FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
September 6, 2022

Biden’s Student Loan Forgiveness Plan Has A Dark Side

IN THIS ISSUE:

1. Why Biden’s Student Loan Plan Is A Very Bad Policy

2. Worst Part of Biden’s Student Loan Forgiveness Plan

3. President Has No Authority To Forgive Student Loans

4. More On Biden’s Student Loan Forgiveness Program

5. Loan Payments Limited To 5% of Income Above $30,000

Overview – Biden’s Student Loan Plan Is Very Bad Policy

I try to avoid purely political discussions in Forecasts & Trends, but sometimes there are political developments which are so egregious I can’t just ignore them, especially when the media does. The president’s Student Loan Forgiveness plan wipes away $10,000 or $20,000 per student, depending on what type of student debt they have, for those who make less than $125,000 or $250,000 for married couples. It is estimated to cost $400-$600 billion and will likely cost a lot more as some sources predict.

President Biden’s Executive Order on student loan forgiveness issued on August 24 would send an already very bad student loan system – a system designed more to create jobs for academics than to really help students – into overdrive. It will generate huge costs for taxpayers, soaring college tuition prices and a massive shift in resources toward the already bloated college sector.

The cancellation of some student debt that already exists is only one part of the Biden policy change. The much bigger change, and the one that the market has finally begun to absorb, is limiting future annual payments on debts to 5% of discretionary income, but only after the borrower’s income rises above roughly $30,000 per year.

Another is the remaining debt, regardless how large, is completely forgiven if the borrower makes payments for only 10 years, instead of the current 20-year payment requirement for such forgiveness.

As I will explain below, these are two of the worst parts of Biden’s student loan forgiveness program — assuming you agree with me that forgiving student loan debt is a bad idea in the first place.

The media has been virtually dead silent on these stealth parts of the Biden student loan forgiveness plan which, if it survives, will cost unsuspecting taxpayers tens of billions over the years. That’s what we’ll talk about today.

But before we get into what President Biden’s student loan plan does and does not do, I want to say this: As one who worked my way through college and repaid all my student loans in full, I am insulted by this! And I would feel exactly the same if it was a Republican president who did this. I know plenty of people who feel the same way. Let’s get started.

Worst Parts of Biden’s Student Loan Forgiveness Plan

In addition to forgiving $10,000 or $20,000 of the student loan debt for students who qualify, President Biden’s new student loan plan would cap monthly payments on undergraduate debt at 5% of their discretionary income, down from the usual 10% to 15% on most existing plans. The proposal also raises the amount of money considered non-discretionary income and is shielded from being used to calculate student loan payments.

The new plan would also shield any student loans for those making less than roughly $30,500 a year, thus setting that level as a threshold for making payments. For example, a college graduate with income of $70,000 would pay roughly $1,975 a year, or 5% of the $39,500 above the threshold.

And instead of making payments for 20 years, as the case is now, whatever balance they have left after 10 years of paying would disappear. Also, there would be no federal income tax on the loans forgiven, although a number of states would tax forgiven debt as income. Altogether, this is a huge deal!

For the vast majority of students, choosing this “income-based repayment” system would be a no-brainer. Given that they pay just 5% of disposable income and for only 10 years, they may not care how much the college charges in tuition. In fact, students might pick pricier colleges with the best amenities, knowing their balance would be forgiven after 10 years. If you always wanted to go to college in a life of luxury, you’re in luck!

Meanwhile, students would have the incentive to take out loans greater than what they need and use the excess for living expenses. Then they could use it to rent fancy apartments, throw parties or do pretty much anything else. Who cares, right?

And here’s what might be the worst part: Colleges would have an incentive to enroll students even if they have poor grades and horrible future job and earning prospects. By enrolling more student, no matter how poorly prepared they are, a college could charge whatever they want and get huge checks from the federal government. In effect, colleges could create massive and perfectly legal money-laundering schemes.

