December, 2020
Washington – The Biden Administration has big decisions to make on student loans. Here are some suggestions.
Immediately: Support bipartisan legislation to treat student loans as other consumer debt is treated and, administratively, develop new, more flexible standards to determine conditions under which to oppose borrower bankruptcies. Such changes will not only assist borrowers in need of a new start, as recognized even in the Constitution, but provide better incentives throughout the student loan system to help borrowers in trouble, as opposed to mistreating them on the assumption they cannot take bankruptcy.
So go big on straightening out bankruptcy, as it is long overdue.
Immediately: Use existing "compromise and settlement "powers (20 U.S.C. 1082) to begin addressing pending cases hung up in borrower defense litigation and in servicer mismanagement of loan cancellation programs, such as disability discharges and public service loan forgiveness. The guiding principle should be that if a borrower is in trouble because of the actions, mistakes, or misrepresentations of a school, guaranty agency, servicer, accreditor, or government agency, the Secretary will take action to slice through the matter using these powers, regardless of the Gordian knots fashioned as obstacles by the Trump Administration.
So go big on rescuing borrowers who are in student loan hell through no fault of their own.
Quickly: Determine workable paths to provide general student loan relief for those (a) most in need, which will provide (b) the most benefit to the pandemic-damaged economy, and which will provide (c) long-term student debt solutions. Choosing the wrong paths may achieve some goals at the expense of others.
The way to find the best paths is by examining equities. The best paths will have not only vertical and horizontal equities within the borrower population, but also across economic sectors and over time.
A place to start is the excellent article "How the Biden Administration Can Free Americans from Student Debt," by Astra Taylor, who argues, with impressive sourcing, for a student debt jubilee, essentially wiping out existing student debt through administrative action. This could do well by (b) and would achieve a measure of equity across economic sectors, inasmuch as much corporate debt has been wiped away twice in this century for economic reasons.
But it does not fulfill (a) as it falls short in terms of vertical (need based) equity and it does not adequately address (c). As to the latter, the Biden Administration should not accept the jubilee premise that "the slate must periodically be wiped clean." Cancelling debt without addressing the underlying causes that created such mountains of it only sets up succeeding generations for the same trouble.
There is another problem: under current law, the amount of cancellation is taxable, diminishing its benefit both to individuals and to the economy. While the Secretary of Education has the authority to cancel debt, the power to change the tax code rests in Congress, according to most authorities, not with the Secretary of the Treasury.
Which means that the bests paths to achieve (a), (b), and (c) run through legislation, and the best way to get legislative action may be a promise to use executive action as a blunt instrument should legislation fail.
But there is good reason to believe legislation could succeed if the right parties are at the table to make it happen. Foremost among them would be those (of both conservative and progressive persuasions) who want the debt relief to be need-based. The higher education community must also be represented with a convincing case that it would be better to commit potentially hundreds of billions of dollars* on ways to prevent future debt crises than to put it toward cancelling debt for those who have no strong case for cancellation. For example, the higher education community should be ready to condition participation in HEA Title IV programs on use of federal aid, like Pell Grants, to reduce or eliminate borrowing. And that is only for starters.
A place at the table should also be made for those who prefer dealing with debt issues through the tax expenditure side of the equation; that is, potentially through need-based, refundable tax credits both to give relief and to provide self-initiated resolution of claims and benefits. This could relieve much administrative burden. It could also set the stage for moving the whole student loan collection process away from troubled servicers toward tax-based repayments, as has been successfully demonstrated in several other countries.
Legislative solutions could and should be bi-partisan; the current situation in the financing of higher education is appalling from many perspectives.
The best way for the Biden Administration to proceed is to act aggressively at the outset to deal with bankruptcy and mismanagement issues, which are clearly within executive purview, and to put forth a legislative agenda to deal with issues best addressed by Congress.
To keep the legislative initiative moving, a back-up plan should be readied for action to start cancelling debt by executive action to demonstrate unwavering commitment.
For example, a first tier of such cancellation could be aimed at those who were Pell-eligible. Demographic analyses, to take into consideration level of education, racial and gender imbalances, and even geographic considerations could inform the development of a systematic executive-action schedule for loan cancellation, to be triggered by how well the economy is doing as well as by prospects for legislative solutions. This should replace various campaign offerings of $10,000 or $50,000 cancellations.
Going big, as recommended here, need not be seen as going partisan, and must not be, so as to give the country our best chance to overcome the huge student debt imbroglio for good.
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* How much of this is real money is in doubt. Of the $1.6 trillion of student loan debt, according to a
recent analysis, $435 billion may be uncollectible and has effectively been written off. This is nearly the size of the subprime mortgage crisis that triggered the Great Recession. However, it is offset in federal budget scoring by fees and higher than market interest rates on student loans (especially on parent loans), which only exacerbates the problem and leads to more borrowers being put at risk. This is a vicious cycle in which the true amount probably extends well beyond even the $435 billion identified. Nevertheless, there are still substantial sums that are in repayment, in the hundreds of billions although not in the trillions.
