Despite COVID extension, Biden’s on the clock for decision on canceling student debt

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Student loan debt has had a tremendously negative impact on our economy; cancellation isn’t just about helping debt holders themselves. Rather than harm the economy, doing so would help everyone, including those who don’t currently hold student debt. The Education Data Initiative (EDI) has gathered extensive data on this.

Student debt reduces consumer spending to an extensive degree: “Each time a consumer’s student debt-to-income ratio increases 1%, their consumption declines by as much as 3.7%.” Over a third of all borrowers report that they “find it difficult to buy daily necessities because of their student loans.” Additionally, higher education debt inhibits the creation of new businesses, since carrying significant debt makes a person less likely to start one.

More broadly, one study cited by the EDI found “a significant and economically meaningful negative correlation between changes in student debt and net new businesses employing one to four employees. …” Student debt also reduces homeownership rates, leads borrowers to put off marriage, take jobs “that are less related to their degree and offer limited career potential,” as well as save less for retirement. Forgiving student debt could turn all these negatives into positives.

There’s also the matter of what would happen if there was widespread default far beyond the current situation. As the EDI noted: “Economists compare the rise in student loan debt to “the housing bubble that precipitated the 2007-2009 recession” and the subsequent economic downturn.” The bursting of that bubble would cost far more than what it would take for the government to write down even a large chunk of student debt.

Since Inauguration Day, the White House has been exploring its options on the student debt crisis. During the 2020 campaign, Biden promised to “immediately” cancel $10,000 of student debt for each borrower. “Immediately” has long since passed, but either way, his use of the word implies that he was talking about doing so through executive action, rather than legislation. Biden also promised to “fight for”—which does suggest he’s talking about legislation—”forgiving student debt for low-income and middle-class people who have attended public colleges and universities.”

Given that student loan forgiveness doesn’t appear to be on the table in Congress—it’s not included in the Build Back Better package, which is a) likely the only way major new spending is going to be enacted, and b) looks pretty dead itself at the moment thanks to Sen. Joe Manchin—the ball is in Biden’s court.

The president has already taken some significant action. First, he reformed the Public Service Loan Forgiveness program—which The Man Who Lost An Election And Tried To Steal It and his Education Secretary Betsy Devos essentially rendered nonfunctional. Biden’s changes have already wiped out the debt of 30,000 borrowers employed in the nonprofit world or government service, and are projected to do so for 550,000 in total. Overall, he’s canceled student debt to the tune of just under $13 billion, including:

  • $7.1 billion canceled for borrowers with “total and permanent disability.”

  • $1.1 billion in forgiveness for former students who officials say were misled by ITT Technical Institute before it went belly-up in September 2016.

  • $55.6 million in loan discharges for people who attended three other trade schools that misrepresented themselves to students, according to the administration.

  • $1 billion for additional borrowers who claimed they were defrauded by schools.

One of the people Biden helped was Jessica King. She wanted to become certified as a medical assistant and attended a program at the for-profit, predatory Everest College in Virginia. Although the only loan document she signed was for the $1,200 she borrowed from a private source, somehow she ended up with another $13,000 in federal loan debt. She says someone at the school signed her name without her permission, putting her on the hook for those federal loans. Everest closed in 2016, along with the rest of the schools owned by fraudster parent company Corinthian Colleges.

When Trump and DeVos were in charge, King only had a quarter of that amount discharged. Instead, we now have Miguel A. Cardona running the department; he wiped out the rest of King’s loans, along with those of thousands of others who had been defrauded and applied for forgiveness. These are important measures, and a good start, but they address less than 1% of all federal student loans. Most loans did not originate with criminal enterprises disguising themselves as colleges, so although helping defrauded students most urgently was righteous, we need to know what Biden will do for everyone else.

On his way out the door, the twice-impeached former president’s Education Department produced a memo—bearing the signature of a political hack, mind you—stating that the executive branch can’t do a whole lot on its own. One would hope Biden found an appropriate use for that piece of paper. In April, the president asked the Department of Education to tell him exactly what authority he has on this matter.

