Student debt cut no cure

The astronomical level of student debt accrued in the United States is inflicting lasting, generational damage on the lives of millions of Americans. More than 45 million people are now carrying more than $1.7 trillion in debt, most of it owed to the federal government.

The burden of that debt is crushing and follows borrowers throughout their lives: It is delaying marriage and home buying and the birth of children. It leaves some students broke on the day after graduation. Others labor for years only to find their balances larger than when they graduated. Lower-income students who must borrow heavily to obtain that degree can end up earning middle-class incomes without being able to lead middle-class lives. Around 40% of borrowers never graduate from school in the first place. And one-third of the debt will never be paid off, according to the Department of Education.

The Biden administration should spend its finite resources and political capital on fixing the higher education system to make it more affordable while helping those borrowers in the most distress. There are already ways to do this, although they have not gotten nearly enough attention or resources.

Canceling student debt across the board is not one of them. Trying to fix such a shattered system with the flick of a pen on an executive order could even make it worse. Canceling this debt, even in the limited amounts that the White House is considering, would set a bad precedent and do nothing to change the fact that future students will graduate with yet more debt — along with the blind hope of another, future amnesty. Such a move is legally dubious, economically unsound, politically fraught and educationally problematic.

As a candidate, Joe Biden said he supported congressional action to tackle student debt. Legal experts disagree about whether the president has the authority to cancel student loan debt through an executive order, as the White House is now considering. That raises the possibility that this issue could be dragged out in the courts for years.

All told, 79 million American adults have had student loans at some point. Nearly half have paid them off entirely. Waiving $10,000 in student debt, the amount Biden proposed during his presidential campaign, could clear the books of as many as 15 million of the more than 45 million Americans who still owe borrowed money for school. Proponents of debt cancellation argue that Democrats need to deliver on a campaign promise to a key constituency, and it may well be politically advantageous for them to do so before the midterm elections, when turnout of the Democratic base will be critical to the party’s success. But if the Biden administration puts forward a plan that voters do not regard as fair, the party could face a backlash at the polls.

Since Biden took office, his Department of Education has taken several important steps to alleviate some of the burden of loans for borrowers who are unable to pay and forgiven the debts of some students defrauded by for-profit schools. Throughout the pandemic, borrowers have been forgiven the interest that accrued on their loans each month in addition to not having to pay down the principal of the loan. The Biden administration has extended the pause several times, and it is now set to expire Aug. 31.

The moratorium on payment of federal loans, which make up more than 90% of all student debt, has already cost $100 billion and has canceled the equivalent of $5,500 in debt per borrower.

The White House is considering various proposals for debt cancellation, possibly with income-based limits for eligibility. Such limits are crucial, because they direct the help to those most in need. An across-the-board cancellation would be tremendously regressive, according to an analysis by the Brookings Institution. Most debt is held by higher-income households, and so any amount of universal forgiveness would benefit them disproportionately. In fact, the growth of student debt for graduate school — held by students whose degrees will offer them the greatest future earning potential — is a major driver of overall student debt. Graduate students account for some 37% of all federal student debt, and there is a lucrative return on investment for getting certain advanced degrees.

Federal repayment plans adjust monthly payments based on income and family size and extend repayment periods. Debts are eligible for forgiveness after 10, 20 or 25 years of payments. Around 30% of all borrowers with federal loans are in such a program, and more borrowers could benefit from participating in one.

But the repayment programs have a poor track record. Not long ago, fully 98% of people who applied to have their debts waived had their claims rejected. A report from the Government Accountability Office in March found that millions of dollars in student debt could already have been forgiven if the programs had been administered properly. Richard Cordray, chief operating officer at Federal Student Aid, an Education Department agency, called the failure “really inexcusable.”

The Education Department has been working to fix these programs by retroactively giving qualified borrowers more credit for time spent in public service and hoeing through a backlog of paperwork, but it could do more. Additional changes to income-based repayment programs — such as reducing interest payments, lowering eligibility standards and exempting forgiven student loan debts from taxation — could have big effects over time, according to a report from Pew. Congress and the Education Department should look to such changes as part of a more sustainable solution to the debt problem.

Lawmakers should also consider making it easier to discharge student loans through bankruptcy, a measure of relief that is available for credit card and mortgage debt. Changes to bankruptcy law in 2005 have also made those protections less accessible.

The Education Department has started a long-overdue crackdown on predatory schools, another significant source of student debt defaults. The Obama administration tightened the rules on for-profit schools, but the Trump administration’s Education Department, under Betsy DeVos, relaxed those rules and let repayment and forgiveness programs atrophy. Last month the department discharged $238 million in debt held by 28,000 people who attended the Marinello Schools of Beauty, which closed in 2016. The school engaged in “pervasive and widespread misconduct,” a department investigation found.

Since 2021, the Biden administration has approved more than $18.5 billion in loan discharges for more than 750,000 borrowers, including $6.8 billion for 113,000 people in the Public Service Loan Forgiveness Program and $8.5 billion for more than 400,000 borrowers with total and permanent disabilities. The administration is also pushing to double the maximum Pell Grant and restore a rule that holds schools accountable for the gainful employment of their graduates — a measure aimed at for-profit colleges.

Those moves are all to the good, addressing the student debt crisis with policies that are compassionate and fair.

They will not, however, solve structural inequalities like the racial wealth gap. Supporters of debt forgiveness argue that targeted relief is inadequate and that broader relief would help to close the gap. Black college graduates, on average, owe $25,000 more than their white peers. More than half of Black borrowers report that their net worth is less than the balance of their student loans. And Black borrowers are more likely than their white peers to drop out of school before receiving a degree.

But across-the-board debt forgiveness will not help. As a recent report from the Brookings Institution concluded, only targeted policies based on race or socioeconomic status “can address the inequities caused by federal student lending programs.”

While inflated college tuitions are part of the reason for the rise in student debt — average student debt is now up to $36,800 from $24,700 a decade ago — it bears noting that the number of students receiving loans to attend college has also increased. In other words, American students keep borrowing to attend college because a degree still offers the promise of prosperity. The Biden administration should focus on confronting the problems with college affordability and loan repayment so more students and graduates have a better chance at that prosperity.