Until fairly recently, student debt cancellation was considered to be a fringe idea that, while popular among the Occupy Wall Street crowd and on the left, was a mainstream nonstarter. That’s begun to change.
The Covid-19 pandemic and resulting economic downturn have pushed the issue even further to the forefront. The CARES Act and then President Donald Trump put a pause on federal student loan payments during the pandemic that expires at the end of January. But with the coronavirus crisis worse than ever, there is a growing chorus of activists, politicians, and voters calling for student debt cancellation as a form of economic stimulus. That chorus is pushing Democrats and, namely, President-elect Joe Biden to go big on student debt, using federal action to wipe out some or even all of what borrowers owe.
“What’s attractive about student debt cancellation in this moment is that in addition to righting a policy wrong — which is the decision to make the cost of college an individual burden when I would say it’s a public good — is that it can help stimulate the economy at a moment when we need economic stimulus. And it has significant racial equity implications as well,” said Suzanne Kahn, director of education, jobs, and power at the Roosevelt Institute and an advocate for complete federal student debt cancellation. It’s also something Biden could try to do independently of Congress, which is attractive since stimulus talks have stalled out.
Biden’s campaign backed legislation forgiving the first $10,000 in federal student loan debt, but some Democrats and progressives are pushing for him to cancel more student debt through executive action — and not just $10,000, but $50,000 or even all of it. Biden cast doubt on the idea of canceling student debt unilaterally.
Beyond direct cancellation, there’s a lot Biden can do to make preexisting student debt programs work better and help more people.
“There is a tremendous opportunity through executive action for President-elect Biden to improve the lives of millions of Americans,” said Seth Frotman, executive director of the Student Borrower Protection Center and former student debt ombudsman at the CFPB.
The conversation around student debt in the United States stretches far beyond questions of education, law, and economics. It also entails thorny discussions around racial justice, politics, and fairness. Advocates argue that debt cancellation will carry a range of benefits — stimulating the economy, promoting racial justice, and righting the wrong of pushing millions of Americans into life-hindering debt.
But as the Biden administration plans its first steps, a debate is raging about whether loan forgiveness is really the best way to get the economy moving and get relief to people who need it. Some critics warn it could be a politically costly push that doesn’t solve the underlying problems with higher education in the US.
Why this, why now
Broad-based student debt cancellation isn’t a new idea, but it being discussed in establishment political circles is.
Forty-five million Americans now owe a total of about $1.6 trillion in student loans, and one in 10 loans are in delinquency or default. The Federal Reserve estimates the typical monthly payment to be between $200 and $299. Research suggests people are delaying buying homes, having kids, and changing jobs in part because of student loan debt, which means it could become a drag on the overall economy. The burden is especially heavy on Black borrowers, who generally carry more debt and struggle more to pay it off.
“This is not some niche problem,” said Bharat Ramamurti, a member of the Congressional Oversight Commission that oversees the CARES Act funds and former adviser to Sen. Elizabeth Warren. “Student loan debt affects a lot of people — it’s basically a fifth of all adults.”
Student debt was a major theme during Occupy Wall Street, a widespread protest movement that emerged in reaction to the global financial crisis in 2011. In the years following Occupy, activists continued to focus on the issue and push it into the conversation: In 2012, they organized 1T Day to mark student debt surpassing $1 trillion, and they subsequently launched Strike Debt and fundraisers to help cancel student debt. Student debt strikes began to pop up across the country, where borrowers stopped paying their loans in protest of the situation, and organizers helped propel regulations to protect student borrowers against misleading and predatory practices.
As student debt, which is difficult to get discharged in bankruptcy, has become an increasingly prevalent issue, so have proposals regarding how to address it. In the 2020 Democratic presidential primary, Bernie Sanders ran on canceling all student debt, and Elizabeth Warren proposed canceling debts of up to $50,000.
Many Democrats and progressives are calling for Biden to cancel some or all debt through executive action, namely, a “settlement and compromise” provision that they argue would allow for debt to be canceled through executive authority.
“The law is pretty clear that the secretary of education has the authority to compromise — that’s the term — which means effectively cancel any individual debt of up to $1 million,” said Ramamurti, who helped devise the plan Warren ran on.
