Don't Overestimate Loan Cancellation Costs

August, 2022

Washington — Much of the recent criticism of President Biden's student loan cancellation plan is based on faulty assumptions about its high cost to taxpayers.  While there are reasons to wish he would have acted somewhat differently — to provide student loan relief through restoration of bankruptcy protections and to address cost of college — it is off-base to overestimate his action's taxpayer price tag.

First, the cost of the loan repayment pause due to the pandemic should be considered in the same category as similar actions, such as the Payroll Protection Plan, to keep the economy from collapsing. It should not be confused with long-term, underlying student loan issues, no more than PPP should be confused with corporate tax rate issues.  

Second (and here I am relying heavily on GAO's 2014 and 2022 reports on federal Direct Loan costs), borrowers for many years have been more than paying for the costs of the student loan program, such that the federal treasury was making money from borrowers in the hundreds of billions of dollars. Think of it this way: if those funds had been put into escrow, and later distributed back to borrowers as rebates for overcharges beyond the cost of the program, would we be saying that the rebates were being paid by taxpayers generally? Of course not. The appropriate question to ask is how much of the Biden cancellations must be paid by taxpayers, beyond rebating borrowers for overcharges, if there is in fact any taxpayer cost. GAO admits to being flummoxed by how to determine costs such that the question can be easily answered.

Third, complicating the question even more, is how much borrower debt was never borrowed to attend college, but has been added by lenders and servicers under questionable circumstances. From my years on the inside of student loan administration, and from looking in depth at individual cases, I know how corruption manifests itself in higher borrower debt. Such debt should be cancelled because it was improperly added to borrower accounts in the first place. Whatever sums are involved, and they may be huge, there are no taxpayer costs for such cancellation.  

Fourth, what are the benefits of potentially eliminating up to half of all loan accounts, in terms of reducing servicing costs and improving servicer performance?  This must be put into the equation as a significant boon both to taxpayers and to borrowers.  (The government should especially stop hounding borrowers who have already paid back principal and more.)

It's wrong in so many ways to cast the cancellations as new, inflationary, poorly targeted taxpayer burdens, when a more careful analysis may well show the opposite, or at least raise so many questions that editorialists (and celebrity pundits) should hold their tongues.

There are plenty of reasons to say the Biden actions don't solve all that ails U.S. higher education.  So let's get to work on real problems, not make up issues that distort and distract.     

President Biden's Student Loan Cancellations

August, 2022

Washington —  Before commending the Biden Administration for its action on student loan cancellations, let me be clear that I think the Administration overlooked an opportunity to couple its action with two other badly needed initiatives:  restoration of bankruptcy protections for borrowers and much stronger measures to control college costs.  These two initiatives would be both good policy and good politics.  Much could be done on bankruptcy and college costs by executive action without waiting for Congress, as I have outlined previously in this space (and would be happy to expand upon at  

But now for the commendation.  Upon taking office, the Biden Administration brought in new managers from outside the revolving door that historically provided under-qualified and ethically-challenged higher education and loan industry functionaries in top positions.  The new people soon began applying consumer protections to assist students, families, and taxpayers in a series of actions involving esoteric-sounding but hugely consequential provisions of the Higher Education Act:  borrower defense to repayment; gainful employment; state consumer protections; disability discharges; forbearance abuse; private collection agencies; income-driven repayment; public service loan cancellation; and many others.  These actions may turn out to be as important as the broader cancellation of up to $10,000 ($20,000 for Pell recipients) as announced by the President on August 24th.  

As to the Biden cancellations themselves, rather than repeating the critiques of others, I'll raise questions that need deeper reflection rather than knee-jerk reactions.  

•  It's not clear who, if anyone (including federal taxpayers), is paying for the cancellations, for several reasons.  Many loans were already in default and written off.  Borrowers themselves have been paying for the cost of the program, including defaults, resulting in the federal government actually making money from the program for many years, until the repayment pause during the pandemic.  When repayment resumes, new revenues will offset taxpayer costs to a degree determined by arcane budget scoring rules.  This is not an easy call; too much should not be assumed without looking at all sides of the question.

•  It's not clear how much debt borrowers willingly incurred themselves, as opposed to debt that was added to their accounts by various lender and servicer deceptions and misrepresentations.  Debt that was added by negative amortization and capitalized interest under suspicious circumstances (such as forbearance abuse, consolidation deception, and denial of borrower benefits) is not a known figure.  If such debt is cancelled, it is not a cost to taxpayers but a recognition that it should not have existed in the first place, had the program been properly administered. 

•  As to the possible inflationary effects of the new cancellations and other policies, the fact that they will be implemented at the same time many more borrowers will be going back into repayment must be taken into account.  It is an additionally tricky business to do net present value scoring over many years on the true cost of loan programs while gauging both the inflationary and deflationary effects of changing policies at any particular time.  I've not yet seen a convincing analysis.  

•  Regarding the possibility that a court will block the Biden cancellations, it is hard to predict but it puts the Department of Justice in the position of having to defend them.  This is justice with a small j, because DOJ has for many years allowed student loan programs to sink further and further into corruption, without taking action against wrongdoing among lenders, schools, servicers, guaranty agencies, and other middlemen, even ED personnel at the highest levels.  It is a mistake to overlook the role of corruption as an important cause of the need for cancellations, and to overlook the failures of the federal law enforcement agency that should have been more active in rooting out the corruption.  Both agencies are trying to avoid the issue by citing section 20 U.S.C. §1098, related to the pandemic emergency, as the authority for the cancellations, rather than 20 U.S.C. §1082, which many borrower advocates recommended.  Admittedly, use of §1082 gets messy because it links loan cancellation to issues of program management, but the Administration, and millions of borrowers, may regret not using it if a court determines §1098 doesn't do the job.   

