May, 2022
Washington — President Biden has signaled that he is considering cancellation of federal student loans for certain borrowers in amounts yet undetermined. Which has become the subject of many news articles, op-eds, and cartoons, but an understanding of the issues involved (especially costs to taxpayers) has not been a prerequisite for much of the commentary.
Here are points to keep in mind:
1. Millions of borrowers have been the victims of unscrupulous loan servicers, which have channeled borrowers into repayment choices that aided their own bottom lines at the expense of the borrowers'. Cancelling these amounts, which have ballooned borrowers' balances, constitutes a removal of deceptive and improper* charges, not a cost to taxpayers.
2. Borrowers' interest rates and origination fees have always been set well above the government's cost of money, to have borrowers themselves pay for the program's administration, including estimated write-offs. The federal student loan program has actually been making money for the government for many years before the Covid-related repayment pause.
3. Many Americans who attended public colleges in the past paid relatively low tuition, heavily subsidized by taxpayers. In recent decades, taxpayers have benefited as the cost of postsecondary education has been shifted onto students and their parents, most of whom have had to cover the costs with student loans. If there are taxpayer costs for the President's student loan cancellations above and beyond the considerations identified above, it is tribute toward generational equity.
4. Much student loan debt has been incurred by those who attended schools that should never have been approved by the federal government for participation in federal student loan programs. The victims of these schools —overwhelmingly low-income — are unlikely ever to be able to repay their debts, so it is best to cancel the loans to relieve an unjust burden from the already disadvantaged. A simultaneous purge of low quality schools from continued eligibility must accompany the loan cancellations, for substantial out-year taxpayer savings.**
5. For debt that is not cancelled (the President wants to target the relief), borrowers should have bankruptcy protection restored, to treat student loan debt the same as other debt. Some have argued that student loan borrower benefits, such as income based repayment options, remove the need for bankruptcy protections, but that obviously has not worked out because loan servicers have steered unwitting borrowers away from taking advantage of such benefits.
The Secretary of Education has broad powers under current statutes to carry out student loan cancellations, remediations, and loan compromises. It is hard to estimate with precision how much can be done at no net taxpayer cost, but it is much more than is commonly acknowledged by critics of cancellation, many of whom are unaware of the basics of student loan finance. To the extent any cancellations would begin to cost taxpayers, the expenditures should be considered a bargain if they lead to borrower victims getting back to being productive members of society and an overdue crackdown on substandard schools. These factors should be scored by CBO and OMB over ten years to determine taxpayer impacts on both revenues and expenditures.
What is still lacking is more attention to fixing accountability for how we got into the federal student loan mess in the first place, which is necessary so that we do not repeat the same mistakes. Under law, the Secretary of Education is responsible for "sound management and accountability" in the loan programs. Better management seems to be in the works; more accountability must follow.
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* Example: “EdFinancial’s failure to tell the full truth to borrowers, so it could pad its bottom line, highlights a systemic problem with loan servicing,” CFPB Director Rohit Chopra said.... “When student loan companies lie about cancellation and repayment programs for borrowers, they are breaking the law.” https://www.washingtonpost.com/education/2022/03/31/edfinancial-cfpb-sanctions-student-loans/
** Unfortuntately for borrowers and taxpayers alike, many of those in Congress who oppose student loan cancellation support federal subsidies for substandard schools.
