What could President Biden do about student loan debt?

Supporters of canceling student loan debt argue that it inhibits economic growth and contributes to prevailing racial economic inequalities.

The United States has a student loan debt problem. Namely, a US$1.7 trillion student debt problem held by some 44 million Americans.

Calls for the federal government to wipe away a significant proportion of this debt have become a regular talking point in recent months, especially among the progressive wing of the Democratic Party.

Supporters of canceling student loan debt argue that it inhibits economic growth and contributes to prevailing racial economic inequalities.

Not everyone agrees and the means through which a Biden administration could conceivably cancel large amounts of this debt are unclear or disputed. Some have also argued that canceling student debt alone fails to address the root causes of student debt in the first place.

Whatever path is taken, student loan debt will evolve into an even bigger crisis in the post-coronavirus world. For much of 2020, student loan payments have been waived amid pandemic conditions.

Should this pause not be extended, Americans face a resumption of millions of dollars worth of loan payments in an ailing post-pandemic 2021 economy.

President Joe Biden, for his part, will be pressed to take decisive action, but the political means he’ll have to do so will be limited should Democrats fail to win the US Senate in January.

The crisis

For many Americans, college degrees remain a pathway to higher lifetime earnings. On average in the US, college graduates earn 80% more than those holding just a high school diploma.

But going to college isn’t cheap. For most people, it can only be afforded by taking out student loans. The average cost of tuition and room and board for the 2019-2020 school year ranged from US$22,000 for in-state students at public universities to more than US$50,000 for students at private nonprofit universities.

In 2019, the College Board estimated that the average amount of student debt held by college graduates was around US$28,800, an increase from previous years.

Not all debt is held equally, either. Students from minority backgrounds, such as Black Americans, tend to rely on loans more heavily and take out higher amounts. In 2015-2016, 86% of Black students took out loans to finance college, compared to 70% of white students.

This is due to the significant racial wealth gap that prevails in the US. White families are, on average, wealthier and possess more intergenerational wealth (such as houses they personally own) than their Black and Latin American counterparts.

In 2016, the median net worth of white households stood at US$171,000, compared to US$17,600 for Black households and US$20,700 for Latin American households.

According to Nicole Smith, chief economist at the Georgetown University on Education and the Workforce, building intergenerational wealth is unachievable for many Americans who are “saddled with too much student loan debt.”

As Smith argues, student loan debt is “negative wealth, as money that could have been used to save for wealth or to purchase a home or to invest in the stock market to accumulate wealth” is instead “used to repay loans.”

Cancellation

For most of 2020, the conditions of the coronavirus pandemic in the US has seen student loan payments paused for the vast majority of borrowers.

As a result of the CARES Act in March, student loan payments were suspended and their interest waived until September. Some 89% of borrowers took up the option by the Department of Education to pause their student loan payments.

President Donald Trump then extended this pause until December, but it is uncertain whether it will continue into the new year.

As a result of the economic conditions of the pandemic, calls have escalated for a cancellation of some, or all, student loan debt, highlighting the difficulty in making loan repayments during a pandemic.

Democratic Massachusetts Senator Elizabeth Warren has been one outspoken proponent.

In a recent Tweet, the Senator argued that student loan debt “is an anchor on our economy, holding back entire generations from buying homes, starting businesses and families, and adding to the economy in ways that benefit everyone.”

Other supporters of writing off student loan debt posit it as a means through which a Biden administration could immediately “build Black wealth.” Jarrell Dillard, writing for Bloomberg, argues that writing off large amounts of this debt would help toward “shoring up finances for Black households on the wrong side of yawning gaps in wealth and income.”

One study found that forgiving at least US$50,000 of student loan debt per borrower would instantly boost the median wealth of Black households by some 34%.

But how would a Biden administration go about this task?

Under the Higher Education Act of 1965, which first created the federal student loan program, the Education Secretary is authorized to “compromise, waive or release” federal student loan debts.

Some have argued that this language would give a Biden Education Secretary the power to cancel large amounts of student loan debt without the need to go through Congress to do so. Senate Minority Leader Chuck Schumer has argued that Biden could cancel student loan debt “with the pen as opposed to legislation.”

Others are not so confident. Ryan D. Doerfler, a law professor at the University of Chicago, believes that such a move would immediately be met with legal challenges.

However, Doerfler also believes this should not dissuade a Biden administration from trying, as the professor argues it is “better to pursue debt cancellation through executive action than pray for Mitch McConnell to have a change of heart.”

The solution?

Even if a Biden administration used the powers of the executive to cancel some or all student loan debt, this may still not be enough.

Kevin Carey, director of the education policy program at the think tank New America, has argued that debt cancellation alone is insufficient toward addressing a more fundamental problem with Higher Education.

Should a Biden administration cancel debt through executive action, “the day after any kind of mass loan forgiveness went into effect, the tide of debt would begin rising again.”

Structural changes – such as eliminating tuition at public universities for those from families earning under US$125,000 a year, making community college free for 2 years and providing more funding for Historically Black colleges and universities – would all require the approval of Congress.

As Carey argues, “debt forgiveness alone would be like treating a contaminated river without stopping the source of the pollution. Truly resolving the student debt problem will require tackling many other parts of the machinery of higher education,” which President Biden could not achieve through executive action alone.

Other commentators have argued that student debt forgiveness is in itself not an effective economic stimulus and, according to Bloomberg’s Noah Smith, “canceling student debt might provoke a backlash among those who don’t have any loans” or “those who paid off their loans early might feel that their frugality was being punished.”

But, as New York Times Opinion writer Roxane Gay writes, this shouldn’t be the case.

“No one benefits from everything our government does,” Gay argues, but student debt cancellation would prove effective, if not total, relief from a “kind of debt from which there is often no escape.”

This alone should make it worthy of consideration, even if cancellation would not affect those who either paid off their loans or did not take any out in the first place.

Following his inauguration on January 20, 2021, President Biden’s administration will have pressing issues to address regarding the student debt crisis that is brewing amid the economic fallout caused by the coronavirus pandemic.

Though the path the Biden administration may take going forward is unclear, what is certain is that student loan debt will only increase unless drastic change occurs.

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