On the other hand, Sen. Elizabeth Warren, Rep. Alexandria Ocasio-Cortez, and even Senate Majority Leader Chuck Schumer have all argued that presidents have the power to enact widespread student debt cancellation, thanks to the 1965 Higher Education Act—which states that the Secretary of Education can “enforce, pay, compromise, waive, or release any right, title, claim, lien, or demand”—as well the HEROES Act of 2003.

In April 2019, Warren became the first presidential candidate to address the issue, calling for $50,000 of debt forgiveness for households earning under $100,000 a year, and some forgiveness for incomes up to $250,000. She argued that this was one of many acts a president could take “all by herself.” A couple of months later, Sen. Bernie Sanders went further, proposing that all student debt be canceled.

This September, Schumer declared that Biden could act “with the flick of a pen,” urging him to wipe out $50,000 of debt per person. With a nod to the leverage a single Democratic senator holds over legislation in the current Congress, Ocasio-Cortez argued that the president “doesn’t need [Sen. Joe] Manchin’s permission.” Considering a president (two, actually) already used their authority to suspend debt payments and interest for well over a year due to the pandemic, it stands to reason that authority is pretty wide-ranging.

It’s unclear as yet to what extent Biden agrees, as the aforementioned Department of Education memo has not been released. In October, 18 House progressives—including Ocasio-Cortez, Rep. Ilhan Omar, Rep. Cori Bush, Rep. Earl Blumenauer, Rep. Carolyn Maloney, and other like-minded allies—penned a letter calling on the White House to release it, to no avail thus far. But thanks to a successful Freedom of Information Act request filed by the folks over at The Debt Collective—which defines itself as a “membership-based union for debtors,” and has pushed hard for cancellation—anyone can read the 113-page document that includes a whole slew of emails and a memo, titled “The Secretary’s Legal Authority for Broad-Based Debt Cancellation.”

While we’re talking about grassroots organizations, let’s also give some credit to the Occupy movement—specifically the Occupy Student Debt organization launched a decade ago, before the notion of wide-scale cancellation of student loan debt was on anyone’s radar screen.

Back to the Department of Education document: Most of it has been redacted—(check out the lovely bright pink boxes, bordered by canary yellow). Some advocates express the belief that, even with the redactions, it’s clear that the memo says Biden can act aggressively. Either way, the document’s existence tells us one thing: The president knows exactly what authority he has, should he choose to use it. Further, there is a big difference between can’t and won’t.

As Debt Collective member Thomas Gokey lamented to The New Yorker: “We’re a signature away from wiping out everyone’s federal student loans, and Biden apparently just doesn’t want to. We’ve given him a magic wand, a way to help millions of people and get them excited to come out to vote for him. Who wouldn’t want to do that?”

But maybe Gokey is incorrect. Some have argued—and the optimist in me hopes this is the case—that Biden has been waiting for the two big spending bills to be passed by Congress before he takes any executive action on student loan debt. Perhaps he is concerned that such an action could be seen as a backdoor way to achieve something he couldn’t get into the reconciliation bill because of opposition from centrists—that Manchin fellow again—and that said centrists might use that as an excuse to call for some other spending measure to be removed from the bill to make up for it.

Waiting for passage before taking executive action takes care of that possibility, although Manchin’s statement that he’s now a flat “no” on Build Back Better throws a wrench into that thinking. In late October, Sec. Cardona did reiterate that “it’s a priority for me and for President Biden to make sure that part of the conversation [about student loan debt] is examining loan forgiveness,” adding that “those conversations are continuing.”

