve it,” said Tamara Hiler, director of education at the centrist think tank Third Way. “The reality is that they also do nothing to actually address the underlying quality and accountability issues that can make it difficult for struggling borrowers to pay back their loans in the first place,” she said.

Johnson said he favored strong consumer-protection measures to prevent fraud. Paying off the debts of those who are earning enough to cover that expense is a matter of fairness, he said.

“Some could argue you’re forgiving millionaire’s debts, yes, but they probably paid more in taxes, anyway.”

Eric Kelderman writes about money and accountability in higher education, including such areas as state policy, accreditation, and legal affairs. You can find him on Twitter @etkeld, or email him at eric.kelderman@chronicle.com.