Ask Students, Is Debt Certain?

Update 506: Ask Students, Is Debt Certain?  
Now for Something Completely Academic…

Amid the impeachment trial in the Senate — with the defense just having rested its case — and unrelenting and unaddressed pandemic needs unabated in the country, we stop to look at a now-endemic economic crisis: the student debt burden. A $1.7 trillion problem, student debt plagues most millennials and those old enough to wonder what college costs. The inequity has yielded the worst generational wealth gap in the last 100 years. 

Below we evaluate the impact of the current pandemic on the student debt crisis, examine possible solutions, and explore the impact of taking action, or not.

Good Presidents’ long weekends all,

Dana

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Last week, the Senate Health, Education, Labor, and Pensions Committee advanced by a 17-5 vote the nomination of Miguel Cardona, President Biden’s pick for Secretary of Education. The Senate will likely confirm Cardona with bipartisan support, and one of his primary responsibilities will be overseeing federal student loans, which now comprise over $1.5 trillion in debt. 

Pandemic Relief 

Student loan debt is the second-largest source of consumer debt in the US, exceeding accumulated car loans and credit card debt; its growth rate is nearly seven percent annually and is expected to reach $3 trillion by 2038. From 2008 to 2020, student debt increased by 102 percent, and the cost of a four-year public degree grew by 15.5 percent.

Source: Federal Reserve Bank of New York, Quarterly Report on Household Debt and Credit, 2019:Q4, February 2020 (Peter G. Peterson Foundation) 

This debt crisis compounded with the pandemic’s shock to the economy demanded swift action. Last March, Congress suspended payments and interest accrual on federally-held student loans. The benefit was originally set to expire in September 2020 but was extended through January, and again through September of this year.

This temporary reprieve excludes privately-owned or held student debt. But the benefit affects about 85 percent of all federal student loans and around 41 million people — the vast majority of student loan borrowers. 

An estimated 90 percent of those eligible have taken advantage of the suspension during the pandemic, but this break from collection is not enough for many borrowers. A November Pew survey found that six in 10 borrowers would have difficulty repaying student loans again if the suspension had ended in December. Many are likely still struggling due to the pandemic’s continued effect on the economy. 

Biden’s Student Debt Plan

With control of Congress and the White House, Democrats have an opportunity to relieve student debt. Over 42 million people, or about 92 percent of all student loan borrowers, have loans backed by the federal government. Recent discussions are focused on how much student debt should be forgiven and how to target relief. On the campaign trail, Biden proposed numerous policies to address student debt:

  • Direct Forgiveness: President Biden has called on Congress to pass legislation forgiving $10,000 in student debt for individual borrowers. Other congressional Democrats, including Majority Leader Schumer, have called on Biden to forgive up to $50,000 via executive order. About one-third of borrowers have debt less than $10,000, while forgiving up to $50,000 would eliminate the debt of about 80 percent of borrowers. Under either plan, only student debt holders earning less than $125,000 a year would qualify for forgiveness. Whether the president has the legal authority to unilaterally eliminate student debt remains debatable.
  • Tuition-Related Debt: Biden has also proposed eliminating undergraduate tuition-related debt for federal student debt borrowers who attended either public schools, Historically Black Colleges and Universities, or Minority Serving Institutions. This could be challenging to implement because it would be difficult to discern whether loans were meant for tuition or housing.
  • Public Service Forgiveness: The Public Service Loan Forgiveness (PSLF) program currently offers forgiveness to public and nonprofit employees, but intake rates are low. Biden has proposed changing the program for new borrowers to offer up-front payments of up to $10,000 per year for up to five years.
  • Income-Based Repayments: Income-driven repayment plans tie loan payments to a percentage of income. Biden proposes the following reforms: automatic enrollment for all borrowers (with an opt-out option), payments at five percent of discretionary income (current plans are at 10 percent and 20 percent), raising the threshold of what is considered discretionary income, and making monthly payments $0 if income is below $25,000. This proposal would make repayment more manageable and decrease the likelihood of default for low-income individuals. 
  • Bankruptcy Discharge: Biden has called for allowing both federal and private student loans to be discharged in bankruptcy, which was previously allowed until 1976. In order to qualify for bankruptcy today, borrowers must prove that their debt imposes an undue hardship — a high standard that effectively blocks most borrowers from discharging loans. Restoring this option would have a minimal cost and provide an option for the small percentage of borrowers who need it the most.
  • Defense to Repayment: The Trump administration made it harder for borrowers whose schools made false claims and defrauded them to get loan forgiveness under an existing rule, only approving a small percentage of applicants for forgiveness. Biden said he would reverse the rule change and restore assistance to students who were financially harmed due to misrepresentations by their colleges. 

Impact of Student Debt Forgiveness

Fair-minded progressives raise the question of whether student debt forgiveness is fair or an effective economic stimulant. We’ve examined student debt relief’s distributional and stimulus effects: 

  • Stimulus Effects: Proponents of student debt forgiveness claim that it would help pull the economy out of the pandemic-induced recession. But student debt forgiveness is ineffective on a dollar-for-dollar basis. The Levy Institute estimates that total student debt cancellation would increase cash flow by as much as $108 billion per year. While Biden’s $10,000 proposal would cost less, it would also have a smaller impact on the economy. Still, forgiving student debt may impact a borrower’s ability to pay down costly debt or their willingness to make larger purchases such as buying a house or a car. 
  • Distributional Effects: Student loan forgiveness can close the widening racial wealth gap. Due to a lack of intergenerational wealth, a higher share of black students take out loans than white students — and take out larger loans. Two decades after entering school, the median white borrower has paid off 94 percent of debt, whereas the median black borrower has paid off just five percent.

Notwithstanding, student debt cancellation rewards mostly middle-income households. Those with college degrees earn more income than those without. The highest-income households owe about 60 percent of outstanding student debt, while the lowest-income households owe less than 20 percent of the debt. However, this reflects that those with college degrees earn more income than those without, and those with the largest debts are graduate school borrowers who earn even more on average. The $50,000 cancellations would begin to phase-out for higher-income households. Though higher-income households may still benefit disproportionately, lower-income households would get the largest relief relative to their incomes.

Two other important distributional concerns have been raised. First, student debt forgiveness rewards individuals who have invested surplus income in 401ks or home equity rather than pay down debt. Second, only those with student debt are helped by the proposal — only a fifth of the adult population—and thus excludes those who did not attend college (roughly 55 percent of the population). Student debt relief will not be a panacea for the country’s economic woes, and other policies must address struggles unrelated to the high cost of secondary education.

While better solutions than forgiveness exist, all major reforms except student loan forgiveness would require legislation. Student loan cancellation is not a maximally progressive solution, but it’s a first step that can likely be accomplished through executive action under the Higher Education Act. Further reforms are certainly needed to fix higher education financing. Still, student loan debt can further the cause of racial justice and ease a growing debt burden on younger generations. 

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