No, Obama’s Student Debt Executive Order Doesn’t Incentivize Colleges to Raise Tuition

WASHINGTON, DC - JUNE 09: The presidential memorandum that was signed by U.S. President Barack Obama is seen during an East Room event at the White House June 9, 2014 in Washington, DC. President Obama signed the memorandum on "reducing the burden of student loan debt." (Photo by Alex Wong/Getty Images)
On Monday, President Obama signed the memorandum on "reducing the burden of student loan debt."
Alex Wong/Getty Images

When President Barack Obama announced yesterday that he would extend the “Pay as You Earn” federal student loan repayment program to older, previously ineligible debtors, it was met with a common contention.

I’ve seen it in a few places, including the comments section in our article on the action. In short, people say that the order will make it easier for students to manage their debt, and that will incentivize schools to raise tuition.

The assertion doesn’t make any sense.

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Before explaining why, let’s acknowledge a couple things. First, yes, the increasingly insane cost of tuition is probably more responsible than anything else for the backbreaking amount of student debt held by today’s young Americans. And second, there’s probably a hell of an argument to be had about whether or not loan forgiveness programs could ultimately dissuade colleges and universities from taking responsibility for keeping the costs manageable.

But yesterday’s action doesn’t hit on either of those points.

The Pay as You Earn program, which limits monthly payments to 10 percent of a borrowers’ income and can allow for loan forgiveness after 20 years of repayments, had previously only been available to new student borrowers. In order to be eligible, debtors could not have taken out a student loan before October 2007, and could not have stopped taking payments before October 2011.

In other words, the program was essentially put in place for the high school class of 2008 and later classes—meaning those currently in school are already eligible for the program. If the program incentivizes colleges to raise tuition—again, probably a fun debate, though it ignores that tuition was already skyrocketing well before the program was put in place—it was already happening.

Obama’s action, meanwhile, extends the option to older borrowers—those who have already graduated and are making repayments, some at much higher rates than the program allows. The vast majority of those people are by definition already out of school. Who, then, would colleges raise tuition on that they couldn’t already?

In some ways this clarification highlights that there are (at least) two sides to the student loan issue. There’s the part that asks, how do we prevent debt from mounting any further—which logically requires students taking out fewer loans to fund their education. But there’s also the question of what to do with those already hurting from their existing burden. That distinction is emphasized in light of a new study showing half of those who graduated from college between 2007 and 2013 are still relying on their parents’ money. Yesterday’s action addresses the current borrower side of the student debt coin, not the prevention side.

Again, if you think the Pay as You Earn program itself incentivizes colleges to increase tuition, you might have an argument. But it would be an argument you should have made years ago, and Obama’s executive order would not bolster it. The order takes an option available to today’s borrowers and made it available to yesterday’s. For those students, there is no more federally-funded tuition for colleges to collect—meaning there is not, in fact, any new, direct incentive to raise tuition further.