Should Biden cancel all student debt? If not, how much? And for whom? There is research to support pretty much every side of the debate. A recent working paper produced by scholars at the National Bureau of Economic Research (NBER) argued that broad-based forgiveness plans were “regressive because high earners took larger loans, but also because, for low earners, balances greatly overstate present values. Consequently, forgiveness would benefit the top [10%] as much as the bottom [30%] combined. Blacks and Hispanics would also benefit substantially less than balances suggest.” The paper’s authors argued that instead of wide-scale forgiveness, the government should focus on strengthening programs that help debtors based on their incomes. They argued: “Enrolling households who would benefit from income-driven repayment is the least expensive and most progressive policy we consider.”

But other research backs up the value—and progressiveness—of debt cancellation now. A different NBER working paper found that immediate loan forgiveness had a tremendous impact on the lives of lower-income borrowers. This study examined a group of those who had their debt eliminated as a result of legal proceedings. First of all, their incomes went up by over $1,000 per year over the three years following cancellation. Additionally, more of them resumed their education, got a different (and hopefully better) job, or were able to move, compared to people who didn’t have their loans canceled but were otherwise “demographically similar, living in the same zip code, with a similar amount of student debt and who were also in default.”

One of this paper’s authors, Harvard Business School professor Marco Di Maggio, contrasted their findings—which were based on what happened to actual people—with the aforementioned theoretical paper that argued against loan forgiveness: “Those people were very constrained. [Loan forgiveness] actually makes a difference, it makes a difference between paying your rent or not. We had an actual forgiveness experiment and measured what happened afterwards.” The other paper, he noted, was “a thought exercise.”

In reality, the two papers aren’t completely contradictory. Loan forgiveness could help lower-income borrowers a lot, but also help higher-income borrowers more. In the end, the data alone can’t provide answers about which approach is the right one. It’s also about values and priorities.

Other research has focused more directly on the question of race as it relates to student debt, to argue that not only will debt cancellation help close the racial wealth gap, but the more widespread the cancellation, the more the gap will close. In the broadest terms, more Black students borrow money to attend college than white students, and the average Black student borrower takes on greater debt than the average white one. Additionally, the data shows that Black students are more likely to default on their debt—one study even found a higher rate of default among Black students who completed their bachelor’s degrees than among white students who never graduated. Overall, it takes longer for Black households to pay off student debt than it does non-Black households; thankfully, this disparity appears to be shrinking for younger borrowers.

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“This crisis is not the result of choices that Black people made,” explained Victoria Jackson, Assistant Director of Higher Education Policy for the Education Trust, a group that “advocates for the high academic achievement of all students, particularly those of color or living in poverty.” Jackson added: “It is the result of choices that policymakers made.”

The authors of a recent Brookings Institute article call for an approach to understanding student debt that “center[s] the experience of Black people.” Looking at income alone is not enough, they argue, because “too great a focus on income can lead researchers to wrongly assume that people with similar incomes have the same ability to pay back student loans.” Here’s one example from the article that demonstrates the problem:

The nation’s tax system invisibly subsidizes high-wealth households, who use Coverdell and 529 education savings accounts so that tuition functions as a tax-advantaged intergenerational [wealth] transfer. For students with education debt, the IRS allows tax filers (married or single) to deduct up to $2,500 in student loan interest from their taxes each year. This means that borrowers with high debts will only be able to deduct a portion of their interest payments. According to our Brookings colleagues, four years after graduation, the average Black college graduate owes $52,726, compared to $28,006 for the average white college graduate. With federal interest rates between 2.75% and 5.3%, the average white household will be able to deduct their complete interest payment each year while the average Black household will not. The tax system prevents low-wealth, high-income households from ever catching up with high-wealth households.

In other words, Black professionals might make a good income, but they are still less wealthy than their white peers—both because of past and present-day discrimination they have faced and, even more so, the lasting legacy of historic discrimination suffered by previous generations.

The authors make another important point along similar lines: Among those with high balances, the ones who are the most creditworthy—i.e., those with the most income, who are disproportionately white—can refinance out of the federal debt system and get lower rates from private lenders. Thus, debt cancellation by the federal government will, even among high balance debtors, disproportionately help lower-income borrowers—who are more likely to be Americans of color.

