Will Biden Cancel Student Loan Debt?

A debate between President Joe Biden and progressive Democrats in Congress continues to heat up, as they remain at odds about how to achieve a shared policy goal: canceling hundreds of billions of dollars of student loan debt.

Progressives and the president agree that the amount of education debt in the U.S.—$1.7 trillion by one count—has become a problem. They remain apart on how much forgiveness to provide and how exactly to achieve it.

In one corner is a coalition led by Sens. Elizabeth Warren (D-Mass.) and Chuck Schumer (D-N.Y.), who say the Department of Education and the president have the power to unilaterally wipe out federal loan debt. They want the president to provide $50,000 in relief for all federal education loans, including those taken out by parents.

In the other is Biden, who has stated his preference to seek $10,000 in relief through legislation passed by Congress. Biden roundly rejected the proposal to offer $50,000 in blanket student loan forgiveness during a town hall meeting hosted by CNN Feb. 16, saying “I will not make that happen.” But, with a split Senate and a narrow Democratic majority in the House of Representatives, his preferred path has its own challenges.

The Burden of Student Loan Debt Gains Weight

Education debt has increased 600% since 2004, with about one in every eight Americans having student loans of some type. Student loan debt might be a drag on the economy as a whole, as young people with student debt wind up spending less on goods and services and are less likely to own a home.

Even before the pandemic, many borrowers have struggled. In a 2019 Federal Reserve survey, 17% of those holding education debt had fallen behind on student loan payments. People who did not finish their degree were most likely to be behind. 

Most student loans are held by the federal government. The federal student loan portfolio includes $1.3 trillion in federally held loans to 35.9 million different recipients, as well as an additional $251.1 billion in loans insured but not owned by the government. With such a large chunk of consumer debt in its hands, the government appears to have an enormous opportunity to provide relief. It already has (temporarily), but both the president and the progressives in his party are in search of a lasting remedy, as the pandemic continues to hit borrowers hard.

Calls for Drastic Measures

One of the main obstacles to moving forward centers around whether Biden (or any president) has the power to unilaterally cancel federal student loan debt.

The Department of Education and the president, using executive authority, have canceled specific instances of student debt. President Donald Trump, for example, used executive powers to streamline the forgiveness process for permanently disabled veterans with student loan debt. The Education Department, during the administration of President Barack Obama, developed rules allowing the department to cancel federal loans of students whose school closed while they were enrolled or soon after they withdrew.

Those were small changes in comparison to the current proposals.

On Feb. 4, Warren and Schumer renewed calls for Biden to use the executive-action framework to provide $50,000 in forgiveness for federal student loans, re-introducing a resolution they first proposed in September 2020. Joining Warren and Schumer on the resolution are 14 senators and 46 members of the House of Representatives—all Democrats or independents who caucus with them.

The action would forgive $627.3 billion in debt and boost the economy with “a flick of a pen,” Schumer said.

They intensified their calls two weeks later after Biden’s CNN appearance, vowing to fight the president’s reluctance to use the executive branch to offer more forgiveness to federal student loan borrowers. Many legislators took to social media to offer their support for the progressive plan.

But no president has broadly canceled debt before, and there’s disagreement about whether it could withstand a legal challenge. In a report to outgoing education secretary Betsy DeVos, Trump’s Education Department concluded last month that the department does not have the power to provide blanket forgiveness of student debt, as Warren and Schumer have suggested.  Legal experts at Harvard University, using the same material, arrived at the opposite conclusion, saying the Education Department could cancel federal student loans.

Even if it is legal, it might not be wise to set a precedent, said Constantine Yannelis, an economist and finance professor at the University of Chicago.

“The people arguing for forgiveness wanting to give the executive branch that power might be careful what they wish for,” he said. “There’s another administration in a couple of years that wants to unilaterally raise taxes in a different way. So, I would be surprised if something goes through executive order.”

What Biden Has Done (And Might Do)

In the U.S., 92% of all student loans are held or insured by the federal government. More than 15 million federal borrowers have student debt of $10,000 or less, and another 9.2 million have between $10,000 and $20,000 in debt. Providing blanket forgiveness of $10,000 on federal student loans would erase $242.8 billion in debt, according to a University of Chicago study.

