WASHINGTON — President Biden’s move this week to cancel student loan debt for tens of millions of borrowers and reduce future loan payments for millions more comes with a huge catch, economists warn: It does almost nothing to limit the skyrocketing cost of college and could very well fuel even faster tuition increases in the future.
That downside is a direct consequence of Mr. Biden’s decision to use executive action to erase some or all student debt for individuals earning $125,000 a year or less, after failing to push debt forgiveness through Congress. Experts warn that schools could easily game the new structure Mr. Biden has created for higher education financing, cranking up prices and encouraging students to load up on debt with the expectation that it will never need to be paid in full.
It is the latest example, along with energy and health care, of Democrats in Washington seeking to address the nation’s most pressing economic challenges by practicing the art of the possible — and ending up with imperfect solutions.
There are practical political limits to what Mr. Biden and his party can accomplish in Washington.
Democrats have razor-thin margins in the House and Senate. Their ranks include liberals who favor wholesale overhaul of sectors like energy and education and centrists who prefer more modest changes, if any. Republicans have opposed nearly all of Mr. Biden’s attempts, along with those of President Barack Obama starting more than a decade ago, to expand the reach of government into the economy. The Supreme Court’s conservative majority has sought to curb what it sees as executive branch overreach on issues like climate change.
As a result, much of the structure of key markets, like college and health insurance, remains intact. Mr. Biden has scored victories on climate, health care and now — pending possible legal challenges — student debt, often by pushing the boundaries of executive authority. Even progressives calling on him to do more agree he could not impose European-style government control over the higher education or health care systems without the help of Congress.
The president has dropped entire sections of his policy agenda as he sought paths to compromise. He has been left to leverage what appears to be the most powerful tool currently available to Democrats in a polarized nation — the spending power of the federal government — as they seek to tackle the challenges of rising temperatures and impeded access to higher education and health care.
Arindrajit Dube, an economist at the University of Massachusetts Amherst who consulted with Mr. Biden’s aides on the student loan issue and supported his announcement this week, said in an interview that the debt cancellation plans were necessarily incomplete because Mr. Biden’s executive authority could reach only so far into the higher education system.
“This is an imperfect tool,” Mr. Dube said, “that is however one that is at the president’s disposal, and he is using it.”
But because the policies pursued by Mr. Biden and his party do comparatively little to affect the prices consumers pay in some parts of those markets, many experts warn, they risk raising costs to taxpayers and, in some cases, hurting some consumers they are trying to help.
“You’ve done nothing that changes the structure of education” with Mr. Biden’s student loan moves, said R. Glenn Hubbard, a Columbia University economist who was the chairman of the White House Council of Economic Advisers under President George W. Bush. “All you’re going to do is raise the price.”
Mr. Hubbard said Mr. Biden’s team had made similar missteps on energy, health care, climate and more. “I understand the politics, so I’m not making a naïve comment here,” Mr. Hubbard said. “But fixing through subsidies doesn’t get you there — or it gets you such market distortions, you really ought to worry.”
Mr. Biden said on Wednesday that his administration would forgive up to $10,000 in student debt for individual borrowers earning $125,000 a year or less and households earning up to $250,000, with another $10,000 in relief for people from low-income families who received Pell grants in school.
What’s in the Inflation Reduction Act
He also announced plans to limit how much lower-income students need to pay each month on their student loans, including a promise that people who stick to a monthly payment plan will not pay additional interest on their balances.
Mr. Biden said the moves would reopen a path to a middle-class life for millions of Americans struggling to make loan payments.
Critics of the moves — and even some supporters — say that by only targeting what students pay, and not what colleges charge, Mr. Biden has effectively given schools an invitation to raise their prices even faster than they already have been. Average tuition and fees at public, nonprofit colleges and universities rose 10 percent from 2010 to 2020 after adjusting for inflation, the Education Department reports. For private schools, the increase was nearly twice as much.
Schools that already charge high prices, including for students from lower-income backgrounds, could raise them further and encourage students to take on more loans with the idea that the government will eventually forgive them, said Melissa Kearney, a University of Maryland economist who directs the Aspen Economic Strategy Group.
