March 26, 2023

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A brass band plays during a rally outside the White House to call on President Joe Biden to cancel student debt on July 27.
Anna Moneymaker/Getty Images
The elaborate system around student loans makes a quick fix impossible.
Special Contributor
Twenty-nine months ago, the Education Department’s enormous student loan collection machine shuddered to a stop. It has stayed that way through the ups and downs of the pandemic, a presidential election, an inflation crisis and more. Officially, the system is supposed to lurch back into operation at the end of this month.
But almost nobody believes this will happen.
Instead, the White House is expected to announce in the coming weeks that the machine will stay dormant until some time in 2023. If so, it would mark the fourth time since taking office that President Joe Biden will have told 43 million people in debt to Uncle Sam that they have to start paying off their loans only to subsequently announce he’d changed his mind.
Whatever decision Biden announces is likely to make people angry across the political spectrum. Advocates on the left don’t just want loan collections paused — they want them completely erased. Even if Biden announces a loan forgiveness program at the same time as the next payment pause extension, it will likely be for a maximum of $10,000 per borrower. Republicans in Congress, meanwhile, denounced the last pause as a wasteful boondoggle that benefits many college graduates who are financially well-off and costs taxpayers $5 billion per month.
Biden’s predicament is partly bad political luck. Nobody wants to make loan payments. Prior presidents weren’t blamed for the very existence of a student loan system that’s been in place for more than 50 years. Being the guy who has to say, “Sorry, pay me,” before a reelection bid is a tough break.
But the administration’s dilemma is much bigger than that. The loan payment apparatus is just part of the larger system of how the government subsidizes higher education and colleges set prices, one that is subjecting whole generations of college students to burdensome debt and increasingly seems beyond anyone’s control. Because he is responsible for the rapidly growing pile of federally-owned debt that system produces, Biden has become inadvertently liable for the whole mess.
The challenge begins with how the loan system works. The Education Department doesn’t collect debt directly. Instead, it contracts out the relationship management part of lending to a handful of for-profit and nonprofit “servicers,” which are paid a flat rate per month by the department for every borrower account they manage. Before the pandemic, those servicers made as much as just $2.85 per month for borrowers who were current on their payments and less for those who were behind. Servicer work involves sending recent graduates that, “Hey, you have to pay your loan back now” email, handling customer service phone calls and helping borrowers pick the right payment plan.
Servicers have come under intense criticism, often justified, for bungling their responsibilities. At the same time, past administrations and Congresses have added layers of complexity to the servicers’ job by creating elaborate and confusing systems for paying back loans. As a result, several large servicers have left the business in recent years, forcing the Education Department to redirect millions of accounts to other vendors.
Servicing depends on maintaining lines of communication with borrowers. Millions of people who graduated from college more than two years ago have never made a single loan payment. Some debtors have had their loans reassigned to a new servicer twice. People move across the country, change phone numbers, change names and lose access to their old campus email. No one really knows what will happen when a system that was not designed to stop finally restarts.
The best way to manage that problem would be to give both servicers and borrowers plenty of advance notice about when repayments begin. That’s what the administration said it was doing a year ago, when it extended the payment pause from October 2021 to February 2022 with a strong, “We mean it this time” vibe. The Education Department sent millions of emails and other communications alerting borrowers of the date. But as the December holidays approached, the White House suddenly changed course, kicking the can to May and then to September, followed by what will likely be another extension later this month.
The administration has repeatedly chosen to extend the payment pause in part because it has been struggling to make a different decision about student debt. When Biden won the presidency and prospects for Democratic control of the Senate were still uncertain, prominent lawmakers like Senate Majority Leader Chuck Schumer (D-N.Y.) and Sen. Elizabeth Warren (D-Mass.) immediately began pressuring Biden to write off huge chunks of student debt with executive authority as soon as he took office. Biden has spent most of the last two years refusing to do that, but also refusing to say he won’t do that, with warring factions within the administration lobbing white papers and press leaks at one another the whole time.
Debt forgiveness and debt repayment are highly related because it makes a big difference which comes first. Biden appears to be considering a plan to erase $10,000 from every federal loan not held by a high-income borrower. That’s a lot less than the $50,000 Schumer and Warren proposed or the total forgiveness called for by many on the left. But $10,000 would still eliminate nearly one-third of all outstanding loans. It doesn’t make sense to make someone start paying on a loan that you’re going to forgive a few months later.
And that assumes Biden can forgive the loan. While the White House dithered, the legal environment changed. In June, the Supreme Court’s six-member conservative majority strengthened a legal doctrine called “major questions.” In West Virginia v. EPA and other recent rulings, the court limited the ability of federal agencies to assert new authority from existing statute in matters of “vast economic and political significance.” Spending hundreds of billions of dollars to write down millions of loans seems pretty vast. What if the administration cancels the loans and restarts the payment system, and then a federal judge un-cancels them?
Many borrowers have bought homes, signed leases, had children and made other major financial decisions without having to make a monthly loan payment over the last two-and-a-half years. Unemployment may be low, but prices are rising and good jobs aren’t always easy to find. To help borrowers, the Education Department has been working on a new plan to make loan payments more affordable, building on existing plans that limit monthly payments to 10 percent of the borrower’s discretionary income. Borrowers can then apply to have their remaining balances forgiven after at most 20 to 25 years.
