Redistributive policy

Biden Decision on Student Debt – People’s Policy Project

In March 2020, the federal government suspended loan repayments, lowering interest rates on student loans to 0%, and stopping collections on defaulted student loans. These changes were only applied to loans held directly by the Department of Education, which account for approximately 80% of all outstanding student loan balances. This student loan freeze costs about $52 billion a year, or about $130 billion for the 30 month freeze.

The student loan freeze is set to expire on August 31, which means President Biden will be obligated by that date to make decisions about what to do about collecting student debt going forward. There are many options open to him, but the two key questions seem to be:

  1. Should he cancel $10,000 of each student’s debt?
  2. Should he end the student loan freeze?

$10,000 forgiveness

The cost and distributional impact of canceling $10,000 of each person’s student debt is not exactly what it appears at first glance. Over the past decade, the percentage of borrowers enrolled in an income-based repayment (IDR) plan has gone from 10 percent at 32 percent. Individuals enroll in these schemes because their debt-to-income ratio is so high that it is better to pay a percentage of their income for their loan than the conventional fixed monthly payment. After making income-based payments for a period of time, their loans are forgiven.

For some IDR borrowers, reducing their debt by $10,000 will lower their debt-to-income ratio enough that they can revert to conventional repayment and therefore benefit to some degree (even if it’s not $10,000 ). For other IDR borrowers, their debt to income ratio will still be so high that they will stay in an IDR plan and not get the $10,000 discount.

The interaction of the $10,000 loan forgiveness and the IDR system alters the actual distributive impact of the policy quite drastically. In the graph below, I ground what percentage of borrowers are registered for IDR by loan balance.

As expected, the higher the loan balances, the more likely a person is to be listed on the IDR. This means that the actual benefits of a $10,000 rebate are heavily skewed toward debtor students with lower balances. And since lower balances are generally associated with lower levels of academic achievement (dropouts, associate degrees, public bachelor’s degrees) and higher balances are generally associated with higher levels of academic achievement (doctors, lawyers, men business and higher education), this means that the benefits of forgiveness are, in a strange way, much more targeted than they first appear.

Because so many borrowers will remain in IDR even after forgiveness, the total cost of such a program will actually be quite a bit less than it first appears.

Overall, a $10,000 forgiveness would wipe out the student loan balances of about 31% of student debtors while reducing the student debt balances of 21% of student debtors by half or more.

What all of this tells us about the wisdom of the $10,000 forgiveness, I’m not entirely sure. Some will see it and bemoan the fact that such forgiveness brings no relief to those who are burdened with the heaviest debt burden, while others will see it and rejoice that it targets the friendliest students. .

Such forgiveness does not necessarily provide any benefit to those without student debt, including those who have never attended college or those who have already paid it off. And a pardon like this also does nothing to fix the college financial system in the future, which means that debts will only pile up again when the next wave of people pass through college.

These last points are the most tempting to bring up in debate, but because of the strange procedural position the president finds himself in – he can unilaterally cancel student debt but cannot unilaterally expand the welfare state or reform the college funding – they are also the least relevant to the question posed.

Student loan freeze

The issue of the student loan freeze received much less attention in the speech than the issue of the $10,000 forgiveness. This is quite odd considering the freeze is a form of ongoing forgiveness, which costs $52 billion a year.

At this point, it’s hard to understand what exactly is the COVID-specific case for pursuing the student loan freeze. Economic output and employment are now above pre-COVID levels and all significant COVID economic restrictions have been lifted. Other COVID relief measures — including extended unemployment benefits and economic impact payments — have all been cut.

These days, it seems that the pursuit of the freeze is predicated on the idea that all student debt should be canceled and everything close to it, including a measure that effectively cancels $52 billion a year while eliminating most of the flow of involuntary debt repayment, is expected to continue indefinitely until lawmakers craft a comprehensive college funding solution, including a more comprehensive forgiveness. It’s kind of like the argument for implementing the Indefinite Deferred Action for Childhood Arrivals (DACA) program until Congress passes comprehensive immigration reform.

What to do

Personally, I found the question of what to do about these two actions a bit difficult to answer. In presidential elections and abstract political debates, it is much easier to toss around different ideas for college funding reform because in such speeches, you are not limited by what the executive can do unilaterally. No one would ever propose these specific actions if they could simply legislate a comprehensive solution to the overall issue of college funding. But in our weird political system, we find ourselves faced with a weird set of policy options that don’t mesh well with a specific vision of how to create a well-designed college funding system.

In this scenario, my mind begins to drift more towards political considerations. Like it or not, 30 months of student debt freezes have, to some extent, created a new baseline policy. It seems wrong to proceed as if simply returning to the pre-COVID system would not be experienced as a significant negative policy change affecting tens of millions of individuals and their families. And to do that two months before a midterm election seems particularly reckless.

During his campaign, Biden explicitly promised to forgive $10,000 in student debt, a promise he has publicly claimed he will soon meet several times this year. To renege on that promise when he has the unilateral ability to enact the policy would be outright treason.

Given these considerations, it seems that as August 31 approaches, the prudent course of action is likely to be to enact the $10,000 rebate while announcing a date for the resumption of student debt repayment. The pardon would deliver on its campaign promise while mitigating the practical and political impact of unwinding the reimbursement freeze.