You might be thinking, surely someone in Congress will recognize what a disaster this policy is and mount an effort to block it. But remember, President Biden did this by Executive Order, which is next to impossible to overturn. But here may be Congress’ best chance to block this boondoggle.

President Has No Authority To Forgive Student Loans

President Biden’s announcement on August 24 that he is forgiving more student loan debt was met with mixed reviews, mainly along partisan lines. Liberals loved it but thought he should do more. Conservatives criticized the move and claimed it will make inflation worse. The conservatives are right, of course.

But the question both sides are largely missing is whether the president has any legal authority to forgive student loan debt in the first place. The fact is, he DOESN’T. Only Congress, not the president, has the constitutional spending power, and there is no rational way that declaring a loan forgiveness plan which will cost an estimated $400 to $600 billion or more is anything but more big spending. The mainstream media is largely ignoring this fact. What else is new?

The new policy provides relief to more than 90% of the 45 million Americans carrying federal student-loan debt. The White House estimates that 20 million borrowers would see their ledgers wiped clean altogether. Yet student-loan forgiveness of any kind is highly regressive, benefiting those who graduated college at the expense of the roughly 60% of Americans who didn’t.

An analysis released on Tuesday, August 23 found that roughly 42% of the benefits of student loan forgiveness would go to the wealthiest two-fifths of Americans, with the bottom fifth receiving just 12%. If anything, those figures understate the extent to which this giveaway harms working-class and poor Americans. The combined impact of canceling debt and extending the repayment freeze will cost taxpayers hundreds of billions of dollars.

And there’s more: By putting cash in borrowers’ pockets, it risks fueling inflation even more by encouraging consumers to spend money they would otherwise have put toward paying off their debts. And wiping out debt now will only encourage students to take out still-bigger loans in the future, reducing incentives for colleges to hold down tuition costs — thus, in all likelihood, making higher education even less accessible for the middle class.

It Could Have Been Worse – Liberals Wanted Even More

About the best that can be said of this decision is that it could’ve been worse: Progressives had pressured the White House to cancel as much $50,000 in debt per borrower, with no income caps — an even bigger bonanza for the rich and those with graduate degrees. That this order was advanced under a dubious legal rationale — and will surely face challenges in court — only emphasizes the fact that the administration’s goals are far more political than practical.

What now? At a minimum, Biden needs to remove any lingering ambiguity about the end of the repayment freeze and make clear that all borrowers will have to resume making loan payments at the start of 2023.

The administration should also do more to protect taxpayers, for instance, by narrowing the public-service loan forgiveness program, which allows workers in public-sector and nonprofit jobs to wipe out their remaining student-loan balances after making 10 years of payments.

If we are actually going to do this huge debt forgiveness program, the Education Department should work to make it easier for borrowers to enroll in the program and pay automatically, which would reduce their likelihood of default.

These steps would help to limit the damage but only up to a point. With one announcement, Biden has undermined any commitment to fiscal discipline, reinforced his party’s reputation for catering to elites, created a significant moral hazard and likely made higher education less affordable for a generation. Canceling these debts may well please parts of Biden’s base, but taxpayers will be stuck footing the bill.

I wish more media commentators and members of Congress would point out that the president has no legal authority to do any of this, but sadly they aren’t. Democrats think this huge freebee will help them in the midterm elections, and Republicans know it is popular with many voters, so most aren’t making a big fuss. This is the state of American politics today.

Now, the question of whether Biden has the power to do this lies in the hands of the courts, and it won’t surprise me if this one ends up in the Supreme Court. We’ll see.

Finally, there is a very good article from one of my favorite writers, Stephen Moore, in the links below with better ideas for reducing student loan debt than forgiveness as President Biden has done, largely for political reasons.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

A Better Way Than Forgiveness to Reduce Student Loan Debt

Surprising Cost of Student Debt Forgiveness Per Taxpayer

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