Now Warren and Senate Minority Leader Chuck Schumer are urging the incoming administration to cancel up to $50,000 in student loan debt with a resolution in the Senate. In the House, Reps. Ayanna Pressley (D-MA), Ilhan Omar (D-MN), Alma Adams (D-NC), and Maxine Waters (D-CA) have introduced a companion resolution also calling for Biden to cancel debt.
But as the idea has grown more popular, so has the resistance. On the right, detractors say it’s a pointless government give-out. In the middle, they warn it’s not a good way to stimulate the economy. And on the left, there are concerns it’s a regressive policy that will help people who don’t need it. Some critics have panned the idea as a “Brahmin bailout” that would help out the upper class (those who went to college) and do little, if anything, for everyone else, and some people have warned that such a bailout could prove a messaging disaster for Democrats.
“No matter how it’s designed, student-debt forgiveness is very poorly targeted,” Bloomberg’s editorial board warned in November. “Even if relief could be better focused on the poor, severe drawbacks remain. For one, the vast majority of Americans who don’t have student debt would rightly feel left out. Many never had the opportunity to get a higher education; others put off financial goals (such as saving for retirement) to pay it down. Also, it would do little to improve the immediate cash flow of the many debtors who — because they’re in default or in income-based repayment plans — are making small or no monthly payments.”
A poll conducted by Vox and Data for Progress found that 51 percent of likely voters support forgiving student loan debt up to $50,000, especially if it is tied to national or community service or comes with a $125,000 income threshold.
Only about one in four likely voters, however, supports forgiving all student debt. And the idea is much more popular among those with debt than those without it.
Other polls have also found that canceling some student debt is a moderately popular idea, though not the most popular idea in the world.
And it is pretty well liked among members of the Democratic base — Black voters and middle-class professionals — who helped hand Biden the election.
If Democrats do go ahead with student debt forgiveness via executive actions, they could pair it with something that would benefit non-college-educated people, such as requiring federal contractors to pay a $15 minimum wage. That would benefit millions of workers.
How much can Biden do to reduce student debt?
The Trump administration has extended the federal loan payment pause through January 31, and Biden could continue to extend it. Still, leaving people in limbo month to month is not ideal.
There are other steps Biden could take short of full debt cancellation, including improving programs to relieve debt for students defrauded by predatory schools or who signed up for programs that let them repay loans based on their income, loan forgiveness for people who go into public service, and debt relief for student veterans and students with disabilities, among others.
But the big conversation has shifted to whether Biden should set students free from their debt — and if so, how much.
The burden of student debt in America isn’t equally shared. In 2019, households with graduate degrees owed 56 percent of education debt, even though only 14 percent of adults over the age of 25 have graduate degrees, and the 3 percent of households with doctorates or professional degrees held 20 percent of all debt. Meanwhile, many of those struggling most with student debt are those who never finished their degrees.
Biden has backed legislation that would cancel $10,000 in debt, but unless Democrats take control of the Senate and make a big effort to push that through, that’s not likely to become law.
In terms of what advocates want Biden himself to do, the more conservative number rests around the $10,000 range, which is the number the president-elect had initially thrown his weight behind legislatively. Capping forgiveness at $10,000 could eliminate debt for more than 15 million borrowers and reduce by half the debt of 9 million more.
Adam Looney, a nonresident fellow at the Brookings Institution and executive director of the Marriner S. Eccles Institute at the University of Utah, noted in a Washington Post op-ed that it would specifically help “borrowers with smaller balances, who, paradoxically, tend to struggle most, accounting for 60 percent of all defaults.”
Borrowers who owe the least are often the ones who struggle most to pay their loans, in part because many of them are people who dropped out of school and aren’t getting the benefit of a college degree in their careers.
From the $10,000, the scale goes up. Schumer and Warren are pushing Biden to forgive $50,000. At the most ambitious end of the spectrum, some activists, organizers, and politicians want to cancel all federal student loan debt for everyone.
Ramamurti told me he sees it as “purely a matter of political will,” and once the mechanisms are in place, there’s room for adjustment on forgiveness amounts and thresholds.
“The nice thing about this policy is you can tweak it, depending on what your goals are,” he said.
When reached for comment, the Biden transition team pointed to his campaign education plan and noted his support for the $10,000 forgiveness legislation. In December, Biden told a group of newspaper columnists that he is “unlikely” to pursue student debt cancellation on his own. “It’s arguable that the president may have the executive power to forgive up to $50,000 in student debt,” Biden said in remarks first reported by the Washington Post. “Well, I think that’s pretty questionable. I’m unsure of that. I’d be unlikely to do that.”