Mr. Biden’s plans, she said, will also “perpetuate the problem of students attending schools and programs that charge high fees even when student outcomes are lousy.”
“If people know their loans will be forgiven, they will be less wary of enrolling in those kinds of low-return, high-risk programs,” she said.
Democrats have also found they must narrow their efforts to get major economic legislation through Congress. On health care, the trade-off has been improved access to care, but at continued high cost.
More than a decade after Democrats expanded access to health insurance for millions of Americans through the Affordable Care Act, the United States still spends twice as much per capita on medical care as a typical wealthy nation.
Democrats’ efforts to impose price caps on some parts of the health care system have been less successful than the party’s efforts to expand Medicaid and increase subsidies for insurance bought through the federal government.
Some researchers had hoped that expanding access to care would reduce per-person health spending by providing preventive care for previously uninsured patients to help them avoid more expensive illness. Those hopes have not come to fruition, said Katherine Baicker, the dean of the University of Chicago’s Harris School of Public Policy, who studies the economics of health care. And as a result, costs have remained high for taxpayers.
“Policies that are designed to solve one problem,” like expanding health coverage, she said, “have to be realistic about the financing that goes along with it.”
Mr. Biden and Democrats made another attempt this month to rein in health costs, imposing limits on prescription drug spending through Medicare in a sweeping bill called the Inflation Reduction Act. That bill also includes the most ambitious effort by the federal government to reduce the greenhouse gas emissions that are driving climate change: nearly $400 billion in spending and tax incentives meant to encourage the growth of wind and solar electricity, electric vehicles and other emissions-limiting technologies.
Those measures join a growing list of administration efforts to regulate emissions across the economy. But for several reasons, most notably the political difficulties of taxing consumers, the bill did not impose a tax on fossil fuels.
Many environmental economists have moved away from their long-held view that such taxes are the best way to reduce emissions. But most of them still say raising the price of fossil fuels, in hopes of discouraging their use, is an important complement to government subsidies of low-carbon fuels — part of a balanced diet, so to speak, that yields a faster, more efficient transition away from planet-warming oil, gas and coal.
The political perils of high gasoline prices all but assured Mr. Biden would not pursue a tax on fossil fuels. But White House officials have also grown increasingly bullish on the idea that regulations and subsidies are enough to meet his goal of cutting emissions 50 percent from 2005 levels by the end of the decade.
“I don’t see this as a missed opportunity on the climate side,” said Brian Deese, the director of Mr. Biden’s National Economic Council, “so much as a historic effort to address climate change based on a new approach.”
Biden aides have more openly acknowledged the holes in his student debt plans, effectively conceding that colleges and universities could accelerate tuition increases to take advantage of more generous support unless Congress intervenes.
In negotiations toward what became his health and climate bill, Mr. Biden dropped plans for higher education access, including federally funded community college. Bharat Ramamurti, a deputy director of the National Economic Council, told reporters at the White House on Friday that the Education Department had taken steps under Mr. Biden to crack down on “abusive” higher education institutions, but he said much more needed to be done.
“We believe the department should have even more authority to go after bad actors and to hold colleges accountable,” Mr. Ramamurti said, “and we’re eager to work with Congress to advance any proposals along those lines.”
Ms. Kearney, the University of Maryland economist, said Congress could help dampen tuition increases by lowering how much students could borrow in federal loans, making it harder for schools and programs to charge elevated prices.
Beth Akers, a senior fellow at the conservative American Enterprise Institute in Washington, said Congress should pass a law that ties schools’ eligibility for student grants and loans to the labor market outcomes of their alumni — a move colleges would be certain to fight.
“Schools that send their graduates or nongraduates into the labor force without the ability to earn wages that would justify their cost should be cut out of the system,” she said.
The liberal writer Matt Bruenig suggested a direct set of federal price controls for higher education in a piece for the People’s Policy Project think tank, writing that Mr. Biden’s new plans to reduce payments for lower-income borrowers in years to come will encourage students to take out “the maximum amount of debt possible.”
In such a system, Mr. Bruenig wrote, “we may need the government to also play a much bigger role in setting college prices.”
Margot Sanger-Katz contributed reporting.