The Biden Administration student debt discharge proposal is being challenged in the courts and may be overturned. This one-time debt relief proposal does not change the trajectory towards higher student debt burdens. A credible case can be made for student debt relief to prevent a shock to consumption when student loan payments are reinstated. However, the proposal is arbitrary in who it assists and is not the most economically efficient or fairest way to address the pending economic shock from the reinstatement of student loan obligations.
The student discharge proposal:
The Biden Administration is proposing a one-time discharge of federal student debt. Borrowers with a Pell grant can have up to $20,000 discharged. Borrowers with a federal loan that were not eligible for a Pell grant could receive a loan discharge of up to $10,000. The amount discharged cannot exceed the amount of the loan.
Taxpayers with income less than $125,000 (single filers) or $250,000 (married filers) are eligible for the one-time debt discharge.
Student loans taken out after June 20, 2022, are not eligible for the loan discharge program.
Six states have brought litigation to stop the Biden Administration student discharge program on grounds that the Biden Administration exceeded their legal authority and that the law damages institutions in their state. The Biden Administration claims their authority to provide student loan debt relief due to COVID stems from the 2003 Heroes Act which allows for relief under a national emergency and that the plaintiffs do not have standing to litigate this issue. The Supreme court has agreed to rule on this matter and the debt discharge proposal has been stayed pending the decision.
Some issues with the Debt Discharge Proposal:
Opponents of proposals to discharge student debt argue the programs are regressive because people with access to education due to their student loans will earn more over their lifetime than workers who never go to school. This view was espoused by the moderate candidates in the 2020 Democratic primary including Joe Biden.
The student loan debt relief package is a one-time benefit. It only favors people with debt incurred prior to June 2022. It does not benefit future student borrowers. It does not change the trajectory toward higher debt burdens for future cohorts of student borrowers.
The absence of debt relief for people taking out student loans after June 2022 is necessary because the legal justification of the program is the COVID emergency. It would be difficult to maintain that people taking out loans after June 2022 needed financial assistance because of COVID, at a time when all other COVID relief packages were ending.
The Biden Administration attempts to ameliorate concerns that student debt relief favors high income professionals over workers by imposing income limits on eligibility for the debt discharge and by having a larger level of debt discharge for people who initially had income low enough to qualify for a Pell grant. These arbitrary provisions don’t lead to the program automatically targeting the student borrowers who are most in need of assistance.
Income is highly variable, especially at the beginning of a person’s career. The need for the loan discharge depends on salaries over many years not salary in one arbitrary year.
A person starting her career in the year of the discharge at a modest starting salary would automatically receive the discharge. A person three years advanced on the same career path might not receive any financial assistance if her salary has risen. For example, the debt discharge will be available for a doctor who is a resident during the year of the debt discharge program but will be unavailable for an attending physician.
A person leaving a high-powered job a year (a law associate who does not become partner) after the financial discharge provision would not receive any financial assistance despite the decrease in salary.
Many medical students who take on hundreds of thousands of dollars of debt may be more deserving of a debt discharge than students with less debt and lower debt burdens.
The person who received a Pell grant may be better off than middle-class people who are ineligible for the Pell grant when the loan was granted.
The Biden Administration claims that the Heroes Act of 2003 gives the Administration the right to modify student loans in the case of a national emergency. The plaintiffs in this case are arguing that relief offered the proposal is broader than what is allowed under the law and that the COVID emergency was only a pre-text for the program.
The Biden Administration argues that without debt relief there will be a historically large increase in delinquencies and defaults. A less expensive way to reduce defaults might involve freezing interest payments and reducing monthly minimum payments for a year or two after reinstatement of loan payments. However, the Heroes Act does not state that financial relief must be offered in the most efficient way.
No one knows how the Court will rule. The Court is not well equipped to deal with the economic aspects of this issue. Congress has other levers, including the budgetary process and the debt limit, to force changes to the program.
The one-time debt relief proposal is at best a band aid. It does not address the continuing acceleration in college costs and student debt. The debt discharge proposal is only one component of the Biden Administrations efforts to assist student borrowers. Other programs including revisions to Income Driven Replacement (IDR) and some waivers for the discharge of current IDR loans will be addressed in a future post.