This week President Biden announced his long-awaited plan to alleviate in part the burden of nearly $2 trillion carried by 45 million American students and former students. The official figure for student loan debt is $1.7 trillion. But when private bank loans and parent loans are considered, the total is around & 1.9 trillion, with an average student debt of $37,000.
In recent decades the cost of college education has tripled while the support for it from US states has declined sharply. Moreover, what started out as grants in aid for students steadily migrated to banks and private financial institutions loan debt. About 90% of the $1.9T debt is held by the US government; the remaining by private sources.
One of the most unpleasant arrangements in the current structure of student debt in the US is the government charges interest rates for it that are much higher than corresponding rates charged by banks holding their share of the total debt. Government rates range from 4.99% to 7.4% while bank rates are around 3.2% (fixed) to 1.3% (variable). The differential in rates is clearly designed to push students to ‘consolidate’ their annual education loans with the US Dept. of Education to private banks. Thus, the private banking sector is given a significant cut of the student debt pie. Loans for both go up annually and are will rise in 2022-23 and after as general interest rates rise by Federal Reserve actions.
Another onerous characteristic of the current system is that as many as one-third of the 45 million with debt were never able to complete a college degree. They bear the cost without any benefit whatsoever. Their fate is due to allowing for years parasitical so-called education institutions to lend to students with the false promise of a guaranteed job. While some of the worst abuses of this parasite educational institution fringe, preying on the poorest students, have been corrected in recent years, the problem continues to a significant degree.
Another element of the system’s crises is the institutions of higher education in general in the USA. They’ve used the availability of easily obtained student loans from the government to steadily jack up their tuitions and add all manner of questionable ‘fees’ as shadow tuition increases. They’ve then taken this student loan largesse and used it to fatten the ranks of college administrators, to raise the pay of senior administrators of colleges to levels comparable to corporate CEOs, and embark upon in many cases needless expansion of campus building projects that have little to do with providing education. The consequence is professional football stadiums and basketball auditoriums and the obscenity of football coaches being paid millions of dollars in compensation a year, sometimes even more than the college or university presidents themselves. In short, the system is broken and students have been carrying an ever-rising bill in the form of out of control student debt.
During his election campaign in 2020 Biden promised to resolve the problem and reform the broken system. Has his just announced plan achieved that? How so? And if not, how not?
The best description of Biden’s recent proposals is that it’s created a bifurcated higher education student debt system. Here’s the major proposals:
First, the proposals apply only to undergraduate students. It appears all graduate students, who bear an average loan debt of over $100,000 are not covered. But undergrads are also divided among the ‘haves’ and ‘have nots’.
A main feature is that $10,000 in undergrad student debt is forgiven, provided they are earning less than $125,000 a year in income as individuals or $250,000 as a couple. That’s of course not insignificant. But with average student debt of $37,000, and with tuition costs rising 5-10% a year and interest rates soon to well exceed 5%, even the $10k does not go very far. The average cost to attend a state university campus in California, for example, is over $15k-$17k a year and rising. The $10k reduction in principal will almost certainly be offset with rising out of pocket payments due to increasing tuition, fees, lodging, etc. as well as current rapid rise in interest rates on top of it.
As a second major element, Biden proposals attempt to address this ‘offset’ problem by reducing the amount of monthly payment on student loans from the prior 10% of discretionary income to now 5%. But if rates on student loans rise above 5% (where they are at now)—which will almost certainly occur within the next year and possibly beyond—then the 5% reduction in monthly payment will be more than offset by rising interest rates. For example, If the interest costs are more than 5% and students pay only the 5% monthly minimum, then they will have left over residual interest being added to their principal debt on a monthly basis. Consequently, their total debt will continue to rise year to year—in effect ‘adding back’ over time annually some of the $10k forgiven this year. Their total debt might be right back where it was in just 3-5 years.
The piling on to principal of unpaid interest has long been another onerous feature of the student debt system. Former students who have found themselves disabled or unemployed, for example, were able to forego monthly payments but during that period of joblessness their principal kept accruing interest that steadily raised their total debt. Something similar might be the consequence, in other words, of lowering the monthly out of pocket payment to 5%, while allowing tuition costs and interest rates to rise.
Biden’s third major proposal is to reduce student debt from Pell grant loans by another $10K, so the lower income former students, who typically receive Pell grant loans, will have a $20k total debt forgiveness. But if one listened to Biden’s announcement address, he quickly noted that Pell grant loan recipients would not necessarily automatically get the second $10K forgiven—even if they earned less than $125k income per year now. They would have to ‘qualify’ for it, according to Biden. Just what constituted qualification he of course did not say, as he quickly went on describing other features of his proposals.
