Canceling student loans: What’s fair for borrowers, taxpayers?

President Joe Biden’s plan to forgive up to $20,000 in student loan debt for millions of Americans represents an attempt to find middle ground on a huge issue the administration has struggled with ever since assuming office 19 months ago.

The core dilemma, for both Biden officials and the continuing public debate over loan forgiveness, might be summed up with a simple question: What is fair?

Opponents say that in this case, using money from all taxpayers to provide targeted relief to a few individuals, isn’t fair at all. Those individuals incurred their debt freely. What about past generations of students who tightened belts to pay for higher education? And won’t another round of government fiscal stimulus overheat the economy?

There’s some dispute about what the macroeconomic effect of Mr. Biden’s plan might be, says Steven Teles, a political scientist at Johns Hopkins University, who cautions that he’s not an economist. “But it’s hard to see how it’s not inflationary.”

Supporters hold that it’s fair to help borrowers battered by fast-rising college costs, falling public investment in schools, and too-often predatory educational institutions. Targeted loan relief could help ease racial disparities in the economy, they say.

School debt can persist long after borrowers enter the workforce, add supporters of the Biden plan. Relief could help millions improve their lives.

Ellyse Marques, an environmental consultant in Gainesville, Virginia, graduated from college in December 2020. She had $20,000 in student debt, which she’s since paid down to $12,000.

Student loans are her biggest financial burden. She and her new spouse have been thinking about buying a house, and loan relief might make that possible.

“I feel great about it because I just got married and my husband and I are trying to plan our future and plan finances,” Ms. Marques says.

The Biden plan

The plan outlined by President Biden at the White House Wednesday would cancel $10,000 in federal student loan debt for individuals with incomes under $125,000 a year or for couples with incomes under $250,000 a year. In addition, those with federal Pell Grants, which are awarded to undergraduates with an exceptional financial need, are eligible for $20,000 in loan forgiveness.

The plan also aims to make loans more manageable for students in the future. Monthly loan payments would be capped at 5% of a borrower’s discretionary income, down from the current 10%. It calls for the government to cover the monthly interest for those making minimum payments, so that the total amount owed would not balloon far past the amount borrowed over months and years.

The plan also extends until the end of the year a moratorium on loan payments that the government put in place at the start of the COVID-19 pandemic. Payments are scheduled to restart in January 2023.

Overall, the Biden approach to student loan relief is far short of what liberals have been pressuring him to do for over a year since he took office. Sen. Elizabeth Warren of Massachusetts and others have called for canceling up to $50,000 of debt per borrower, essentially wiping out much of the total $1.6 trillion in loans owed by more than 45 million borrowers.

By making Pell Grant recipients eligible for more loan forgiveness, however, President Biden is trying to at least partially meet liberals’ desire to provide extra help for low-income and Black borrowers. About 60% of school loan borrowers also receive Pell Grants, and the majority come from families making less than $30,000.

Black school loan borrowers are more than twice as likely to have received Pell Grants as their white peers, according to the White House.

“I understand that not everything I’m announcing ... is going to make everybody happy,” Mr. Biden said Wednesday. “But I believe my plan is responsible and fair.”

“Resources that could be better used”

Republicans and some moderate Democrats differ about the plan’s fairness. They note that only about 42% of Americans have a college degree. A similar percentage of Americans between the ages of 18 and 24 are enrolled in a four-year degree program at any one time.

All taxpayers would thus share the burden of paying for a move that only benefits a slice of the total population.

The program would also be expensive, with cost estimates of $300 billion to $600 billion, depending on how many people sign up. Colleges could take advantage of their students’ debt relief by simply raising their price.

“Student loan debt relief is spending that raises demand and increases inflation. It consumes resources that could be better used helping those who did not, for whatever reason, have the chance to attend college,” Lawrence Summers, secretary of the Treasury under President Bill Clinton and director of the National Economic Council under President Barack Obama, tweeted earlier this week.

It is also not clear that the Biden administration has the legal authority to put the program in place.

Mr. Biden is relying on executive actions, rather than congressional legislation, to forgive the student loans. But earlier this year, the Supreme Court ruled in the case of West Virginia v. Environmental Protection Agency that the federal government can’t act on programs of broad economic significance without congressional authority.

In part the administration is basing its legal authority on emergency powers derived from the COVID-19 crisis. It’s a novel approach that could be vulnerable to court action.

“I think the thing that should be striking about it is just the sheer scale of what they’ve done ... on a spending commitment in the absence of any appropriation or legislative action whatsoever. At the least, it’s extremely unorthodox,” says Dr. Teles of Johns Hopkins.

A crisis caused by declining state support?

But in the end the Biden plan is addressing a real, acute crisis, say supporters. School loan debt is the second-largest kind of household debt in the country, behind mortgages. It’s the only kind of consumer debt that’s been increasing steadily since before the 2008 Great Recession.

Some of it funds professional graduate schools, such as law school, that can produce students with good economic prospects. Some of it also funds less remunerative degrees, or the first undergraduates in a family, or students who don’t get a degree. People are thrown into the lower rungs of the workforce with tens of thousands of dollars in debt strapped to their backs.

“It’s growing much faster than other types of debt, and there doesn’t really seem to be any indication that that’s going to stop,” says Raphael Charron-Chenier, assistant professor of sociology at Arizona State University. “It’s a crisis now, given the size that it is and when it gets people in the life course.”

One reason student debt is growing is the trend of declining state support for higher education, says Dr. Charron-Chenier. That’s helped drive the out-of-pocket cost for college at a four-year public university from around $8,000 annually in 1980 to about $23,000 today.

At the same time, more jobs require a college degree than ever before. Yet fewer of those jobs come with the pay and benefits necessary for a solid foothold in the middle class.

The Biden plan is a modest one, says Dr. Charron-Chenier. But even a modest plan can help, he adds.

“It’s going to make a real difference in people’s lives,” he says.

Ms. Marques first saw the news on her phone. She was aware the White House was planning something on student loans and she’d been checking all day for an announcement.

The first person she texted was her husband. Then she talked about it with co-workers, some of whom would be, like her, eligible for the forgiveness.

Ms. Marques says she understood what she was getting into with student loans. Both her parents are teachers. She’d wanted to go to a school where she could play varsity volleyball, which meant she had to borrow.

But at this stage in her life, just starting out, lessening her student loan burden would feel like a burden lifted.

“It feels really good to have this. This is the largest financial burden or loan that we [have],” she says.