by Dr. Watson Scott Swail, President & Senior Research Scientist

Earlier today, the Biden Administration unleashed the Biden Administration’s Student Loan Debt Relief Plan (SLDRP?), a new series of policies aimed at reducing student loan burden for millions of current and past students across the country. My organization and hundreds (perhaps thousands) of others around the country have been diligently advocating for improvements to college access and affordability for students for decades. It should be understood that there is still a “have and havenots” reality in higher education based largely upon income categories and socio-economic divisions. Thus, when a new policy comes along that attempts to ameliorate the significant barriers to and through college, we applaud those efforts. However, from a policy standpoint, it is important to point out the potential challenges with stated policies, which I will do here.

To be transparent, I’ve written extensively about the issue of loan cancellation/forgiveness policies for quite a while. I remain consistent in my belief that debt cancellation is imprudent public policy. For past pieces, simply click here, here, here, or here.

On first blush, the Biden plan sounds promising. It provides $10,000 of debt cancellation to those earning under $125,000/year or $250,000 (married filing jointly). My understanding that this will be available to anyone with outstanding federal student debt. If the student received a Pell Grant, then that amount doubles to $20,000. Not insignificant. A second part of the program is the “Public Service Loan Forgiveness” (PSLF) program. This program is aimed at borrowers who work for “non-profits, the military, or federal, state, Tribal, or local government.” For them, they can have their entire student loans cancelled after 10 years of “service.” We’ll talk about this later. A third part will require borrowers to pay “no more than 5% of their discretionary income monthly on undergraduate loans.” It is currently 10 percent. These borrowers will also have their loan balances forgiven after 10 years.

First, the idea of reducing debt sounds good, but there are many caveats to consider. First off, we need to point out that the SLDRP programs are not free. In fact, we do not know how much they will cost, although estimates for the $10/$20k loan cancellation will likely fall in the $400 billion range. The Department, as of this writing, has not provided cost data at this stage. But the program will either be paid via taxpayers (e.g., federal budget) or through new federal debt financing, which is largely held by foreign nationals (e.g., Japanese-based financiers own $1.2 trillion of US federal debt and Chinese financiers own $980 billion of our debt)[1].

Second, $10,000 sounds like a lot. $20,000 even more. But only 5 percent of current borrowers have $10,000 or debt or less.[2] This program will nick it down, but overall, $10k isn’t that much of an injection. People have larger car loans that student debt in many cases. Here is something I wrote last year based on sitting in a student loan hearing on Capitol Hill 20 years previously:

“It harkens me back to a college affordability hearing on Capitol Hill 20 years ago. A student was testifying about the exorbitant cost of her student loan, to which John Boehner, the future Majority Leader and Speaker, asked her, “Do you own a car, and did you buy that car?” He asked how much she paid a month for her car and how much for her education loan, summing: “well, you were able to go out and buy a car with a loan but somehow your loan for higher education is too high?” [paraphrased by the author].”(Click here for full article).

I get that John Boehner perhaps oversimplified the situation, but he wasn’t altogether wrong. I think many people will feel the same way with today’s announcement.

I don’t overly worry about students who take out small amounts of student loans to get into and through college. In fact, we, as an industry, strongly encourage the use of student loans to make college possible. No one likes debt, but well-thought-out debt can be life-changing. I have more empathy for students who have to take out much larger student loans (e.g., in the $25-$50k mark, or higher) to make their college dreams a reality. I feel sorry for those who could not make the savings necessary or have parents that simply do not have the resources to help out. These students, some of whom are graduates and some of whom did not graduate, hold significant debt burdens that are much harder to get out from underneath. $10k will help them, but not overly in the grand scheme of things.

My biggest issue with any of the proposals today is about fairness. While it sounds good to reduce debt for those who can use a lift, if you are making $125,000/year, you get $10,000 in free money. That seems like a high ceiling. If they had capped it at $40k or $50k, I’d feel better about it. Also, the policy is a slap in the face of those students and families that worked diligently and made prudent decisions to keep from excessive debt, let alone no debt. What about parents who took on PLUS loans to keep our kids from running up student debt? And what about parents who borrowed from retirement programs to pay for college costs? Continuing on the fairness principle, what about borrowers who diligently paid off their loan prior to this policy? Is this a refundable program? And what about those who go to college next year? Will they benefit? Does this become a program like Pell? (No, it won’t).

