June, 2021
Washington — In all the current back and forth about potential cancellation of federal student loans, for whom and in what amount, two crucial considerations are largely and regrettably absent from the discussion.
One is a management issue. Loan servicers often cannot properly handle loan administration even in the best of times. They will be overwhelmed later this year when the pandemic moratorium on loan repayment expires. It is in the best interest of the federal government to cancel loans where there is a good case to do so, simply to reduce loan administration volume.
The other consideration is the honor and credibility of the federal government. Many borrowers are in financial trouble and cannot repay their loans because of malfeasance and fraud at schools, or mistakes by the many middlemen involved in loan administration, including the U.S. Department of Education itself.
The Secretary of Education has statutory authority to compromise loan repayment obligations, which clearly extends to these two reasons for exercise of that authority. Rather than arguing about cancellation solely in terms of which borrowers may or may not benefit, the conversation needs urgently to turn to what's in cancellation simply for the cause of good and honest government.
First, the Secretary should take immediate steps to cancel the loans of borrowers who are legally entitled to cancellation. Who would that be? If you don't know, you haven't been paying attention. The Trump administration denied cancellation to many such borrowers.
Next, loans for which principal and the government's cost of interest have already been paid back should be cancelled to relieve borrowers of further payments. In many cases, remaining balances represent fees, penalties, and capitalizations that audits and accountability reviews trace to faulty servicer advice, which in turn is a function of an overly complicated loan system and poor administration of it.*
Next, with the input of the CFPB and SFA, a process of loan cancellation should be afforded to borrowers who have been caught in loan hell through no fault of their own. Where there is documented evidence that borrowers have been the victims of the mistakes of others' handling of their student loans, and no other remedy has been applied, the remaining balances should be cancelled. The very honor of the federal government is at stake here. Bankruptcy reforms should be a part of this discussion as another way for people to get their lives back.
The creative ideas of some in the higher education community to address the student loan crisis should be explored as a way to cancel even more loans. For example, applying "retroactive Pell" grant amounts to reduce the loan balances of former Pell-eligible borrowers could result in the cancellation of many small-balance loans, as well as a way to target loan relief to those most in need of it.**
Costs of loan compromises must be weighed against costs of business as usual, and discounted for the fact that huge percentages of current loans must be written off as uncollectible in any honest budget scoring.
I believe the Secretary's authority to compromise loans is broad and extends beyond the examples listed above but, simply for the sake of good government and honorable execution of the Department of Education's mission, the Secretary should act now to cancel as many loans as possible to avoid another looming crisis yet this year.
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* Much of the rationale for the interest rates and fees now charged on federal student loans is a legacy of a dual loan delivery system, under which the Secretary was to provide equal terms and conditions between bank-based and direct government loans. That dual system no longer exists; any remaining bank-based paper could be bought up by the Secretary, who could also issue an emergency regulation to reset interest rates going forward at lower levels.
** I like the retroactive Pell concept because it eliminates schools' role in subjecting Pell to aid packaging formulas that often disadvantage low-income and minority students.