The economic argument for canceling student debt
At the heart of the argument for canceling student debt, especially in the midst of the pandemic, is that it would be good for millions of people and, therefore, the economy. How good is where the disagreement resides — and because mass student debt forgiveness isn’t something we’ve seen in the past, the data on what could happen is relatively limited.
One 2019 working paper from Harvard Business School looked at what happened when students in default had their debt discharged because of a lawsuit. They found that borrowers reduced their overall indebtedness by a quarter and were also less likely to default on other accounts. That’s good for them and for the entities they owe money to.
“We actually find that these individuals tend to lower their total liabilities over time by repaying, for instance, credit card debt, so their overall financial health improves,” said Marco Di Maggio, an associate professor of business administration at Harvard and one of the paper’s authors.
People also demonstrated more mobility — they moved states, changed jobs, and took more risks that often translated to higher incomes.
Di Maggio’s research focused on people who were in default and weren’t making payments at all. But if it were broader federal debt forgiveness that includes borrowers who are paying, he thinks the impact could be much greater.
“If you give the same type of forgiveness to people that are not in that situation, one effect that we don’t capture is that your monthly payment is going down,” he said. The $300 people were putting toward loan payments every month could then be spent elsewhere.
Some critics have argued that student loan forgiveness could be quite regressive, especially at higher amounts, because it would mean canceling debts for high-earning households. And there is disagreement among economists about just how effective stimulus forgiveness would be. The Committee for a Responsible Federal Budget, a group that advocates for fiscal responsibility, estimates that student loan forgiveness would have relatively small near-term multiplier effects, meaning the impact on the economy would be limited (and that’s assuming it’s tax-free — more on that later).
“We found that it’s all really poorly targeted stimulus,” said Marc Goldwein, senior policy director at CRFB. “It would boost the economy, but by our estimates, for every $1 of loan forgiveness ... it would boost the economy by somewhere between 8 and 23 cents, which is a very poor multiplier.”
Other analysts disagree. Di Maggio estimates the multiplier to be at least $1 on every $1 — meaning that spending on forgiveness would directly boost the economy. A 2018 study from the Levy Economics Institute of Bard College projected that debt cancellation could boost GDP by tens of billions of dollars a year and reduce unemployment.
Biden’s appetite for loan forgiveness might even depend on how willing Congress is to do other stimulus.
“I would expect that student loan cancellation by executive action is more likely the extent to which the Republicans are blocking progress on a stimulus package through Congress,” said Bob Shireman, the director of higher education excellence and a senior fellow at the Century Foundation. “It is definitely not one of the most effective ways to stimulate the economy, but if it is one of the things available to the administration, then it might be something they do.”
But economic stimulus is not the only argument for wiping out debt.
The justice argument for canceling student debt
Black borrowers are disproportionately burdened with debt. From 2000 to 2018, the median student debt for young white borrowers with a bachelor’s degree about doubled from $12,000 to $23,000. For Black borrowers, it quadrupled, from $7,000 to $30,000, even though white families tend to have more cumulative debt than Black families overall.
A study from Brandeis University found that 20 years after starting college, a typical Black borrower still owes 95 percent of their debt, while the typical white borrower has paid off 94 percent of their debt. Across socioeconomic levels, Black borrowers wind up worse off than their white counterparts.
“Black students borrow more often, they borrow more, and they have a harder time repaying than their peers,” said Tiffany Jones, senior director of higher education policy at the Education Trust. “That’s true all the way up the income ladder.”
Forgiveness is a racial justice policy. A recent Roosevelt Institute working paper found that while white borrowers stand to gain the most in absolute dollars from cancellation, “the relative gains for Black borrowers are much larger and the greater proportion of Black borrowers means that Black wealth overall would experience much more growth as a result.” They did not, however, find that it would meaningfully address the racial wealth gap.
Darrick Hamilton, a professor of economics and urban policy and founding director of the Institute for the Study of Race, Stratification, and Political Economy at the New School, said the wealth gap isn’t entirely the point.
“If you’re really trying to close the racial wealth gap, the main component, from an accounting standpoint, is assets, not debt,” he said. “Debt is problematic because it’s almost like sharecropping — that’s hyperbole — but it puts people in a debt trap where they are not permitted pathways for social mobility because they are constrained by a financier and the efforts of their labor go to pay off the interest on finance.”
