Introduction: The student debt discharge proposal crafted by the Biden Administration is in trouble.
It is currently being challenged before the Supreme Court and in Congress.
The connection of the student debt discharge proposal with the COVID pandemic is tenuous at best. The conservative court is likely to rule that the President does not have the authority to provide debt relief in this form. A ruling against the Administration on this proposal could expand the type of federal regulations subject to challenges.
The GAO has ruled that the Biden Administration’s student debt discharge proposal is subject to the Congressional Review Act, which allows Congress to overturn government agency rules by majority vote. A bill currently in Congress could eliminate the student debt discharge program; although President Biden will likely veto this bill if it passes Congress.
The additional debt stemming from failure to reinstate some payments on student loans will also increase the national debt and exacerbate issues related to the debt limit dispute. Congressional Republicans may link the student debt discharge proposal to the debt limit debate.
The Biden Administration will find itself in the uncomfortable situation of having to defend an executive order that reduces revenue when Congress is refusing to increase the debt limit, an action that could lead to a catastrophic default.
Clearly, Congress is responsible for all debt incurred from past spending and tax decisions. However, the Biden Administration student debt discharge plan was not explicitly approved by Congress.
These economic, legal and political problems can be resolved by replacing the current student debt discharge proposal with a modified program that is more closely linked to payment problems caused by the COVID pandemic.
Background on the Biden Student Debt 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 without a Pell grant can receive a discharge up to $10,000.
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.
Many people question the connection between the proposed student debt discharge and the COVID emergency which created the rationale for the proposed discharge. Some people will have all of their debt discharged, far more than is necessary to deal with problems caused by the COVID pandemic and the payment shock from the reinstatement of payment obligations.
The COVID pandemic has largely ended in the United States and most program designed to assist people because of COVID, including additional food stamps, housing assistance, expanded access to Medicaid, and free vaccines, have ended or are ending.
Motivating student debt relief because of the COVID emergency:
The COVID emergency has exacerbated two problems associated with student debt.
First, the restart of loan payments creates payment shock for many households at a time when interest rates are rising, and many prognosticators believe the economy is heading towards a recession. A limited temporary revision to student loan contracts could address problems to the economy caused by the payment shock.
Second, most borrowers have a higher outstanding student loan balance because of the student debt payment freeze. A non-trivial portion of these borrowers are older and either nearing their last decade in the workforce or nearing retirement. The growth of the number of older Americans with retired student loans is a growing problem, which appears to have been exacerbated by the payment freeze. A limited temporary revision to student loan contracts could address problems caused by the higher outstanding loan balances stemming from the student loan payment freeze.
Any emergency student debt relief proposal that is consistent with efforts to mitigate problems associated with the COVID pandemic should be tailored to address those problems in a cost-effective manner. A one-time debt discharge of up to $20,000 is not a cost-effective solution to these COVID era problems.
An alternative student debt relief plan:
The alternative student debt relief plan presented here offers a 0 percent interest rate on federal student debt up to a balance of $30,000 for a period of five years.
The alternative student debt relief plan could also include a loan discharge of 10 percent of each on-time monthly payment.
A new executive order replacing the current debt discharge proposal with these modifications to the student loan contract would address the problems caused by payment shock and the the increase in borrowers nearing retirement with large outstanding student loan balances.
This interest rate reduction is a cost-effective way to reduce payment shock from the return of student debt payment obligations.
The reduction of the interest rate from 5.0 percent to 0.0 percent on a 10-year $30,000 student loan would reduce monthly payments from $318 to $250, approximately a 21 percent decrease in monthly payments. The reduced payments over five years add up to $4,092.
The additional 10 percent discharge applied only when payments were made on time could reduce debt by an additional $409 dollars.
The 10 percent discharge and a late fee when payments are not made on time would incentivize student borrowers to make payments on time, even though the interest rate on the loan was set to zero.
Concluding Remarks: The interest rate reduction and partial debt discharge described here incentivizes student borrowers to repay their loans. The receipt of loan payment by the Treasury will reduce the national debt over time compared to the Biden Administration discharge proposal and compared to the current freeze on payments.