These numbers include loans for graduate students and parents who borrowed on behalf of children, who wouldn’t be covered by a plan Biden campaigned on: a promise to request Congress cancel $10,000 in undergraduate student loans for federal borrowers.

White House press secretary Jen Psaki reiterated the administration’s commitment on Feb. 4—the same day Warren and Schumer rehashed their plan—saying Biden “would welcome the opportunity to sign a bill sent to him by Congress.”

Biden did not include student loan forgiveness in his “American Rescue Plan,” a $1.9-trillion economic stimulus package Congress began discussing in early February. However, the Education Department already has extended a pause on interest and principal payments for all the federal student loans it holds until at least Sept. 30, 2021.

The legislative route would require getting debt forgiveness through a Congress where the Democrats lost seats in the House and hold the narrowest possible majority in the Senate. No Republicans have gone on record supporting either the Warren-Schumer plan or Biden’s, and there’s no guarantee moderate Democratic senators like West Virginia’s Joe Manchin or Montana’s Jon Tester would support blanket student loan forgiveness either.

Using legislation would open the possibility for Congress to make comprehensive changes to the student loan system, not just pass a one-time forgiveness of debt. It also could allow Congress to begin on the path to provide free tuition to public colleges for low-income families, something Biden also promised during the campaign.

“This is clearly an area that really does require a legislative solution,” said Adam Looney, an economist and a nonresident fellow at the Brookings Institution.

But student loan borrowers have waited a long time for Congress to make comprehensive policy changes, and there are still many obstacles to reform despite Biden’s and some lawmakers’ stated desire to get there, said Lindsay Clark, director of external affairs at Savi, a tech startup in Washington that helps borrowers repay student loans. Pandemic relief efforts, like the “American Rescue Plan,” also have taken precedent and most likely will continue to do so.

“We’re not going to hold our breath for cancellation,” Clark said.

If Not Now, Cancel Later?

Loan cancellation has gained top billing because it’s easy to describe and simple to understand, Yannelis said. But a growing body of research from economists suggests blanket cancellation—no matter the dollar amount—might not be the best route for providing relief to those who need it.

In fact, much of the relief may go to the people with the highest salaries. The top 10% of earners would receive as much forgiveness as the bottom 30%, according to an analysis conducted by researchers at the University of Chicago. Forgiving money owed by high-earners wipes out debt likely to be repaid.

The researchers, including Yannelis, said a program called income-driven repayment could be a more effective option.

Income-driven repayment (IDR) currently exists in the United States in the form of multiple programs that give a borrower monthly loan payments based on their income. Then, at the end of a certain number of years making payments in the program, the government forgives the remaining loan balance (though borrowers often must pay taxes on the forgiven debt).

It sounds simple, but the details can be difficult to understand. IDR programs are hard to apply for and gain admission into but very easy to accidentally drop out of, Looney said. Congress passed legislation in 2019 meant to fix some of the problems, like allowing for easier sharing of income data that could streamline the process of enrolling and keeping people in IDR. The law has not yet been implemented.

Biden has suggested simplifying and expanding IDR. Under Biden’s plan, those making $25,000 or less per year would not owe any payments or accrue interest on their undergraduate student loans. Anyone earning more than $25,000 would pay no more than 5% of their discretionary income (income after taxes and essential spending) toward their loans. After 20 years, the amount remaining on the loan would be forgiven. All borrowers would be automatically enrolled in IDR, but could opt out. Several of these changes can be made by executive order, Looney said.

Despite its current issues, IDR still has fans.

“Income driven repayment has been and will continue to be the most valuable tool for repayment for borrowers who are struggling,” Clark said.

The Bottom Line

The momentum in Washington seems to be headed toward some sort of relief, but it will require patience, Clark said.

Biden’s nominations of Miguel Cardona as secretary of education and Rohit Chopra as director of Consumer Financial Protection Bureau will create “a landscape where borrowers are put first,” she said.

Pandemic relief efforts and a new dynamic in Congress may take time to shake out, but student debt relief has gained a policymakers’ notice.

“I'm optimistic that there'll be some sort of relief, but I'm not sure how it will come together,” Looney said.