How should economists criticize Biden’s actions on student loans?
There has been a lot of criticism of Biden’s student loan forgiveness among economists and policy journalists. And the criticism is not limited to libertarian types, but extends to many economists who clearly care about debt relief, progressivity, and improving the quality and accessibility of higher education but who are nonetheless very critical of the substance of the policy.
I find it hard to know what to think. On the one hand, the policy really does seem to have lots of serious flaws. It’s mostly a one-time fix that leaves underlying problems unaddressed, and may even make some problems worse. It may be struck down in court in a way that blocks even very targeted efforts to address the most abusive debt problems (I’m just speculating here, I haven’t looked at the legal issues, but if you don’t think this is a risk you’re not paying attention). It wouldn’t be hard to design a much better policy. On the other hand, it’s important not to let the perfect be the enemy of the good, or even the better-than-nothing. The policy will help many people who really need help. It is also possible to argue that this is the way progress gets made . . . one step at a time, but more of a drunken stagger than well choreographed dance. So maybe a better policy will emerge when the dust settles, although to me this seems far from pre-ordained.
Another important point is that criticism of the policy is criticism of Biden, but Biden was hemmed in by the unwillingness of Republicans to legislate, by political pressures, and by limits on his legal authority. We cannot judge his choice without taking these constraints into account.
Economists often focus on what they view as the substantive merits of policies and ignore electoral politics and political constraints. I think that doing policy analysis and advocating for good policy is very important, but I have little patience for purist, technocratic criticism that ignores politics. It’s fine to argue for better policy while the contours of policy are up for grabs. And even now it’s fine to argue that the policy is imperfect and more needs to be done. But once the policy is announced I don’t see the point of harsh criticism that is aimed at Biden implicitly if not explicitly – unless you think the policy is so bad that it’s evidence that he should not be re-elected, with all that implies.
Indeed, if the student loan measures help the Democrats in the elections this year, as far as I’m concerned that’s a big, big reason to adopt the policy even if it’s merits are debatable – preserving American democracy is my number 1 issue, by far, and that means helping the Democrats. Unfortunately, in this case it’s not clear how the politics shake out, at least to me.
At the end of the day, what troubles me most about Biden’s proposal is not its technical flaws and imperfections, but the fact that we seem unable to engage in anything close to a sustained, thoughtful effort to solve problems. We have lots of serious problems that really cannot be addressed very well, or even at all, with half-baked policies: climate change, pandemic preparedness, health care reform, improving the social safety net, crime and criminal justice reform, etc. I suspect this is one reason why some liberal economists are frustrated with Biden’s proposal. But it’s important to remember that this is not a criticism of Biden. Left to his own devices he might have chosen the world’s greatest package of higher ed reforms.
Finally, as always, I wish Biden had done a better job highlighting the fact that Republicans were unwilling to work on a sustainable legislative solution to problems in higher education. In my ideal world, he would have acknowledged that executive action is not the best approach, and challenged Republicans to work with Democrats on bipartisan legislation that would focus on quality, cost-control, debt relief, college completion rates, and related issues. Then when that effort predictably failed, he could have blamed Republicans and taken executive action on debt relief. This approach would educate the public about Republican obstructionism and enable Democrats to deflect blame for some of the problems that result from his use of executive authority to reduce debt burdens.
Let’s see some suggestions about how to handle $1.6T of student loan debt.
Student loans and ‘helicopter drops’
(This is from 7 years ago. More recently, the loan balance is $1.6 trillion. More helicopters will be needed.)
The balance of all student loans outstanding in the U.S. increased to $1.3 trillion in the second quarter of 2014, compared to only $363 billion a decade ago.
About $100 billion of federal student loans are currently in default, and the situation has begun to create a drag on U.S. economic growth.
In April, Census reported that the U.S. homeownership rate fell to 65.4%, the lowest level since 1995. Many young people can’t afford to buy homes because they are so crushed repaying student debts.
At a recent conference, renowned hedge fund manager Bill Ackman called student loan defaults the biggest risk in the U.S. credit market, and he predicted a presidential administration eventually will decide to forgive some federal student debt principal.
Would such forgiveness be difficult? Perhaps not politically, because federal student loans are off the federal balance sheet, not subject to Congressional appropriation.
A student loan forgiveness program could take many forms, including a “helicopter drop” by the Federal Reserve.
The term derives from a 2002 speech given by former Fed Chairman Ben Bernanke, in which he observed that the Fed could throw cash from helicopters, if necessary, to combat deflation. …
Related:
What tools does the Fed have left? Part 3: Helicopter money
Ben Bernanke – April 2016
Busting myths about bankruptcy and private student loans
Student Loans and Bankruptcy (americanbar.org)
For cases filed prior to October 17, 2005, a student loan may be dischargeable if the program under which your student loan was issued involved only for-profit, private (non-government) entities. However, if the program is funded in whole or in part by non-profit institutions (for example, a non-profit university or guarantor), the loan is not dischargeable in bankruptcy.
