Why canceling student loan debt is complicated

WCCO, UNIV. OF MINNESOTA, CNN

By Katie Lobosco, CNN

President Joe Biden is considering canceling some federal student loan debt, suggesting a once pie-in-the-sky idea is closer than ever to becoming reality.

But while some Democrats argue that the President should immediately erase large amounts of student loan debt for 43 million Americans with the stroke of his pen, the implications of such a significant policy move are complicated.

There are upsides and downsides.

On the one hand, student debt cancellation could deliver financial relief to millions of Americans, helping them buy their first homes, start businesses or save for retirement — all investments that may take a back seat to pay off student debt. Loan forgiveness could also help narrow the racial wealth gap, some experts say.

But broad student loan forgiveness would also shift the cost — likely hundreds of billions of dollars — to taxpayers, including those who chose not to go to college or already paid for their education. Loan cancellation could also add to inflation while doing nothing to address the root of the problem: college affordability.

“This is a pretty complex issue,” Education Secretary Miguel Cardona told MSNBC’s Symone Sanders earlier this month when she pressed him on why broad student debt cancellation hasn’t happened yet.

Borrowers currently hold $1.6 trillion in outstanding federal student loan debt, more than Americans owe in either credit card or auto loan debt. About 54% of borrowers with outstanding student loan debt owed less than $20,000 as of March 2021, according to the College Board. About 45% of the outstanding debt was held by the 10% of borrowers owing $80,000 or more.

Compared with other kinds of debt, it’s extremely difficult to discharge student loans in bankruptcy. Prior to the pandemic, thousands of borrowers had their Social Security checks garnished because their student loans were in default.

Federal student loan payments and interest accrual have been frozen since March 2020 due to a pandemic-related pause that Biden has extended several times. Payments are set to resume after August 31, and the White House has indicated that the President will decide whether to cancel some student debt by then — just months before the midterm elections.

Student loan debt cancellation won’t lower the cost of college

A one-time cancellation of federal student loan debt would do nothing to bring down the cost of college for future borrowers or those who already paid for their degrees.

“Forgiving debt does not affect college affordability at all,” said Douglas Holtz-Eakin, president of the American Action Forum, a conservative think tank, and former director of the nonpartisan Congressional Budget Office.

In fact, it might even drive up the cost of college, he said. If prospective students have reason to believe that a future president may cancel their debt, they may be more willing to borrow more money — and colleges, in turn, may decide to charge more for tuition and fees.

“It creates this moral hazard and sets up an expectation that debt may be forgiven in the future,” Holtz-Eakin said.

Biden has acknowledged that college affordability is a problem and called for making community college free — but that move would require an act of Congress. The proposal was cut from the Biden-supported Build Back Better bill, which passed the House but stalled in the Senate.

An economic boost? Or higher costs for all?

A lot of borrowers say that having less student debt hanging over their heads could help ease the pain of rising inflation.

If Biden cancels some student loan debt, it’s true that some borrowers will owe less money on a monthly basis and in turn, have more money in their pockets. But more consumer spending could add fuel to an already overheated economy.

“It’s a situation where what’s good for individuals is not necessarily good for society,” said Beth Akers, a senior fellow at the conservative American Enterprise Institute, where she focuses on the economics of higher education.

“In reality, it probably wouldn’t move the needle drastically in either direction. But the downside for cancellation got a bit worse since we entered this inflationary period,” Akers added.

One reason the economic impact may be modest is because borrowers generally pay back their student loans over time. They wouldn’t receive a lump sum of money if some of their debt is canceled. They would instead be required to pay less money each month toward their student loan payments.

A report from the nonpartisan Committee for a Responsible Federal Budget estimated that canceling all $1.6 trillion in federal student loan debt would increase the inflation rate by 0.1 to 0.5 percentage points over 12 months. But Biden has suggested he would cancel less than $50,000 per borrower.

The group has also found that canceling student debt is not a cost-effective way of providing economic stimulus.

The cost of canceling student loan debt would add to the deficit — transferring the cost from borrowers to all taxpayers. The White House has suggested Biden is considering canceling $10,000 per borrower, but excluding those who earn more than $125,000 a year. Under those parameters, student loan debt cancellation would cost at least $230 billion, according to the Committee for a Responsible Federal Budget.

Helping poorer households as well as high-earners

There are certainly many low-income Americans who are struggling to pay off their student loan debt. But it’s not easy to target loan forgiveness to those who need it the most and exclude borrowers with higher salaries.

Many economists argue that canceling student loan debt would disproportionately benefit higher-wealth households, like those of doctors and lawyers, because those borrowers tend to have more student debt after attending graduate school.

An income threshold that cuts off borrowers who earn more than $125,000 a year could help make sure a bigger proportion of the relief goes to low-income borrowers.

Matthew Chingos, vice president of education data and policy at the Urban Institute, has estimated the share of forgiven debt by income group if Biden canceled $10,000 of student loan debt for borrowers earning less than $125,000 a year.

About 16% of the canceled dollars would go to the poorest households earning less than $25,000 a year.

Roughly one-quarter of the relief dollars would go to those earning between $26,000 and $44,000, and another quarter to those earning between $71,000 and $122,000.

One-third of the relief would go to households with total incomes between $45,000 and $70,000 a year.

Student debt cancellation would help close the racial wealth gap, experts say, because Black students are more likely to take on student debt, borrow larger amounts and take longer paying them off than their White peers.

“Canceling student debt is one of the most powerful ways to address racial and economic equity issues. The student loan system mirrors many of the inequalities that plague American society and widens the racial wealth gap,” wrote dozens of Democratic lawmakers in a March letter to Biden urging him to cancel “a meaningful amount of student debt.”

But the impact on the racial wealth gap could be muted by the fact that there are also fewer Black college students than White college students. Chingos’ model found that 62% of the canceled student loan dollars would go to White borrowers while 25% would go to Black borrowers if Biden canceled up to $10,000 for those earning less than $125,000 a year.

Plus, most Americans don’t have student loan debt at all. Roughly 80% of households below the $125,000 threshold don’t have student loan debt and would not see a benefit if Biden takes new action, according to Chingos.

Some loan forgiveness programs already exist, but they don’t always work

There are already federal student loan repayment programs that exist to help borrowers who are struggling to make their payments or were victims of for-profit college fraud.

Most federal student loan borrowers are eligible for loan repayment plans that tie their monthly payment amount to their income and family size, known as income-driven repayment plans. There are a variety of plans, but generally they cap payments at 10% of a borrower’s discretionary income. After 20 or 25 years of payment, depending on the specific plan, the remaining student loan debt is forgiven.

But the programs are messy and don’t always work the way they should. A recent Government Accountability report found that few people have qualified for forgiveness under an income-driven repayment plan. The Department of Education had approved forgiveness for a total of 157 loans as of June 1, 2021. Meanwhile about 7,700 loans in repayment may have already been eligible for forgiveness.

The federal government also offers a student loan forgiveness plan for public sector workers who make 10 years of qualifying monthly payments. But the program, known as Public Service Loan Forgiveness, has also had problems that prevented people from qualifying.

The Biden administration has made changes to both the income-driven repayment program and the Public Service Loan Forgiveness program that are bringing millions of borrowers closer to debt forgiveness.

There is also a government forgiveness program for borrowers who enrolled at schools that shut down while they were enrolled or fell short of delivering the education the institutions promised. The Biden administration has been chipping away at a backlog of forgiveness claims filed under this program, known as borrower defense to repayment.

Altogether, about $18.5 billion in student loan debt has been forgiven for more than 750,000 borrowers since Biden took office, per the latest figures from the Education Department.

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