About 14 million of the 45 million with student debt are Pell grant debt holders. How many of them will actually get the extra $10k forgiven is unclear. It will be left to the bureaucrats to define what ‘qualifies’ for expunging Pell grant loan debt. One should not expect generosity from the bureaucracy when it comes to ‘means’ testing.
The fourth main feature of Biden’s announcement addressed the time frame over which all of a student’s remaining debt might be expunged. Currently, if one enters public service then what remains of total debt after 10 years will be forgiven. But what defines public service? So far that’s been narrowly defined and those eligible limited. Biden suggested that definition might be expanded, even perhaps to considering military service or national guard duty as qualifying public service. He also let it slip that maybe 2 year community college debt might be forgiven after a 10 year period. There was also a reference to maybe a 20 year limit for everyone with student debt. Again, the bureaucrats will decide.
A big question related to year limits to debt forgiveness is when does the time clock start? Is it today, when the program was announced? Or does it go back to the year of the origination of the loan? And what about loans that are consolidated with private banks after the government originated them? What’s the start date in the 10 or 20 year clock?
A final major feature of Biden’s program is that these partial debt forgiveness measures take effect only when the last two and a half years of student debt forbearance comes to an end. That’s next January 1, 2023 for both debt cancelation and end of debt forbearance and resumption of monthly student debt payments. All students will resume paying student debt on that date. All graduates as well as all undergrads with still remaining student debt after the $10k or $20K forgiven. 20 million may have their relatively low levels of debt canceled, while 25 million, with much higher average levels of debt, will have to start paying again.
The boss giveth with one hand and taketh away more with the other, which is a definition of spending programs under the Biden administration since February 2020, one might argue.
Biden estimated that the commencing of student debt payments to the government will raise government revenues by $50 billion a year. That’s approximately $500B over a decade.
Independent sources prior to today’s announcement had estimated the cost of the $10k forgiven will amount to $321B over a decade, or around $32B/yr. on average. So the US government will stay make an $18B a year net surplus off student debt.
The Problem of Bifurcated Student Debt Reform
There are some serious problems with Biden’s proposals. First, as many have pointed out, the proposals resolve the debt problem for about 20 million of the 45 million, if one is to believe the claim of the administration that 20 million students will have their full debt canceled. That leaves 25 million still sinking deeper under the unsustainable mountain of debt.
As previously noted, the 5% minimum payment means for many that their residual interest will keep adding to principal should interest rates rise. For new student debtors, rate rises and the escalating further of student college costs means total debt will rise as they pay the 5% minimum. Also previously noted, it’s not clear how much government bureaucrats will allow Pell grant debt holders qualify for the extra $10K cancelation.
Unless student debt reform includes a ceiling on debt interest rates and there’s a cap on how much colleges are allowed to raise tuition and fees, total student debt principal for millions will continue to rise. Both rates and tuition & fees should not be allowed to rise more than the cost of living (for the urban district in which the college resides).
And the time is long overdue for the government to step in and limit colleges shuffling millions to administrators, spending on infrastructure turning colleges into youth resorts and on construction projects that have nothing to do with education—not least of which is allowing football coaches to have million dollar annual salaries and golden retirement parachutes.
If private banks can charge current rates, fixed or variable, 2-3% below that charged by the US government, why can’t the government charge similar lower rates? Why does the US government insist on gouging US students even worse than the banks?
Student loan rates should be pegged to the 10 year US Treasury bond. And if that 10 yr T-bond declines in price, so should the interest rate on student debt decline by a like amount. It wouldn’t be difficult to create a formula for student loan rates based on a combination of the T-bond rate plus an inflation adjustment (after first lowering current rates charged by the government to the lower levels currently charged by banks as a start point).
Then there’s the problem of grad students debt. If grad students earn less than $125k a year why shouldn’t they be included in the $10K cancelation?
Not allowing the debt cancelation provisions to apply to grad students creates a form of bifurcation. So does introducing a means test for who qualifies for the Pell loan extra $10k cancelation. Any student with a Pell grant loan should be eligible for the second $10k, period.
Biden admitted that the 10 year public service rule for eliminating remaining debt after ten years isn’t working well. In his TV address he toyed with the idea of expanding eligibility for public service exemptions to occupations not currently covered but offered nothing specific. In other words, he made it sound like it was part of the proposals when it was just Biden’s own wishful thinking out loud.
A simple and firm schedule for eventual complete debt cancelation for all is necessary. Millions of students face a kind of permanent indentureship: They can’t keep up with even the interest payments. Missed or partial interest payments just keep adding to a rising level of unpaid principal. They have no hope of ever exiting the indentureship.
A simply rule might be established by the US government: for every year in which payment of the debt was made, a year of cancelation of debt occurs. That would apply immediately to all current student loans regardless of the remaining duration of the term of their debt. New student debt might be issued for a 20 yr. term period in order to keep monthly payments low. The 10 year cancelation rule above would mean no one pays for more than 10 years.
