Breaking Down President Biden’s Student Loan Handout

The White House released the details of President Biden’s student loan handout yesterday, which includes the following policy proposals:

• $10,000 of handouts for student loan borrowers making less than $125,000 per year ($250,000 per year for married couples) who did not receive a Pell Grant
• $20,000 of handouts for student loan borrowers making less than $125,000 per year ($250,000 per year for married couples) who received a Pell Grant
• Required student loan payments will continue to remain paused through the end of 2022
• Reduces the required monthly debt payment under income-driven repayment plans to 5% of discretionary income and allows these types of loans to be forgiven after 10 years if the remaining balance is under $12,000. The government would also forgive a borrower’s unpaid monthly interest on income-driven repayment plans and categorize more income categories as “non-discretionary,” thereby decreasing a borrower’s monthly payment further.

What is the cost?

The Committee for a Responsible Federal Budget (CRFB) estimates that the plan will cost U.S. taxpayers anywhere from $440 to $600 billion over the next 10 years. Since the plan ultimately fails to address the high cost of education itself, something we pointed out in a previous post, CRFB also expects that overall levels of student loan debt will return to their current level within just five years.

The Penn Wharton Budget model draws a similar conclusion, finding that the debt cancellation alone could cost between $469 and $519 billion over 10 years. They also estimate that failing to resume required student loan payments in 2022 will cost another $16 billion. But the surprise could come from the changes to income-based repayment plans, with their analysis noting that “there would also be financial incentives for future borrowers to shift education financing toward more borrowing to take advantage of the 5% repayment threshold” and “the additional costs [of this change]…could reasonably exceed $450 billion.” This could result in a total taxpayer bill of $1 trillion.

There is also an inflationary cost to the policy, with some estimates finding that the increase could be between 1%-2% next year as affected borrowers spend some of the money that they no longer have to pay on their student loans.

Who benefits and who loses?

The American taxpayer is the one ultimately responsible for the cost of these handouts and, therefore, loses. But future generations of borrowers are likely to lose as well – Penn Wharton notes in their analysis that “part of the benefit might be captured by colleges and universities in the form of higher net prices, either higher tuition prices or reduced needs-based tuition offsets.” 

Borrowers who previously refinanced their federal student loan also lose out. Refinancing means that their loan was converted into a private loan, so the federal government has no jurisdiction to reduce their balance. Even though many borrowers use refinancing as a way to try and relieve their financial stress, those that did will see no benefit.

It’s also worth noting that roughly 62% of student loan debt holders successfully finished college. As The Wall Street Journal notes, the current unemployment rate among college graduates is just 2%, which raises substantial questions as to whether many of these borrowers are truly in need of assistance repaying their loan. Consider a young borrower that has been making timely and full payments on their student loan with a remaining balance of $10,000. This individual sees their loan wiped away, despite a clear ability to pay down the full balance on-time, while a struggling borrower with $37,667 in debt (which is the current average balance on a federal student loan) is still left with a balance.

Does the President have legal authority to cancel student loans?

It is unlikely that the President has the legal authority to cancel student loans in any form. Congress provided general administrative authority over the student loan programs to the Department of Education, but they did not explicitly state that the Department would have the authority to cancel any debt currently owed. In West Virginia v. EPA, which the Supreme Court just decided in June, the Court cited the Major Questions Doctrine, explaining the following:

Precedent teaches that there are “extraordinary cases” in which the “history and the breadth of the authority that [the agency] has asserted,” and the “economic and political significance” of that assertion, provide a “reason to hesitate before concluding that Congress” meant to confer such authority…..Under this body of law, known as the major questions doctrine, given both separation of powers principles and a practical understanding of legislative intent, the agency must point to “clear congressional authorization” for the authority it claims.

The administration claims to have authority under the HEROES Act of 2003, which authorizes the Secretary of Education to “waive or modify any statutory or regulatory provision applicable to the student financial assistance programs….. as the Secretary deems necessary in connection with a….. national emergency.” However, the Department of Education’s General Counsel issued an opinion during the Trump administration refuting this claim to authority: “Congress funds student loans with the expectation that such loans will be repaid in full with interest, except in identified circumstances, and did not authorize [the Secretary] to countermand or undermine that expectation.”.

How are the handout amounts determined?

All borrowers meeting the income thresholds are eligible for the full $10,000 (for those that didn’t receive a Pell Grant) or $20,000 (for those that did receive a Pell Grant) handout so long as their outstanding debt balance exceeds the amount they will receive. If their debt balance is below the handout value that they are eligible for, then their entire loan is discharged.

How many Americans currently owe student loan debt?

48 million Americans, roughly 19% of the total U.S. adult population, owe a collective $1.75 trillion in student loan debt. 8 out of 10 Americans do not hold any student loan debt – whether because they successfully paid off their loans, chose instead to attend a lower-cost career, technical, or vocational school, or otherwise chose not to attend college due to its cost.