I just read a quote on WAPO from the Groundwork Collaborative, a “left-leaning think tank” (I have never heard of them prior to this reading). Their executive director said that “It’s great to see the president take action to forgive the crushing debt burdens of borrowers from the most disadvantaged backgrounds.” Well, if only that were totally accurate. First, $10,000 isn’t going to reduce “crushing debt.” Second, based on $125,000/$250,000 (married), it isn’t just hitting those with “disadvantaged backgrounds.”

As for the income contingent program that was advertised today, I have long been an advocate of income contingent programs. They are practiced in many other countries, but they never really clicked here, even though there is currently an ICL program in place at ED. As of today, the President wants to cap repayment at 5 percent of income, regardless of amount of debt (there may be some “contingency” for this, but program details are still limited at this stage). For many students, there is an opportunity to “run out the clock” on their student debt as opposed to those who diligently repay their loans. Others may fully game the system, especially those with very high student debt from very expensive schools.

With regard to the SLFP (forgiveness) program, it just doesn’t seem fair to me. It suggests that people who work in other industries that also do “public good” will not benefit from this program. From my vantage point, working for the federal government (or state or local) isn’t “public good” for most employees. It is a job. Same for the military and for many non-profits. We have a GI Bill for the military. I don’t necessarily believe that someone who works for a non-profit should be treated better yet differently than someone who is working for a for profit that may, for example, find a cure for cancer or lead some climate change technological program. It is a very myopic and rose-colored view about the world of work and society at large.

On an aside, there was talk today that this program could influence inflation. Let’s just nip that one right here. This program simply doesn’t provide enough capital to individuals to make an inflationary adjustment. Quite simply, there won’t be a $10,000 check going to people to spend on Amazon. This will be a direct payment of current student debt. Borrowers will never see the money (and they won’t see that debt, either). Sorry Larry Summers, you are wrong on this.

As stated, this isn’t new, but this is the first actual policy we’ve seen rolled out by either an Administration or Congress. It harkens back to Hillary, then Bernie, and then Biden. The progressives have been pushing for agenda for quite a while.

For me, I would rather see a renewed level of support for the Pell Grant program. Currently in its 50^th year since it was authorized (1972 Reauthorization of the Higher Education Act), it has been underfunded for decades. The Biden Administration could have used this 50th Anniversary to create a new, groundbreaking version of the Pell Grant Program that could have a massive impact on low- and middle-income families and students. Unfortunately, the Administration punted on that one. The reality is that this fall, students will have to deal with the same Pell maximums and the same rising costs. Nothing will have changed for most students.

As a close to this piece, which I hope to discuss in further detail as we receive further details, including hopefully a Congressional Budget Office scoring, here some things that came to my mind about what we heard today from the President.

Regarding the $10,000/$20,000 Debt Cancellation Program:

• If you carefully selected your college and program to keep from taking on student debt, sorry, this program won’t help you;
• If you saved to go to college and didn’t take on a student loan, sorry, this program won’t help you;
• If you worked one, two, or three jobs to help with college costs and didn’t take on a student loan, sorry, this program won’t help you;
• If you paid off your student loan quickly and prudently, sorry, this program won’t help you;
• If you recently made your final student loan payment after years and years of repayment, sorry, this program won’t help you;
• If you take out a loan this year and next year and onwards, sorry, this much of this program won’t help you (SLFP will);
• If your parents used their retirement funds to pay your college and keep you from taking on student loans, sorry, this program won’t help them;
• If your parents took on PLUS loans instead of you taking on student loans, sorry, this program won’t help them.

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[1] https://www.statista.com/statistics/246420/major-foreign-holders-of-us-treasury-debt/.

[2] https://www.washingtonpost.com/education/2022/08/24/biden-student-loan-cancellation/.