•  Regarding the administrative difficulties that will be faced by targeting cancellations by income, a question arises about the role of the Treasury Department, which heretofore has often been uncooperative about assisting in efforts that would require the agencies to work together.  Historically, the Treasury Department hardly acknowledges the Education Department, so far apart are they in the Washington pecking order.  But now it is the President who will be directing both agencies to try to make targeted cancellations work.

•  As to whether the Biden cancellation policy is regressive or progressive, certainly there is an attempt to take regressivity out of it.  But it must be remembered that traditional higher education support through subsidies to institutions is regressive to start with, especially tax subsidies to public institutions that keep tuition low for the middle- and upper-income masses.  The blue collar family that does not send its children to college has a greater basis for grievance over that regressivity, as compared to cancelling the loan of a Pell grant recipient who needs a reprieve from a bad loan experience, quite possibly not of his own making.  And, clearly, regressivity questions sometimes must take a back seat to citizen support for widely accepted public goods, like higher education.  Put in the context of other federal actions, like tax cuts aimed at the highest tax brackets, the issue hardly registers.  

•  The use of Pell grants to target the cancellations is sound for more uses than targeting.  It also recognizes that the value of Pell grants has diminished greatly over the decades and thus helps to make up for it.  Importantly, it also avoids institutional packaging and displacement of grants, which has deprived the Pell-eligible of billions of dollars annually.  (This is another area overdue for Secretarial attention and action.)  Putting Pell into the equation also reduces troubling gender and racial gaps in debt distribution.  

•  Not to be overlooked is the planned overhaul of income-driven repayment, to stop capitalized interest and negative amortization from putting borrowers even further behind when they are already faithfully paying as much as they can on their debt.  This is an important reform that goes beyond cancellation.     

•  The Biden cancellations should reduce significantly the number of borrowers in the loan system, which is no small consideration when two major loan servicers have chosen not to continue their federal contracts.  Each was notorious for poor servicing and saw ever-increasing litigation from borrowers, states, and federal regulatory agencies.  Better to cancel loans if possible rather than transfer borrowers from one bad servicer to another.  Combined with "Fresh Start," another initiative to take borrowers out of default, fewer borrowers will wind up with bad servicing.  These considerations should not be underestimated as to how they shaped the President's decision.  For example, what seems like a high income limit may have been driven by the need to reduce the number of borrower accounts.  

•  One negative review of the Biden cancellations, which warrants special mention, is the Washington Post's editorial of August 24.  It was remiss not to note that for several years, the Post was kept afloat by profits from a for-profit chain of colleges that was heavily dependent on federal student loans.  Exploitation of students by such colleges is partly responsible for the student loan crisis that has precipitated the President's actions.  Readers deserve better.  

Although I would have recommended a different approach to how the President went about his decision and its promulgation, I'm nevertheless pleased that the Pell-eligible population is part of the equation, that the number of accounts to be serviced will go down significantly, that the capitalized interest debt trap will be eliminated, and that federal agencies will have to work better together, all suggestions that have appeared often in these pages. Mostly I'm pleased that many, many lives will get back on track as a result of these actions. 

But there is much, much more to do.   


Secretary Speaks Truth, Court Should Take Note

August, 2022

Washington — U.S. Secretary of Education Miguel Cardona spoke the truth this month about priorities in higher education, even going so far as to call them a "joke":
[M]any institutions spend enormous time and money chasing rankings they feel carry prestige.... There's a whole science behind climbing the rankings.  [Emphasis added]

Separately, the trade press this month noted an alarming decline in Black enrollment in the U.S.:

Black enrollment grew from 282,000 in 1966 to more than 2.5 million in 2010.... But from 2010 to 2020, as overall college enrollments fell, the number of Black students on campuses fell even more sharply, to 1.9 million.

Would the "science" behind climbing the rankings have anything to do with Black enrollment declines?  Yes.  The science of so-called Enrollment Management, as widely practiced in higher education, does not target race per se as a factor in chasing prestige, but it might as well.  A look at who gets loaded down with student debt and who doesn't reveals the unavoidable connection.  This has been clear for more than a decade.  The Black population is increasingly wary of the debt load it is being expected to assume, and it shows across a wide spectrum of debt and enrollment indicators.  

Meanwhile, the higher education establishment is once again weighing in with the U.S. Supreme Court to protect race-based affirmative action, arguing that without this tool it cannot achieve desired racial diversity.  The Court will hear oral arguments in two affirmative action cases in coming months.

Which raises a question:  Why not use Enrollment Management science, which is not race-based but causally linked to enrollment distributions, to increase rather than suppress Black enrollment?  Instead of using resources to chase rankings, use them to reduce Black debt load.  A commitment to do so would make the higher education community appear less hypocritical.*  

The Secretary could aid this himself, by sending his program review teams to institutions that use the science of Enrollment Management in ways that counter the purposes of federal student aid programs.  He could make participation in HEA Title IV programs dependent on use of the science to complement, rather than countervail, federal programs. 

I am not optimistic about how the Court will approach these questions, based on previous decisions. The Court has not looked seriously at Enrollment Management science and its effects.   In oral argument for a 2015 decision, Justice Scalia was more interested in asking whether Black students might be better off attending institutions that are not academically competitive.   Such is the level of the debate at the Court.  

A sensible decision in the current cases, in my opinion, would be one that reaffirms strict scrutiny for any use of race, not just nominally but in effect as well.  Especially in effect.  That would lower the hypocrisy and would be more likely to achieve racial diversity goals. 


*  See also Matthew Johnson, Undermining Racial Justice: How One University Embraced Inclusion and Inequality.