Five lingering questions on Biden's student loan forgiveness plan
By The Citizen on August 25, 2022
President Biden’s plan to forgive up to $20,000 for Pell Grant recipients and $10,000 for other student loan holders is a controversial move cheered by many Democrats but jeered by Republicans, who say it will increase inflation.
The effort — the largest student loan forgiveness plan in U.S. history — also leaves a lot of questions.
Here are five of the biggest.
Will it raise inflation?
Biden’s plan immediately came under fire for the potential negative impact it could have on the already 40-year high inflation rate, with some economists warning it will be highly inflationary. Others have said any effect is likely to be more marginal.
While Republicans are using inflation to hammer the White House, the criticism that the plan could raise inflation is also coming from at least some political allies to Biden.
Jason Furman, a Harvard professor and former top economic adviser to President Obama, said Wednesday that it is “reckless” to pour “roughly half [a] trillion dollars of gasoline on the inflationary fire that is already burning.”
The White House argued any risk on inflation will be mitigated by the fact that while it is extending the years-long payment pause on federal student loans through Dec. 31, the pause will end in January 2023. Officials argued that the combination of restarting loan payments while providing some relief will basically zero out any inflationary effect.
The pause has long been seen as a program that could be adding to inflation, though other stimulus programs and the fact that consumers saved money during the pandemic are likely bigger factors.
“It’s pretty clear that the pause in student loan repayment has probably been a little bit inflationary, that’s money that would have been drawn down from the economy and has stayed in peoples’ pockets,” said Kevin Miller, Bipartisan Policy Center associate director for higher education policy.
Will colleges raise tuition in response?
Many observers have questioned whether colleges will raise tuition in response to the Biden move, under the rationale that more forgiveness could be on the way.
“It creates this problem of once you have forgiven or have canceled loans, just broadly … that sets a precedent and it gives people going forward an expectation and a reasonable argument,” said Neal McCluskey, policy analyst at the CATO Institution. “If people don’t think their loans will ever have to be repaid or repaid in full, they have incentive to take out more loans.”
Others doubt it will have an immediate or substantial impact on tuition.
“Most schools are basically multilevel organizations,” said Dalié Jiménez, director of the student loan law initiative at the University of California Irvine. “The process of setting tuition prices, there are just so many inputs that I don’t know that it would have any kind of immediate effect on average or overall.”
The Department of Education will be “vigilant” and “laser-focused” with bad actors, according to officials, and plans to publish an annual “watch list” of institutions with the worst debt levels as a way to hold accountable colleges that have contributed to the student debt crisis.
Will this stand up to court challenges?
Court challenges to Biden’s effort are expected, though their precise nature is a bit of a mystery.
White House press secretary Karine Jean-Pierre said on Thursday that the White House is confident in its legal authority and that the steps will hold up in court.
The legal authority the White House has pointed to is through the 2003 HEROES Act, which gives the Secretary of Education authority to take certain actions believed to be necessary to ensure a borrower is not placed in a worse position financially due to a national emergency, like the COVID-19 pandemic.
McCluskey said it’s far from clear those holding student debt were made worse off during the pandemic.
“College graduates were sort of the most insulated from the negative impacts of the pandemic and the associated economic problems that went with it and lockdown because they were most able to continue working,” he said.
“They have been made much better off regarding their loans as they have been frozen,” he added.
McCluskey also raised the issue that Biden is “essentially appropriating money,” which is a power that belongs to Congress. But, he noted, the Democratic-controlled Congress is not likely to challenge that.
“To say loans, which is money from the government that has to returned, now doesn’t have to be returned, that turns the loan into a grant,” he said.
Democratic Rep. Chris Pappas (N.H.) said on Wednesday that the decision “sidesteps Congress and our oversight and fiscal responsibilities.”
Who is in and out in terms of eligibility?
The policy appears to leave out a very small number of borrowers— estimated to be about 5 percent of those who have loans.
The program caps eligibility for the program by income level; $125,000 for a single person and $250,000 for couples.
If everyone who is eligible claims the relief, 43 million federal student loan borrowers will benefit and nearly 90 percent of the benefits will go to borrowers earning less than $75,000, according to the White House.
Who pays for it?
Taxpayers will pick up the bill for the program, though it isn’t clear how much the price tag will be and the White House has skirted questions on the issue.
Reporters pressed Jean-Pierre for a cost estimate at the White House briefing on Thursday and she leaned on saying it’s unclear how many borrowers will take up the offer.
The White House has insisted the loan forgiveness will be fully paid for because of other policies it says Biden has taken to reduce the deficit.
Republicans are going on the attack, raising political issues that aren’t going away.
Sen. Ben Sasse (R-Neb.) said the plan is a “scheme” that “forces blue-collar workers to subsidize white-collar graduate students.” He and other Republicans have also argued the plan will help wealthy people, given the income levels are capped at $125,00 and $250,000.
Senate Minority Leader Mitch McConnell (R-Ky.) called the decision a “wildly unfair distribution” of wealth in favor of higher-earning Americans and a “slap in the face” to those in the workforce who made sacrifices to pay off their debt.
How the arguments on both sides resonate with blue collar workers — a demographic Democrats worry they could lose to the GOP in the midterms — will be closely watched in November.
Biden is betting enough people will support the forgiveness, particular in minority communities, to ward off political hits from the GOP.