Advocates say the racial justice argument applies at the top and bottom of the income spectrum, for Black borrowers who are well-off and those who are not, and that narrow targeting isn’t necessary. “Folks are feeling like providing relief to a group that are high earners is probably not the right thing to do, forgetting and erasing that among high earners there are Black and brown people who would be impacted,” Jones said.
But student loan forgiveness could also be a restorative justice issue in that it would help right past wrongs. Higher education has long been held up as the gateway to a livable wage, and students have been encouraged to go into debt to go to school, build their résumés, and advance.
Now millions of young Americans are living through their second recession at the outset of their careers, and they’re saddled with debt they were told was a good idea. Forgiveness could be “stimulus to a generation that’s been particularly scarred,” Hamilton said.
Frederick Wherry, a professor of sociology at Princeton University and director of the Dignity and Debt Network, emphasized that if student debt is canceled, “it’s also a good idea to cancel it in a way that’s not denigrating for the debtors” — making it easy to access instead of making people feel bad about jumping through hoops to reap the benefit.
“For those who are already drowning and you are saying you want to do a stimulus, do a stimulus,” Wherry said. “No one says anything when rich people get a tax break.”
One looming question: Taxes
One major policy and political issue that hangs over the forgiveness discussion is taxes. Debt cancellation is generally counted as taxable income. So if someone has $50,000 in student loans forgiven, that would mean $50,000 would be counted as gross income for the year it was forgiven on top of other income.
Under today’s tax rates, that would be taxed likely somewhere between 22 and 37 percent. In other words, major student debt cancellation could come with an enormous tax bill for borrowers.
Those who have studied the issue say there are workarounds. John Brooks, a law professor at the Georgetown University Law Center who has studied student debt taxes, told me that there are a number of legal arguments that would allow the secretary of education, the treasury department, and the IRS to make forgiveness tax-free. Forgiveness could get a “general welfare” exclusion, or qualify as disaster relief, or get a scholarship exclusion, among other options.
“Student debt is just really, really weird, and it just doesn’t fit into the categories and the ways we think about other kinds of debt,” he said. “It’s a form of government funding for higher education, and it’s designed to provide as many people as possible with a way to get over some degree of affordability problems that’s limiting their ability to enroll in higher education.”
Jessica Thompson, associate vice president at the Institute for College Access & Success (TICAS), said the case that there’s a preexisting legal way around taxes on cancellation is “definitely more in question” than forgiveness proponents would like, though there’s an argument to be made. “You can make your case, but in the end, you’ve got to meet every single hurdle that could be thrown at you,” she said. “Treasury and the IRS tend to be conservative and careful about how they interpret their authority to act.”
It’s worth emphasizing that the tax issue isn’t limited to the current executive action forgiveness question — the assumption for people repaying loans through programs that eventually forgive any remaining balance is that they’ll owe taxes, too. So this problem is going to show up whether there’s mass cancellation or not.
The moment to cancel debt might be now. It also doesn’t solve the bigger problem.
The conversation the United States is having right now around student debt cancellation isn’t a new one — it’s the result of years of activism, organizing, and thinking among people who think it’s a good, just, and right idea.
But this is also indicative of the moment: Millions of Americans are hurting and in desperate need of help amid the Covid-19 pandemic, especially as much of the federal stimulus already provided has run out or is about to. Debt forgiveness may be an outlet for the Biden administration to be creative and nimble in addressing the crisis.
“Any debt relief is better than what’s happening right now,” Jones said.
But wiping out debt is only part of the equation when it comes to the cost of higher education in the United States. Even if you cancel all existing debt, you have students in school or about to go to school who are going to wind up stuck in the same loop.
“Every breath that you hear someone talking about debt cancellation, we need to be talking about the urgency of people who are in school right now and people who should be in school right now,” Thompson said.
That translates to issues such as making college more affordable, keeping students away from predatory institutions, and fostering degrees and training that are worth the money. The issue on those fronts is that Biden can’t do much on his own.
“We need a Congress that’s willing to have that conversation,” the Century Foundation’s Shireman said. “We cannot address the broader affordability questions, the broader affordability problem, without Congress and the administration working together.”
Is widespread student debt cancellation the optimal path toward stimulus? Reasonable minds can disagree, but probably not. But if there’s ever a time to try it, the moment could be now.