In short, there are several very big holes in the Biden proposals. There are no inflation adjustments for rising college costs or interest rates. There are no caps on interest rates. Students still with debt must keep paying more interest to the government than they do to the banks if they consolidate loans. It should be the opposite for government loans: rates should be lower than the banks’ rates. There was loose talk by Biden about a better rule for canceling remaining debt for public service. But a cancelation rule should apply to all in order to avoid tens of millions mired in permanent economic debt indentureship.
And there’s another big problem. Biden’s proposals are authorized only by presidential Executive Order. It can be overturned by Congress, and likely will be, especially if and when Republicans take over Congress again.
And there’s the question why didn’t Democrats pass legislation to cancel student debt? They seemed to be able to get the required 50 +1 votes in the Senate in the past 10 months to pass $600 billion for infrastructure, $280 billion for semiconductors & manufacturing R&D, and $740 billion for the mis-named Inflation Reduction Act.
The Ideology of Student Debt
While the Biden administration’s student debt proposals do provide benefits for some, they clearly leave behind a majority (25m) of student debtors who now face further, even accelerating student debt levels.
Republicans and business sources have adamantly opposed even Biden’s proposals. They argue the debt forgiveness raises the government’s deficit and is also inflationary. But simple economics 101 refutes that ideological claim.
Independent sources have estimated that the Biden proposals will reduce student debt payments to the government by $321 billion over next ten years. If evenly distributed over the period, that’s about $32 billion a year. In his address Biden indicated that resumption of student debt payments for those still owing will occur on January 1, 2023 and will bring about $50 billion a year in resumed revenue to the government. That’s $500 billion a year. The difference is roughly $180 billion net revenue over 10 years. How then is it that a net gain of $180 billion represents a deficit, is the point?
Those that argue it is deficit busting to cancel student debt are typically silent when it comes to the infrastructure, chips and R&D, and recent Inflation Reduction Acts that together amount to more than $1.6 trillion spending, the vast majority of which ends up in corporate coffers. Nor do the same opponents mention the $64 billion passed in Ukraine military and economic aid this past six months as deficit causing. The Ukraine aid alone in six months is double that amount for a full year of Biden’s student debt cancelation proposals.
As for inflationary effect of the debt cancelation, if the $32B of debt canceled contributes to inflation then requiring resumption of $50 billion in debt payments will almost certainly result in less consumer demand for other products and services as students divert what might have been spending on other goods and services in order to resume their debt payments. That’s a reduction of Demand and therefore inflation. The combined result is a net reduction of Demand.
Ideology always obfuscates the truth. It inverts cause and effect. It replaces causation with correlation. And performs a dozen other ‘language games’ to confuse what’s real. That’s its fundamental nature. And ideology runs rampant in the halls of US government whenever policy is implemented, whether via executive order, Congressional legislation, of bureaucratic rule making. The arguments that canceling student debt is deficit busting or inflationary belongs in the category of ideological argument. It’s right up there with similar nonsense like business tax cuts always create jobs, free trade benefits all, or income inequality is caused by workers’ lack of productivity—to name but the few most notorious such propositions.
Some Ways to Resolve the Student Debt Crisis
There is no good economic reason why all student debt should not be canceled. Doing so would have no appreciable negative effect on the general economy. In fact, it would release badly needed income for consumption and savings by households that would boost the real economy, in the process redirecting what is now being diverted to both banks and government balance sheets. The fundamental reason why there’s no general student debt cancelation is that bankers and investors (and their politicians) do not want to create the precedent of debt forgiveness for households. (They don’t mind forgiving, of course, the nearly $1 trillion in loans to small business in the 2020-21 Payroll Protection Program). And they want the government to keep funneling government student debt origination to them, the banks, via the student debt consolidation process that exists.
Short of just declaring a general debt cancelation, there is another path that might do essentially the same. That is just eliminate the onerous consumer bankruptcy law changes that were introduced under George W. Bush and allow individuals to get out from under their crushing levels of student debt burden by simply declaring bankruptcy. Prior to Bush this was an option. But Congress changed the law during Bush and made it virtually impossible to declare bankruptcy due to student debt—while at the same time it further liberalized business bankruptcy laws to let businesses dump and restructure their debt. Giving individuals and former students the same bankruptcy rights as businesses would thus represent another alternative path to student debt cancelation.
Of course, that would make the lawyers richer in the process. A more equitable solution is to just cancel all debt over a course of a 10 or an even 5 year phase-ins as discussed above.
But one shouldn’t expect that to happen under the rule of either wing of the Corporate Party of America, aka Republicans or Democrats. The Republicans will continue to say student debtors have no seat at the economic table; while the Democrats will say students can gather the debt cancelation crumbs that may fall under it.