Push for student loan forgiveness puts Biden in tight spot

Democratic leaders in Congress are pushing President-elect Joe Biden to take quick action on canceling student loan debt with an executive order to stimulate the economy and provide relief to struggling borrowers.

Biden has expressed interest in forgiving some amount of education debt, a move that would undoubtedly trigger political backlash, perhaps on both sides of the aisle.

There are also questions among economists about how much of a boost to consumer spending would result from swift action during a downturn.

Progressives such as Sen. Elizabeth Warren (D-Mass.) have long called for student debt cancellation as a necessary plank of any economic recovery. In an economy where education is shown to be one of the most reliable tickets to prosperity, progressives argue that sizable loans make it harder for people to get ahead, leaving them struggling to pay the bills and unable to save or invest.

More than 40 percent of U.S. adults who attended college — about 30 percent of all U.S. adults — had at least some student debt last year, according to a survey released in May by the Federal Reserve. Nearly 30 percent of those who have student loans also deferred their payments in 2019.

Warren, who alongside Senate Minority Leader Charles Schumer (D-N.Y.) is calling on Biden to cancel $50,000 of student debt through executive fiat, upped the pressure this week by characterizing student loan cancellation as the “single biggest stimulus we could add to the economy.”

Biden has not gone quite that far, saying this week that he supported canceling $10,000 of student debt through legislative means as part of a broader proposal to make community college free, doubling Pell grants and offering free public education to people earning under $125,000 a year.

“It’s holding people up. They’re in real trouble. They’re having to make choices between paying their student loan and paying their rent,” he said.

But a legislative path to lowering student debt is unlikely if Republicans maintain control of the Senate after two runoff elections in Georgia scheduled for Jan. 5.

Still, the urgency around action on student loans has been diminished somewhat by a bill signed into law in March that automatically put federal student loans into forbearance, meaning borrowers could defer payment without interest accruing or penalty. For those who kept paying, their monthly payments went directly to the loan’s principal and accrued interest.

In August, President Trump extended that provision through Dec. 31 with an executive order.

Advocates for student borrowers have pointed to Trump’s pandemic-related actions to argue Biden would have wide authority and ample rationale to relieve student debt through executive order.

Seth Frotman, executive director of Student Borrower Protection Center, said Biden should not only put forward a broad-based forgiveness plan, but also improve existing programs that allow debt to be forgiven in exchange for public service or in cases of disability or fraud.

“The most effective course of action would be to utilize the full range of tools that the executive branch has — the combination of not only broad-based relief, but actually making the programs work that were created specifically in mind to do whole debt cancellation,” Frotman said.

“By combining those efforts and looking across the full suite of authorities that the executive branch has, you could go a very, very far way towards eliminating the student debt crisis.”

Those who support broad-based student loan forgiveness also argue it could help close the racial wealth gap and make inroads with income inequality. The Fed’s 2019 survey on household finances found that only 7 percent of white respondents were behind on their student loans, compared to 26 percent of Black respondents and 19 percent of Hispanics.

But many economists say broad-based student loan forgiveness offers less bang for the taxpayer buck to get the economy accelerating again.

“It’s not a great form of stimulus, it’s poorly targeted,” said Adam Looney, an economist at the Brookings Institution.

For one, forgiving student loans spreads stimulus out over time instead of pushing it all out at once because it eliminates a monthly payment. A borrower who owes $200 a month would get the same amount of relief this month, in the middle of an economic downturn, as they would when the crisis is over.

Additionally, people with student debt are more likely to have higher incomes and be in better positions to pay off loans, economists point out.

“People who have student loans are more likely to own a home, start a business, be married and start a family,” Looney said.

“The economic consequences of student loans are exaggerated because they focus on the debt instead of the social and economic benefits a college or graduate degree gives you in society,” he added.

Broad-based loan forgiveness could help lawyers and business school graduates as much as it would lower-paid social workers.

Carson Lappetito, president of Sunwest Bank, said the pandemic has only put a finer point on the issue, overwhelmingly leading to job losses among people with lower income and less education who are unable to work from home the way many educated white-collar workers can.

“The unfortunate part of the economic impact of COVID is that it’s impacting a sector of the workforce that statistically has less savings, less reserves, lives on a paycheck to paycheck basis and doesn’t have the wherewithal to deal with the longer levels of unemployment.”

Stimulus, he said, “should be very focused on the restaurants, hotels, front-line workers that are being most heavily impacted.”

Programs such as expanded unemployment insurance, on the other hand, put money in the pockets of people who need it most and who are likely to spend it rather than stash it away. That boosts the economy more broadly by helping the unemployed keep spending.

Extending forbearance would cost less and help the slice of people with student debt who are worse off.

Frotman countered that while some student debtors may be able to cover their monthly payments, their debt may prevent them from paying other essential expenses or saving for a child’s college education. He also argued that the focus on who needs aid the most doesn’t consider the broader structural forces that drove student debt higher in the first place.

The average total amount borrowed by those with bachelor’s degrees increased by 22 percent between 2000 and 2016 when adjusted for inflation, according to a study released by the Pell Institute this year.

“Forty million people didn’t collectively make bad decisions,” Frotman said. “This was a higher education system designed and put in place that drove people, who really did nothing wrong, to bear a burden that no generation before has had to.”

While canceling student debt was popular on the campaign trail, Americans do not appear to be putting it atop their list of priorities for the Biden administration. A recent Politico-Morning Consult poll found that just 26 percent of respondents said Biden should make it a top priority in his first 100 days in office.