Update 641 — An “Incomplete” on Debt Relief
Midterm View: Education Finance and Future
In late August, President Biden announced a student debt cancellation of up to $10k of debt and $20k of debt for Pell Grant recipients, a temporary fix to a larger problem — a move hotly-discussed, as subsidizing “elite students” isn’t popular among those without higher ed degrees and other taxpayers with other debt. The decision also left open the longer-term fixes and reforms. In the short term, debtors are preparing to claim their relief through the simple application process touted by the White House while the last few kinks in the policy are ironed out including fiscal costs, the rollout, tax burdens, and legality.
Beyond the current moment, broad investments in post-secondary education are necessary to invest in the future of our economy – Biden’s cancellation opens up the conversation for discussing next steps. In this update, we reflect on the political and policy responses to Biden’s student debt cancellation announcement, the hiccups along the way, and the future of higher education finance reform and non-college investments in the next Congress.
Good weekends, all…
Six Weeks On, Five Weeks Ahead
In late August, President Biden formally announced his student debt relief policy. He extended the payment moratorium to the end of the year and canceled $10,000 of debt per borrower and $20,000 of debt per borrower who received Pell Grants, provided those borrowers made less than $125,000 annually. The move to cancel a significant amount of student debt was supported by a majority of voters, per an Economist-YouGov poll that showed 51 percent of voters supported the decision and only 40 percent opposed it.
The policy was also a net winner with the crucial bloc of independent voters, with a 44-42 favorable split. While the split may seem narrow at first glance, independents slightly supporting the policy on net makes this a smart move politically, despite initial concern about blowback from independent voters. With independent voters not penalizing Biden and Democrats for the move and base voters largely rewarding the president for the action, it appears that student loan cancellation is a politically advantageous move for the Biden administration.
Perhaps one of the most important voting blocs in this midterm cycle, young voters, have shown tremendous support for the policy. Sixty-two percent of respondents aged 18 to 29 supported the policy while a mere 24 percent opposed it. This age cohort faces the largest impacts of student debt and the high costs of higher education.
This voting bloc is expected to continue being a new large group in the 2022 midterms, a boon for Democrats. Since 2016, the youth vote has been turning out at a faster clip. Back in 2018’s blue wave election, 28 percent of voters aged 18 to 29 voted, and 50 percent of that cohort voted in 2020’s presidential election. While we may not see that 50 percent number this November, the combination of student debt forgiveness, the overturning of Roe v. Wade, the mass pardons for, and rescheduling of, marijuana, and other key issues will bring a significant chunk of the youth vote out.
Historic Total* National Student Loan Debt Balance (in trillions)
Source: Education Data Initiative
Hiccups Along the Road
With any new policy, hiccups are to be expected. Biden’s policy to cancel student debt is already being met with challenges regarding fiscal costs, the rollout, tax burdens, and legality.
- Fiscal: The Congressional Budget Office released an estimate of the total cost of the payment moratorium extension and debt forgiveness policy, which the agency reports will cost the federal government $420 billion, a figure slightly larger than what was initially anticipated. Many opponents of debt relief immediately seized on the report as evidence that relief was irresponsible and inflationary. However, beyond the inflationary argument being a largely baseless one, even the CBO acknowledged its estimate is “highly uncertain” and dependent on future economic and loan conditions. In other words, the picture will likely change a lot as the economy changes and we begin to see the positive returns from the policy.
- Rollout: Regardless of positive polling results, student debt relief will only be as well received as its rollout is effective and accessible. With the application for forgiveness expected in a matter of days, the White House and Department of Education will be prioritizing ease of use and administrative efficacy to ensure as many people as possible can receive relief. Technical issues could arise, particularly with the recent launch of this year’s FAFSA and the upcoming expiration of the PSLF waiver. Avoiding another healthcare.gov rollout debacle will be an important hurdle to clear to maintain support for this policy.
- State Tax Burden: A handful of states are expected to tax the relief borrowers receive as income. While most states have tied their tax liability to the federal definition and have thus exempted student loan forgiveness as taxable income due to a Warren-Menendez provision in the American Rescue Plan, some states have to manually change their tax codes to reflect this. Pressure campaigns are mounting in these states to seek changes to the tax liability of student loan debt relief, but some borrowers will be on the hook for an extra $10,000 or $20,000 of income.
- Legality: Pacific Legal Foundation attempted to file a suit on behalf of one of its attorneys citing the harm done by new burdens from state income taxes due to the automatic relief granted. However, the Department of Education announced those who fall under automatic relief could opt out, quickly scuttling the case before it could move higher through the judicial system. The Biden Administration also announced commercially-held FFEL and Perkins loans – federally-guaranteed loans managed by private banks – will not be eligible for relief, a move to prevent potential lawsuits that will exclude roughly 800,000 people from any relief and 1.5 million people from some additional relief. There are other outstanding lawsuits from different states that remain unresolved, but so far it does not appear any lawsuit has surmounted the challenge of obtaining standing to challenge the executive order.
With the moratorium ending on January 1, 2023, tens of millions of borrowers will be paying back their loans again. The White House will need to ensure its rollout of the policy is effective and accessible and that all remaining issues are resolved before the resumption of payments. In addition, the White House and Congress need to tackle higher education finance reform and the growing education divide forcefully over the next two years.
As discussed in a previous update, numerous proposals are circulating to reduce the cost burden of higher education. While some of these would certainly reduce the cost burden for students and borrowers, some would go further to reduce the total cost of education for both the private and public sectors. Ideally, we would secure Senator Sanders and Representative Jayapal’s College for All Act to make public two-year programs tuition-and-fee-free for all students and public four-year programs tuition-and-fee-free for families making up to $125,000.
With an eye to viability, Sens. Reed and Collins’ Partnerships for Affordability and Student Success (PASS) Act to expand financial aid through federal and state partnerships could accrue some broader bipartisan support. The PASS Act could very well be a good starting point for higher education finance reform in the next Congress.
Beyond reducing the cost of education, we have to consider investing in non-college-educated populations. Comprehensive investments in workforce development are a down payment in the future of our country and the productive capacity of our economy. This is key to securing broad enough support, especially in the Senate, for passage.
The CHIPS and Science Act and the Inflation Reduction Act signaled a sea-change of possibility in terms of national investments in cutting-edge services and manufacturing in order to reach our industrial potential, while reducing the growing divides between college-educated and non-college-educated people. That is, reforming higher education finance and ensuring equitable investments in other populations is just as much about easing the growing costs of education as it is about investing in the future of our economy and, by striking a cultural equilibrium, perhaps even democracy itself.