The Student Debt Trap Both Parties Built

Why progressives’ giveaways and conservatives’ austerity both miss the mark—and how a centrist alternative could actually fix the system.

Abstract

Student debt policy in the United States has become polarized between progressive Democrats advocating widespread loan forgiveness and Republicans emphasizing fiscal restraint and borrower responsibility. This paper examines the Biden Administration’s SAVE program, the Trump-era RAP reforms, and a proposed third-party alternative. Each approach modifies repayment structures in different ways, yet all share limitations tied to administrative complexity, unpredictable borrower outcomes, and fiscal risk. The third-party proposal aims to reduce reliance on income-driven repayment by making conventional loans more affordable and sustainable, while offsetting costs by abolishing the student loan interest deduction.

The Philosophical Divide and the Politics of Student Debt

There is a large philosophical division between progressives and conservatives on the best way to modify student debt contracts to protect both taxpayers and borrowers.

The progressive wing of the Democratic Party, led by Senators Bernie Sanders and Elizabeth Warren, favors large-scale cancellation of student debt.

Republicans and many centrist Democrats reject this approach, arguing that most borrowers are capable of repayment and that blanket forgiveness diverts scarce taxpayer resources from more urgent priorities such as improving health insurance coverage or shoring up Social Security.

Most Republican, favor significant reductions in assistance to student borrowers, even though debt burdens are higher for recent cohorts entering the workforce, an increasing number of student borrowers are having a difficult time saving, and many Social Security reform measures favored by Republicans require higher savings rates by young workers.

The progressive push for cancellation shaped President Biden’s early agenda. Sanders and Warren’s influence encouraged Biden to attempt broad discharge of student debt under the justification of the COVID emergency. This approach consumed political capital and months of administrative effort but was ultimately struck down by the Supreme Court. The failure of this effort illustrates how polarization and pressure from party bases can lead to divisive, legally fragile, and ultimately ineffective policies.

The more practical debate focuses on Income-Driven Repayment (IDR) plans. First expanded in 2007 during the George W. Bush administration, IDR programs were intended to offer affordable monthly payments based on income. Yet all IDR programs are flawed:

· repayment outcomes depend heavily on marriage, divorce, or income shifts

· many borrowers end up paying more over a lifetime than under conventional loans

· forgiveness relies on political discretion and uncertain tax treatment.

Democrats have generally sought to expand IDR to favor borrowers, while Republicans have redesigned it to favor taxpayers.

The following sections examine the Biden Administration’s SAVE program, the Trump-era RAP plan, and a third-party proposal for reform.

The Biden Administration’s SAVE Program

The Biden Administration centered its student loan policy on reforms to Income-Driven Repayment (IDR) through the Saving on a Valuable Education (SAVE) plan. SAVE reshaped the repayment system by expanding protections for low-income borrowers, reducing required payments for many, and changing the rules on interest accrual and forgiveness.

Key Provisions of SAVE:

· Increases protected income from 150 percent of the federal poverty line (FPL) to 225 percent FPL

· Reduces payments on undergraduate loans from 10 percent to 5 percent of discretionary income starting in 2024; graduate loans remain at 10 percent

· Eliminates negative amortization by waiving unpaid interest when required payments fall below interest owed

· Links forgiveness timelines to the original loan balance: balances of $12,000 or less are discharged after 10 years; each additional $1,000 adds one year up to 20–25 years

· Allows married borrowers filing separately to exclude spousal income but removes the spouse from household size used to determine disposable income

· Requires annual recertification of income and household size; failure to recertify leads to loss of SAVE eligibility and reversion to the 10-year standard plan

· Permits consolidation and crediting of past payments across multiple IDR plans, addressing some record-keeping problems

· Includes a temporary consolidation option that allows older loans to count toward forgiveness timelines, but only for a limited period

Evaluation of the SAVE Program:

SAVE was enacted through executive order, not an act of Congress. It was immediately challenged in the courts and the courts halted many of its provisions including widespread loan discharges, the decrease in loan payments from 10 percent to 5 percent of disposable income, and the interest subsidy preventing negative amortization of interest when the SAVE payment did not cover all interest charges. The courts order led to an immediate pause of all IDR enrollments online. These events illustrate the limits of the use of executive orders to expand IDR programs.