In 2014, there were 1.9 million borrowers in some form of such income-driven repayment (IDR) program, compared to 10.9 million in the standard 10-year plan where payments are always the same, like a mortgage. By 2020, enrollment in IDR plans had surged to 8 million, while the number in traditional plans stayed unchanged. Because graduate and professional school can be very expensive, and (unlike undergrads) graduate students can borrow the full cost of tuition, room and board from the Education Department, graduate school loans tend to be large — and graduate students are especially likely to enroll in IDR plans. As a result, there is now more than $520 billion in loans being repaid through IDR, compared to less than $210 billion in traditional 10-year plans. The disparity would likely be even bigger, except another $150 billion in loans came due during the pandemic payment pause that aren’t yet in a repayment plan.
The department’s new, more generous IDR plan hasn’t been finalized, but may look something like this: IDR plans calculate discretionary income by starting with the Adjusted Gross Income on your tax return and subtracting 150 percent of the federal poverty level for your family size and state of residence. By increasing the deduction to, say, 250 percent of the poverty line, discretionary income is reduced and payments shrink. The percentage itself would drop from 10 percent to 5 percent. Taken together, monthly payments for some borrowers could drop by two-thirds or more. As with existing IDR plans, some would owe no payment at all until their income rises.
Yet some of the biggest opponents of this plan are the advocacy organizations calling for mass debt forgiveness. Why? Because the payment plan doesn’t change how interest accrues every month. Often, very low payments are less than newly accrued interest, which means the total outstanding balance grows. In theory, remaining debt is forgiven after 20 to 25 years (or 10, for public servants). But for a variety of reasons related to overly complex program design, Education Department inaction and bad loan servicing, very few applications for loan forgiveness have thus far been approved.
Mike Pierce is the Executive Director of the Student Borrower Protection Center, which advocates on behalf of people with student debt. He said, “Because these plans allow people to pay less money than the interest charged on their loans, and because multiple administrations have been unable to deliver on the promise of these plans to forgive after decades, IDR has become akin to a debt trap, more like a payday loan.” He’s worried a new plan with lower payments and the same design flaws will dig the debt trap deeper still.
There’s another wrinkle. The administration would likely tout a $10,000 reduction in loan principal as a reason people should be less angry about the resumption of payments. But a reduction in principal won’t change how much the eight million people in IDR owe each month — their payment is based on their income, not the balance of their loan. If they’re making more money than they were at the start of the pandemic, their payments will go up.
Then there are the 7.5 million people currently in default on their student loans. The payment pause temporarily saved them from dire financial consequences. The Biden administration wants to bring many of those loans back into good standing, which means people could start making regular payments without penalties and a stain on their credit. But these are, by definition, borrowers who have struggled to navigate the complex loan system. Helping them is a challenge. Which makes the sequence of events crucial once again — it doesn’t make sense to rehabilitate and start payments on defaulted loans for less than $10,000, if loan forgiveness is right around the corner.
All of this points in the same direction — extending the payment pause until all of the forgiveness, servicing, IDR, legal and default issues get worked out. But there’s a catch: The administration’s current legal authority for pausing payments is the national emergency related to covid, which Biden has extended through February 2023. The pandemic will end someday, and there will be political value in saying so. Biden could be forced to choose between declaring victory over covid and extending student loan relief.
Then there’s inflation, another problem that has grown worse as the payment pause has lengthened. The student loan system is so massive that changing it affects the entire economy. Marc Goldwein, an economist at the Committee for a Responsible Federal Budget, estimates that continuing the repayment pause would increase inflation by two-tenths of a percent compared to restarting payments. The $10,000 loan forgiveness plan would add another 15-hundredths of a percent, Goldwein estimates.
More broadly, there is a price for extending the payment pause beyond the dollar cost to the Treasury Department. Loan repayment is a relationship between lender and debtor, a financial habit and a state of mind. Every additional month of paused payments causes further deterioration in the system. Like a lawn mower left in the shed for many winters, it will take more and more effort and maintenance to restart.
All of this falls on President Biden because nothing has been done to change the ways colleges set tuition and the government lends students money. State governments remain free to pull dollars out of public colleges and universities, secure in the knowledge that federal loans will fill the gap. The market for graduate school is like a gold-rush boom town in the unregulated territories, with lucrative, debt-financed online degrees driving all manner of unscrupulous behavior. Biden’s proposal for nationwide free community college was an early evictee from the 2021 Build Back Better agenda, in part because D.C.-based lobbyists for pricey four-year universities helped kill the plan.
Nobody has yet mustered the public resources and political will necessary to stabilize the higher education system and prevent students from borrowing unaffordable amounts of money. So pressure to help victims of the loan crisis continues to grow. The result is policymakers continually trying to restructure, reformulate, hand-wave, hide or disappear the ever-growing $1.7 billion corpus of student debt without doing anything to stop billions of dollars in new loans from being thrown onto the pile. It’s no wonder student loan policy has become a kind of waking nightmare for the Biden administration.
Thanks to Alicia Benjamin for copy editing this article.
Special Contributor
Kevin Carey directs the education policy program at New America.
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