US Debt Cancellation – What Just Happened?

So, the big news last week in world higher education was the Biden administration finally cancelling some student debt and – in theory, who knows? – resuming student loan repayments in December of this year (they were suspended in the Spring of 2020 in the chaos of early COVID.) Let’s break down Wednesday’s announcement.

The government forgave the following debt:

  • Up to $20,000 of Department of Education debt for borrowers who apply and meet the following three criteria:
    • have outstanding debt,
    • have current incomes under $125,000 
    • received Pell grants while they were in school (which is really a test of whether they were low-income prior to attending post-secondary education).
  • Up to $10,000 of Department of Education debt for borrowers who apply and meet the first two test but not the third.

That’s a lot of debt forgiveness.  In fact, it wipes the slate clean (at least with respect to debt from the US Department of Education) for about 20 million borrowers and provides partial relief for another 23 million.  Total cost: probably something on the order of $500 billion.  The scope of the announcement is somewhat smaller that what Biden promised in his 2020 platform, and much less than was being advocated by the Warren/Sanders wings of the Democratic Party, but the policy ends up being more progressive (in the sense of providing proportionally less benefits to wealthy households) as a result.

(The announcement also included a bunch of stuff around future loan repayment rules, public sector loan forgiveness, a reminder that Pell grants have gone up in value significantly recently, plus some toothless stuff around institutional accountability on costs.  I’ll talk more about the loan repayment rules tomorrow, but as for the rest of it, just think of it all as a “here’s what we’re doing for future borrowers” counterpoint to the bulk of the announcement, which is all about past borrowers.)

I’m not going to get into the all the arguments for and against this, as a tremendous number of them are either bad faith or rationalizations rather than rationales and also I have gone through most of the arguments in previous blogs (see here and here).  You can safely ignore most of the wailing from the billionaire-tax-cut crowd about the unfairness of this to working class people who did not go to college, just as you should definitely roll your eyes at those Democrats (not all of them) who two years ago backed cancellation on the grounds that it would feed an economic stimulus yet who are currently claiming it will have no inflationary effect whatsoever.  Pick a lane, guys.  

In any case, while the technical arguments for this program do matter (and FWIW, I think this is close to the best way they could have done it) the rationales for addressing debt at all are very different.  Again, ignore all the arguments about stimulus, racial equity, etc. – if those things were really the goal, there were oodles of better ways to do it.  No, the real policy rationale here was two-fold.  The first is reparations to a generation which seems to have had an unnecessarily tough time due in part to bad policy-making, and the second is a nakedly political one of awarding spoils to a key part of a voting coalition.

The reparations argument is pretty clear: the post-2008 generation of students in the United States has had a pretty rough time of it.  Apart from the UK, there are not many countries that has had a similar combination of stagnating or decreasing graduate incomes, increasing tuition, and student debt and heavy increases in living costs as the US over the same period.  In Canada, for instance, only the third of those is true over the period 2008-2022; in fact, the better comparison from our side of the border is the generation that went through post-secondary education in the mid-1990s.  A lot of that stems from multiple failures to properly fund or oversee the higher education market, the blame for which can partially but not entirely be laid at the feet of the federal government.  The best way to think of this whole debt cancellation effort is as a kind of big mea culpa for all of that.  The problem, of course, is that this announcement really does not do much to prevent the accumulation of future debt.  It’s a near-certainty that we’ll be back in the same place in less than a decade. 

The second rationale is maybe a bit more troubling.  Obviously, there is nothing unprecedented about a government using public funds to build and maintain an electoral coalition: that is in part the point of electoral politics.  And it is certainly the case that electoral coalitions in the US are increasingly polarized by education, with the highly educated tilting ever more strongly left and the “poorly educated” (to use Trump’s term) heading in the other direction, so one can see the logic in using money this way.  The problem comes when power shifts back in the other direction: if support of graduates and higher education becomes seen as a purely “Democratic” thing, expect some almighty vandalism to these causes when Republicans return to office. 

In any event, what you’ve heard in the past few days isn’t the end of the story, because there is legitimate debate about whether any of this is legal.  Wednesday’s announcement was not the result of legislation, because the Democrats could not put together fifty Senate votes for this.  Instead, it came from an Executive Order – that is, a decree signed by the President – and moreover one using a fairly dubious authority.  Instead of looking to the Higher Education Acy, the Government chose to use its authority under the HEROES Act, which gives the President the right to provide relief to borrowers in connection with “a war, other military operation or national emergency” (see the official legal opinion here).  Conceivably, this argument might have worked two years ago – indeed, Trump used this to suspend student loan repayment in Spring 2020 – but it’s far from guaranteed that courts will accept that rationale for a policy executed in the late Summer 2022.

In other words, stay tuned: this one still has a ways to run.

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