The SAVE program would provide substantially lower debt payments and quicker debt discharges than any previous IDR program. No other program has a payment as low as 5 percent of disposable income. The potential 10-year discharge for smaller loans under SAVE was the quickest discharge for any IDR loan, not linked to public service. The creation of the more generous SAVE option would lead to increased costs to taxpayers and could encourage some students to increase the amount they borrowed in anticipation of having the loan discharged.

The provision of the SAVE program allowing for discharge of student loans under $12,000 after 10 years could encourage some students with debt from a two-year program to forego additional education. This incentive exists because additional debt would lead to substantially higher lifetime loan payments both directly from the additional debt but also from the longer period until potential loan discharge.

Historical experience shows very low rates of on-time successful IDR discharges due to servicer errors and reporting problems. Democratic Administrations tend to be more aggressive in regulating loan servicers and mandating discharges than Republicans Administrations. All borrowers using IDR loans are exposed to political risk.

The SAVE program allows married student borrower to file separate returns to reduce their SAVE payments. However, filing separately to exclude spousal income often raises household tax bills and eliminates eligibility for key tax credits and deductions

The decision to choose an IDR loan or a conventional loans is made when the student borrower starts their career and begins repayment. The IDR loan is often the only affordable option at the beginning of a career. Borrower outcomes depend heavily on changes in income, marriage, or divorce, making repayment trajectories unpredictable. Total loan payments could be much larger for the IDR options than the conventional option, but this is less likely for the highly generous SAVE option.

The Trump-Era Changes to Student Debt

The most publicized feature of the July 4, 2025, tax bill enacted by President Trump and the Republican Congress impacting student debt was the replacement of all prior student debt programs with a new plan called the Repayment Assistance Plan (RAP).

Beginning July 1, 2026, new borrowers will have only two options: a RAP loan or a conventional student loan with terms ranging from 10 to 25 years.

The new RAP program becomes the sole IDR option on July 1, 2028.

The replacement of all other IDR loans with the RAP loan will lead to a fairly sharp increase in borrowing for many students.

Other notable changes in the July 4, 2025, tax bill include limits on borrowing and the elimination of forbearances for economic hardships on student debt payments.

Key Provisions of RAP:

· Minimum payment of $10 per month for all borrowers

· Tiered payment structure from 1 percent of adjusted gross income (AGI) for incomes of $10,000 to $19,999 up to 10 percent for incomes over $100,000

· Tier percentages applied to the entire AGI, not just incremental income within the tier, creating sharp jumps in monthly payments

· $50 per month deduction for each dependent, subject to the $10 minimum payment

· Waiver of unpaid interest to prevent negative amortization

· Guaranteed monthly reduction in loan balance of at least $50 when payments do not cover full interest; households where both spouses have loans may receive up to $100

· Loan forgiveness after 30 years of qualifying payments; public service borrowers remain eligible for 10-year forgiveness under PSLF

· Married borrowers filing separately can exclude spousal income when calculating payments, but may incur higher tax bills and lose access to credits

Other Notable Changes to Student Debt Provisions in the 2025 tax bill:

The most notable other provisions of the 2025 tax bill involved limits on borrowing and the elimination of forbearances for economic hardships.

· Lifetime federal student debt borrowing cap is $257,00 (excluding Parent Plus loans),

· Elimination of Grad Plus loan for all new borrowers,

· New limits on graduate federal borrowing for professional programs ($50,000 per year and $200,000 total.)

· New limits on graduate student borrowing other graduate programs ($20,000 per year and $100,000 lifetime.)

· Limits on borrowing through the parent plus program

· Unemployment and economic hardship deferments are eliminated starting in July 2027

· New limit on total time a person can be in forbearance is nine months every two years

Evaluation of Trump Era Changes to Student Debt Programs:

Both the Trump and Biden student debt programs involved forcing student borrowers to choose between an IDR loan and a conventional loan as soon as the student borrower entered the workforce and began repayment.