Another Brookings piece by two of the same authors, Andre M. Perry and Carl Romer, posits that:

Because student debt disproportionately harms the wealth-poor—and the Black wealth-poor in particular—student debt cancellation could be a powerful tool in dismantling institutional discrimination and shrinking racial wealth disparities if implemented correctly. … In this paper, we center the Black experience in our consideration of student loan debt and draw from our own analysis to argue for debt cancellation that is not means-tested (predicated upon household income) as an important mechanism for closing the racial wealth gap.

These are all powerful arguments in favor of large-scale student debt cancellation.

Unfortunately, based on what Biden’s said since taking office, it’s clear that if the president is going to act unilaterally on this issue, it will not be to cancel all debt, or even to cancel anywhere near the levels called for by more aggressive advocates. Whether he ultimately exercises his authority or not is as much a political as a constitutional question—he certainly has cover from members of his own party if he wants to say he possesses that authority, though Speaker Nancy Pelosi said flat out that he can’t forgive loans on a wide scale.

Separate from any kind of broader debt cancellation, the White House is developing new income-driven repayment (IDR) plans to address some of the problems with the current ones, which include the following:

  • Most IDR plans offer payments equal to 10-15% of a borrower’s discretionary income, defined as their income above 150% of the poverty line based upon their household size. While this formula results in lower payments for borrowers, many lower-income borrowers are still not able to afford these amounts.

  • Although IDR plans can reduce monthly payments, borrowers who pay less than the rate of accumulating interest see their balances grow each month, sometimes significantly.

  • IDR plans offer forgiveness of remaining balances after 20 or 25 years. While this may be appropriate for those with higher balances, that could be too long to repay for borrowers who have low loan amounts or who have low incomes for long periods of time.

  • Despite the presence of IDR plans, many low-income or lower-balance borrowers still end up delinquent or default on their loans, suggesting that these plans are not doing enough to ensure the borrowers most at risk of negative repayment outcomes enroll and stay enrolled.

  • The variety of IDR plans and their differing terms and benefits may create tradeoffs that complicate which IDR plan provides the strongest protections and best repayment option for borrowers, and may make it difficult for borrowers to choose among them.

Hopefully, we’ll see those new plans soon, but for now, they are very much a moving target, as this draft memo makes clear. Trust me, you don’t want to read it unless your goal is to give yourself a headache. What it will tell you is that civil servants with a lot of expertise are knee-deep into the process. One hopes they’ll come up with changes that will help large numbers of borrowers.

As Rep. Ayanna Pressley has argued, “the student debt crisis is multiracial & multigenerational … it is a racial, gender & economic justice issue.” I urge you to check out Pressley’s tweet thread, in which she relates just a few of the lived experiences of those burdened by student debt.

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Thanks in part to awareness raised by student debt activists over the past 10 years, there have been some positive developments for future and would-be borrowers, even beyond the actions the Biden-Harris team has taken this year. More and more colleges are removing loans from their need-based financial aid packages, enabling students to avoid debt. There are now 15 highly ranked colleges that claim to meet the full financial need of accepted students without any loans, and others have publicly declared their intent to do so, once they raise enough in donations.

Still, most students don’t go to those elite colleges. And bear in mind that 40% of all debt holders don’t actually have a degree. Also, we aren’t getting the two years of free community college that was in the Build Back Better plan before Sen. Manchin got hold of it. So while colleges doing more, thanks to the largesse of donors, represents progress, it does nothing for the tens of millions of students already in debt. They need help, and it needs to come from the federal government.

Given the current political realities, the only person who can help them anytime soon is the president of the United States.

Ian Reifowitz is the author of  The Tribalization of Politics: How Rush Limbaugh’s Race-Baiting Rhetoric on the Obama Presidency Paved the Way for Trump (Foreword by Markos Moulitsas)





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