For cases filed on and after October 17, 2005, and under current law, both federal and private student loans are not dischargeable in bankruptcy unless you can show that your loan payment imposes an “undue hardship” on you, your family, and your dependents.
Historically, it has been very difficult to meet the requirements of “undue hardship.” Courts have generally disfavored discharge of student loans, but some courts will discharge part of a student loan if repaying it all would be an undue hardship.
In order to have a student loan discharged on undue hardship grounds, you must file a separate motion with the bankruptcy court and then appear before the judge to explain your hardship.
Generally, you must show that
• you cannot maintain a minimal standard of living for yourself and your dependents if forced to repay the loans
• circumstances exist showing that the conditions that make repayment a hardship are unlikely to improve substantially during the repayment period; and
• you made good faith effort to repay the loans through making past payments or arranging for forbearances.
Do you think they did not make a good faith effort???
Bull shit, why do you think students with debt have been complaining.
They can’t get it forgiven. And if they do in court, the administration appeals the judge’s decision. In this case Cardona backed off and the $100,000 was forgiven,
These are few and far apart. It is surprising that most every article I have seen is recent (including yours).
In 2005 and with Biden’s support the law was changed to undue hardship as the bar needing to get by,
As a senator, Biden was one of the lawmakers who supported the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, which established stricter standards a borrower must meet to get rid of their loans through bankruptcy. Specifically, it created an “undue hardship” standard that Wolfson attempted to meet, in which the borrower cannot maintain a minimal standard of living, their circumstances will likely not improve, and they have made a good-faith effort in repaying their debt. Student Loan Bankruptcy
This is one of those situations in which general principles can more or less answer specific policy questions. The right overall approach to higher ed (including grad programs) is to make enrollment and completion as accessible as possible for everyone in society and then to tax progressively the higher incomes that ensue. All or nearly all college debt should be forgiven and at least public higher ed should be free — with stipends! And pay for it, and then some, on the tax side.
Of course, as the OP says, the rational, progressive approach was not on the table. But I think discussion of meliorative approaches like Biden’s should be couched in terms of general considerations. That would counteract the handwringing about how progressive the partial writeoff is or isn’t; the energy should go into a big push on the tax code.
Eric:
Since 1980, Biden has been a major road block for every attempt to declare bankruptcy with regard to student loans. There is a litany of actions he took to block pathways to student loan bankruptcy. I have no debt and neither do my children, If they did, I could pay it off.
This not an economics issue. It is a political issue. Every year since 1980, Biden has made it worse. Democrats do not have the power or the willingness to really take action. And Repubs won’t even think of it.
I think it must be an economics issue if $1.6T (or a significant fraction of that amount) has to be found to cover this debt. Unless simply writing if off is to be the solution, if that is even permissible.
Fred:
Ok, we will take a vote amongst economists and see what impact it has. Nadda and a nice opinion.
Congress has to take a stand and correct The situation. Biden helped create since 1980. You know, I posted the on the content of these loans. A. The original loan amounts + B. fees, accumulated interest, penalties all the paper debits to the original amounts + C. the debt owed once all has been added up.
Student Loans are little more than CDS and Naked CDS. Paper debt with paper interest and with nothing to back it up other than more paper. How many $billions did we write off there in 2008?
It is more than peculiar that billionaires (like Trump, maybe) are allowed to declare bankruptcy whenever it seems convenient to do so, but ordinary folks seem to be humiliated to do so.
(When has Trump ever been humiliated? Ok, 2020 maybe.)
This has something to do with the adage that ‘If you owe your bank a thousand dollars and can’t pay it back, you have a problem, but if it’s a million dollars, the bank has a problem.’ Now, multiply those figures by 10, or 100, and you have more of an issue.
It seems bankruptcy laws are designed mainly to help banks.
They may work better (for them) since there are way fewer billionaires than there are ordinary people.
‘The situation. Biden helped create since 1980.’
Biden was more of a centrist back then. He still makes a show of being one, but clearly is less so currently. He’d like to be able to get along with GOP senators he imagines could be coaxed back into the centrist ranks.
Poking around in this issue this morning I see that the Tax Foundation is pretty much dead-set against providing much further in the way of debt relief. Not a surprise, I suppose.
Inconsistent Tax Treatment of Student Loan Debt Forgiveness Creates Confusion
(Oh, no! Not confusion! We can’t have that!)
One assertion is that too much debt is in the hands of folks who have some wealth.
Another is that ‘debt forgiveness’ is treated by the IRS, by law, as taxable income. So, forgiveness of enormous debts would lead to enormous tax bills. So, those laws would have to be changed also.
I also notice that scholarships are not taxable, to the extent that they do not go for ‘room & board’. If they do also get used for those expenses, then that portion becomes taxable income. This may seem inconsistent. It does to me. Another set of laws to change?
So, how about those trillion dollar coins to go toward tax-free debt relief?
Hmmm. Maybe it could work to just forgive the portion of student debt that is due to tuition charges, accumulated interest & penalties. That might reduce the forgivable student debt to under a trillion dollars. Only one trillion dollar coin would be needed.