There are sharp differences between the SAVE program and the RAP program.

SAVE’s design provided substantial immediate relief to student borrowers entering the workforce and offered the promise of relatively quick loan discharges for student borrowers who made timely payments.

RAP’s design front-loads financial pressure on early-career workers. In some cases, the RAP program provides very little or any reduction in loan payments compared to a conventional 20-year student loan. In addition, the RAP program substantially increases the number of payments needed to become eligible for a loan discharge.

Two borrower examples illustrate the at times extreme generosity and cost of SAVE and the unsustainable burdens created by RAP.

· A $12,000 community college borrower who once paid roughly $5,000 over 10 years under SAVE will now pay about $26,000 over more than 24 years. The SAVE payments are always less than the interest payments, hence, the borrower will have the full $12,000 discharged. The RAP loan is fully repaid after 24 years; hence, no portion of the loan is discharged. Go here for calculations.

· A typical undergraduate borrower with $35,000 in debt and a $62,000 income now pays about $310 per month under RAP, compared to $116 under SAVE and $261 for a 20-year conventional loan. In this case, the RAP loan does not offer payment relief compared to a conventional 20-year loan. More about this example can be found here.

RAP and SAVE are both IDR program with flaws common to all IDR loans.

· Both programs are administratively complex with record keeping problems, recertification lapses and servicing mistakes,

· The federal tax exemption for forgiven balances expires in 2025, raising the risk of surprise tax bills

· Household outcomes are highly sensitive to life events such as marriage, divorce, or income changes, making repayment trajectories unpredictable

· Filing separately can reduce payments but often results in higher taxes and loss of credits, leaving households worse off overall

· Both systems push many borrowers into IDR as the only affordable option at the start of repayment,

Both programs claim to eliminate situations where the loan balance rises due to negative amortization. However, neither program prevents negative amortization when borrowers miss a payment or fail to make the minimum required payment.

Since RAP payments are larger than SAVE payments and forbearances allowing missed payments due to economic or financial hardship are no longer available, more student loans will negatively amortize due to the 2025 tax law. This structure guarantees that many borrowers will carry student debt into retirement, undermining their ability to save and complicating future Social Security reforms which require additional household savings.

The 2025 tax law’s tight borrowing caps and elimination of Grad PLUS loans push medical students toward private lenders, who offer higher rates and no income-based protections. A typical resident earning $70,000 may see private balances grow by 40 to 50 percent during a four-year residency. A complete version of an article on this issues is under review but a short description of result can be found here.

This shift threatens not just individual borrowers but the healthcare system itself. These education related costs will be passed along to patients and may deter some highly qualified doctors from obtaining additional training. The real problem impacting medical professionals is not RAP itself but the migration from public to private credit, which makes advanced education less accessible and more financially hazardous.

The new student debt law will create unanticipated financial impacts for American households attempting to save for emergencies and to purchase a home and a car. Adverse financial impacts will grow overtime.

RAP currently affects only new graduates, but within a decade it will shape the finances of millions of working-age households. As that happens, its higher payment demands, and lack of flexibility could dampen consumer demand and strain credit markets.

Borrowers managing student loans alongside car loans, credit cards, and mortgages will face tighter debt-to-income ratios and reduced access to new credit. In recessions, the inability to pause payments may amplify delinquencies across multiple credit lines, producing procyclical shocks to consumption and lending.

If RAP remains the sole repayment framework, it risks evolving from a micro-level budget strain into a macroeconomic drag—suppressing household spending, delaying homeownership, and heightening credit vulnerability during future downturns.

RAP ties payments to nominal income rather than inflation-adjusted disposable income. As wages rise with inflation, borrowers are pushed into higher payment tiers even though their purchasing power is unchanged.

For a typical borrower, RAP payments may rise by roughly 50 percent over ten years of moderate inflation—far faster than real income growth—creating a creeping affordability crisis. Previous IDR programs avoided this “bracket creep” by indexing thresholds to inflation and basing payments on disposable income, which was impacted by the poverty line.

