President Biden’s student loan forgiveness

It helps to address equity issues among current borrowers, but does not address college affordability going forward, is more expensive than the White House has admitted, has a questionable legal basis, and is opposed by a narrow majority of Republicans

On August 24, President Biden announced his intention to take executive action to cancel up to $20,000 of outstanding student loans for borrowers with incomes less than $150,000. Both President Trump and President Biden had previously taken several actions to help student loan borrowers during the COVID-19 pandemic, including an ongoing pause in required loan payments, an expansion of the Public Service Loan Forgiveness Program, and expanded access to income-driven repayment plans. But this new proposal is the most significant action by far. Progressives praised the action, although many had been pushing for forgiveness of up to $50,000 of loans. Some moderate Democrats criticized the action as too expensive and an overreach of executive authority. And Republicans have almost universally condemned the action as unconstitutional, unfair, and bad economic policy.

What would the executive action do?

The proposed executive action has three main points:

Loan forgiveness

For single borrowers who earned less than $125,000 in 2020 or 2021 (or married or head of household borrowers who earned less than $250,000), $10,000 of federal student loans will be forgiven for borrowers who didn’t receive a Pell Grant and $20,000 will be forgiven for borrowers who did. Of the approximately 43 million borrowers who will be eligible for loan forgiveness, more than 60% received Pell Grants and thus will be eligible for the larger amount.

Only loans taken out before June 30, 2022 that are currently held by the U.S. Department of Education will be eligible for loan forgiveness. That excludes state loans and private loans. It may also exclude some federal loans, such as Federal Family Education Loans, which are held by commercial lenders, and Perkins Loans, which are typically held by colleges; however, borrowers may be able to consolidate these loans first, so the consolidated loan would qualify for loan forgiveness.

Payment pause

The action will also extend the payment pause on all federal student loans that has been in effect since March 2020 through the end of 2022. It marks the seventh extension of the payment pause and is expected to be the final extension, with loan payments resuming in January 2023.

New income-driven repayment plan

The action will create a new income-driven repayment plan that would cap monthly payments at 5% of a borrower’s discretionary income for undergraduate loans; as we discuss below, current plans cap payments at 10% to 20% of discretionary income. The action would also increase the threshold used to calculate discretionary income from 150% to 225% of the poverty line. And it would forgive loan balances after 10 years of payments under the plan for borrowers with original balances of $12,000 or less; as we discuss below, that period is 20 to 25 years under current plans.

What is the current student loan landscape?

Types of loans

Federal loans represent about 92% of outstanding student loans in the United States (about $1.62 trillion); about 7.6% are private loans and 0.4% are state loans. The table below provides information on the different types of federal loans that are outstanding.

Profile of student loan borrowers

Student loan borrowers by balance

Of the 330 million U.S. adults, about 48 million have outstanding student loans. The total U.S. student loan debt is $1.75 trillion, so the mean balance is about $36,500. The chart below shows the distribution of borrowers by balance. Most borrowers have balances less than $40,000, but a small number of borrowers with very large balances inflate the mean.

Student loan borrowers by income percentile

Most student loans are held by borrowers with above average incomes. The table below shows the distribution of student loans among American families by income quintile. Families in the top three quintiles are both more likely to have loans and have higher mean loan balances than families in the bottom two quintiles. Of course, as a percentage of income, the opposite is true: among families with outstanding student loans, families in the bottom two quintiles have the highest average loan balances as a percentage of their incomes.

Student loan borrowers by age

The likelihood of having outstanding student loans decreases consistently with age, as people younger than age 35 are most likely to have loans and people older than age 74 are least likely to have loans. However, for people who have outstanding loans, the mean loan balance is similar for all age groups up to age 74 and the median loan balance is similar for all age groups up to age 64.

Student loan borrowers by race or ethnicity

Non-Hispanic Blacks are much more likely to have outstanding student loans than non-Hispanic Whites or Hispanics. Other racial and ethnic groups, which mainly include Asian-Americans, are the second most likely group to have outstanding student loans. Among people with outstanding loans, non-Hispanic Black people also have the largest average loan balances.

Student loan repayment plans

There are several different repayment plans available for federal student loans. Borrowers select a plan initially when they leave school, but can change plans later by contacting their loan servicer. Across all plans, the average monthly payment for people with student loans is about $300.

Standard repayment plan

The standard repayment plan for nonconsolidated loans has fixed payments over 10 years. For consolidated loans, the standard plan has fixed payments over a period of 10 to 30 years, depending on the loan balance.

Graduated repayment plan

The graduated repayment plan is similar to the standard plan, with payments over 10 years for nonconsolidated loans and payments over 10 to 30 years for consolidated loans. However, with the graduated plan, payments start smaller and increase every two years.

