Misguided student loan bill fails to help those most in need

Last week, a bipartisan group of lawmakers introduced the Employer Participation in Student Loan Assistance Act. The bill creates tax breaks for businesses that make student loan payments for employees. The benefit is up to $5,250 each year per worker.

As the Washington Post reports, the private sector — Fortune 500 companies included — sees this plan as “another tool [it] can use to lure and hire the best talent.” At first glance, this sounds great. But consider whom this benefits — people with a college degree and a job.

{mosads}That’s not exactly a group that is struggling and in need of more government benefits. Indeed, they’re the least deserving of public subsidy and the ones struggling with debt the least.

For reference, here’s how the arrangements work: firms contribute some money to employees’ loan payments, with eligibility requirements around time worked previously and a commitment to work there in the future. PricewaterhouseCoopers, for instance, gives employees $1,200 per year for six years toward their student loans.

Another firm, Natixis Global Asset Management, doles out $5,000 toward employees’ loans after five years of work, with another yearly $1,000 for the next five. About 4 percent of employers offer this benefit already. Right now employers pay taxes on this benefit; with the plan, they wouldn’t.

The programs seem to work too, at least for recruiting and retaining new employees. Fidelity Investments saw 5,000 new employees sign up for its loan repayment program. One can easily imagine how workers may think twice before heading for greener pastures if their employers are picking up the tab on their loan balances.

That’s great for them, but there’s no reason for taxpayers to subsidize this cozy arrangement, considering it wouldn’t help those who need help.   

Here’s who is actually struggling — the unemployed and college dropouts. Research from the Brookings Institution reveals that, in 2011, over 20 percent of student borrowers leaving for-profit colleges and 17 percent leaving community colleges are effectually unemployed two years later.

The same data show that, for the same set of borrowers, just 49 percent at for-profits completed four-year degrees, while a mere 37 percent at community colleges completed two-year degrees. Dropping out of college is one of the strongest predictors of student loan default. What does an employer-paid loan benefit do for this class of borrowers? Not much.

But it does help the winners keep winning, benefiting well-off borrowers with expensive degrees. Since higher-income workers have higher tax rates, an analysis by my colleague Preston Cooper shows that, under this plan: “An individual earning $100,000 per year…would avoid $2,200 in taxes, but someone earning $25,000…would have his tax bill reduced by only $1,300.”

Further, the Urban Institute’s Matt Chingos explained how “arbitrary and potentially unfair” the delivery of the subsidies would be. He writes: “the largest benefits go to individuals with the most student debt, who are least likely to default on their loans. A worker with $10,000 in debt could only use the benefit for two years, whereas a worker with $100,000 in debt could use it for 20 years”

What you’re left with, then, is not a targeted and effective means of alleviating the hardship of student debt. It’s just the federal government’s latest stimulus package for the college-educated.

Proposals like this are par for the course these days. Just look at Sen. Elizabeth Warren’s (D-Mass.) much touted student-loan refinancing plan, which lowers federal borrowers’ already-low interest rates. Refinancing would provide meager monthly benefits to borrowers who don’t need it and at significant cost.

Then, check out our current loan forgiveness programs, which expunge certain borrowers’ balances after just 10 years. Again, loan forgiveness offers the biggest payoff to people who deserve it least, graduate students with high debt loads.

Not only are these policies poorly targeted and overly generous, but they offer breaks for borrowers after the damage has already been done. In doing so, policymakers neglect one of the root causes of all this widespread debt and regret — the federal government lending to students to attend any accredited program, no matter its quality or price.

Students are permitted to take out loans to attend overpriced schools with lackluster outcomes. Perhaps more due diligence in allowing postsecondary programs to receive federal loans is a better approach.   

Today’s borrowers are still struggling though. In the search for new solutions, policymakers ignore that we already have one — the Income-Based Repayment (IBR) program. IBR lets student borrowers with federal loans make payments at a manageable percentage of their income, no matter how much they owe.

If you drop out before completing your degree and have low-to-no earnings, you make low-to-no loan payments. IBR has its own problems worth fixing, but maybe enrolling more borrowers in the program could be another step in the right direction.

This proposal came from the right place — the desire to provide relief to concerned constituents with student loans. Yet, policymakers may want to consider whether the constituents they’re hearing from most need the most help. Maybe they should turn to the 8 million students currently in default on their federal loans before sweetening the pot for our next generation of consultants and lawyers. 

Rooney Columbus is a research associate at the Center on Higher Education Reform at the American Enterprise Institute.

The views expressed by contributors are their own and not the views of The Hill.