RAP quietly increases the real burden of student debt year after year. Go here for a discussion on the impact of inflation on RAP payments.

The tiered percentage defining loan payments in the RAP formula apply to the entire loan balance not just the incremental amount. This leads to abrupt increases in payment burdens.

Moreover, RAP bases payments on adjusted gross income. The combination of abrupt payment changes linked to AGI lead many borrowers to reduce payments by choosing to contribute to a conventional 401(K) or IRA rather than a Roth 401(k) or IRA. The contribution to the conventional retirement plan reduces AGI and loan payments but also increases lifetime loan payments.

The result is a distorted incentive structure basing retirement savings choices on the need to maximize current cash flow. Over time, RAP could reduce Roth participation and future retirement security. Go here for a discussion of this issue.

A Third-Party Student Debt Agenda (2028 Proposal)

The third-party proposal shifts away from heavy reliance on IDR systems and blanket discharges. Instead, it seeks to make conventional student loans more affordable and predictable, while paying for the program through the elimination of interest deductibility.

Key Provisions of the third-party student debt proposal

· Zero interest for the first four years of repayment, easing burdens during early career years

· Elimination of the tax deductibility of student loan interest,

· Modification of RAP tiered percentages to cause less abrupt changes in loan payments

· Replace RAP loan discharge at maturity with earlier partial discharge

· Convert RAP loans to a zero interest loan 25 years after repayment begins

· Have IRS administer zero interest loans created 25 years after start of repayment

· Removal of limits on federal borrowing for medical students and others in need of advanced training

Evaluation of the Third-Party Student Debt Reform Measure:

The objective of the third-party student debt measure is to create a better outcome for both student borrowers and taxpayer. We are searching for a pareto improvement.

Many students entering the workforce initially receiving a low starting salary find that the IDR loan is the only available option. The initial zero interest rate for the new conventional loan, under the third-party proposal, will make the conventional loan affordable for most student borrowers and will facilitate greater reduction in student loan balances early in a career when most salaries are low.

The more favorable conventional loan terms will result in more students taking out a conventional loan instead of the IDR option. This eliminates uncertainty about whether the discharge will occur as scheduled and uncertainty over lifetime loan payments inherent to IDR loans.

The early partial discharge, after a certain number of payments, creates an incentive for borrowers to make all payments and may enable some borrowers to refinance their federal loan to a private loan if they maintain good credit and interest rates fall.

The removal of the limit on total federal borrowing will allow young residents and medical fellows to obtain additional specialty training at a crucial juncture of their career.

The partial rather than a total discharge ensures the people who borrow more repay more, thereby, reducing the incentive for people to increase the amount they borrow while in school.

The elimination of the total loan discharge and the use of the IRS as a collection agent, 25 years after the initiation of repayment will reduce costs to taxpayers.

The movement towards some loan relief earlier than 30 years will reduce the number of borrowers taking debt into retirement.

This proposal makes both taxpayers and student borrowers better off. A classic pareto improvement.

Concluding Remarks

The Democratic approach under SAVE makes repayment more generous but risks large taxpayer costs and overborrowing.

The Republican RAP plan is much stricter. It fails to provide any payment relief to some borrowers, and its 30-year repayment horizon will leave many borrowers unable to save adequately for retirement.

Both approaches illustrate the limits of policymaking in a polarized environment, where ideological commitments override pragmatic solutions.

A third-party alternative, by embedding affordability directly into conventional loans and paying for concessions through elimination of the interest deduction, offers a more durable and fiscally responsible path. The broader lesson is that polarization leads to policies that are either too costly or too punitive. Without centrist reform, student debt will continue to undermine household financial security and limit the ability of younger generations to prepare for retirement and withstand future Social Security adjustments.

Author’s Note

The impasse over student debt mirrors another long-running policy failure: America’s inability to reform its health insurance system. Both issues reveal how partisan polarization blocks practical progress — and how deeply entrenched incentives keep either party from delivering sustainable solutions.

For a parallel discussion, see my post on the health reform stalemate:
👉 Health Reform Has Stalled — Here Is Why

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