Extended repayment plan

Borrowers with more than $30,000 of nonconsolidated loans can apply for an extended repayment plan as long as 25 years. The extended plan can involve either fixed payments or graduated payments.

Income-driven repayment plans

These plans base the required monthly payment on the borrower’s income and family size. Depending on the specific plan, the monthly payment will be 10% to 20% of the borrower’s discretionary income, which is redetermined each year. The repayment period is 20 to 25 years and any remaining balance is forgiven at the end of that period.

Student loan forgiveness programs

In addition to the loan forgiveness that is available at the end of the income-driven repayment plans described above, there are some other federal programs that offer loan forgiveness. The two main programs are for teachers and for government and nonprofit workers.

Teacher loan forgiveness

People who teach full-time for five consecutive years in a school serving low-income families may be eligible for forgiveness of up to $17,500 of federal student loans. As of September 2021, about 27,000 borrowers had an average of $9,400 of loans forgiven under this program.

Public service loan forgiveness

People who work full-time for a government or nonprofit agency and make payments on their loans for 10 years may be eligible to have the remaining balance forgiven. As of June 2022, about 165,000 borrowers had an average of $64,000 of loans forgiven under this program.

Student loan defaults

Current default statistics for student loans are misleading because required payments on federal student loans have been paused since March 2020. However, in the first quarter of 2022, 4.7% of student loans were delinquent by 90 or more days; in the third quarter of 2019, before the payment pause, 10.9% of loans were delinquent by 90 or more days.

With that background on President Biden’s executive action and the student loan landscape, we’ll continue to analyze the effectiveness, social acceptability, legal feasibility, and equity of the executive action.

What will be the effects of the executive action?

Budgetary cost

The White House stated that the executive action would cost $240 billion. However, a Wharton School brief estimated that the three parts of the executive action would cost $526 billion in fiscal 2022 and an additional $79 billion over the next nine years. Of that $605 billion total, loan forgiveness would cost $519 billion, the extended payment pause would cost $16 billion, and the new repayment plan would cost $70 billion.

Distributional impact

The Wharton School analysis estimated that Americans in the lowest income quintile would receive 14% of the loan forgiveness. The second quintile would receive 23% of the benefits, the third would receive 36%, the fourth would receive 21%, and the highest quintile would receive 6%. So, the loan forgiveness benefits would mainly go to middle-income families. According to the analysis, the payment pause benefits would be distributed more evenly across quintiles and the benefits of the new repayment plan would flow largely to lower income families. Still, because the loan forgiveness part is so much larger, the middle three income quintiles would benefit most from the executive action.

Economic impact

Some economists have expressed concerns that the loan forgiveness could add to already high inflation rates by increasing consumer spending. However, most economists and Wall Street more generally believe that the overall impact of the executive action on inflation will be negligible, because the resumption of student loan payments in 2023 will offset the impact of the loan forgiveness.

Impact on college affordability

The executive action has been criticized for failing to address the root cause of America’s student loan crisis. The average cost to attend a four-year college full-time increased by 180% from 1980 to 2020, after adjusting for inflation. The executive action will not meaningfully affect college affordability going forward. However, the new repayment plan will help to reduce the after-college debt burden for some borrowers.

How do Americans feel about the executive action?

There have been many recent polls about student loan forgiveness generally and at least one poll has already been conducted more specifically on President Biden’s executive action. These polls have produced fairly consistent results. A majority of Americans support forgiveness of some student loans – the percentage in favor has ranged from 51% to 60% in recent polls. However, in an August Data for Progress Poll, while 60% of all Americans supported forgiveness of some or all student loan debt for every borrower, only 45% of Republicans agreed with that idea; 52% of Republicans did not support any loan forgiveness. This result agrees with other recent polls finding that a majority of Republicans (62% in a July YouGov poll, 59% in a June Morning Consult poll) oppose loan forgiveness.

More specifically, Emerson College included questions about the executive action in its August tracking poll. With regard to the loan forgiveness, athough 64% of all Americans felt that the forgiveness provided was either just about right or not enough, 52% of Republicans felt that it was too much. With respect to the extended payment pause, 65% of all Americans felt that the length of the extension was either just about right or not enough, including 51% of Republicans. Emerson did not poll regarding the new income-driven repayment plan.

Therefore, it seems likely that:

1. A majority of all Americans support at least as much student loan forgiveness as the executive action provides.

2. A majority of all Americans, including a narrow majority of Republicans, support extending the student loan payment pause at least through the end of 2022.

3. A narrow majority of Republicans oppose the student loan forgiveness provided by the executive action.

Can President Biden forgive student loans by executive action?

Many commentators have already examined the question of whether President Biden’s executive action would be constitutional. The consensus opinion seems to be that the Supreme Court could find that the executive action oversteps executive authority. The Biden administration’s Office of Legal Counsel issued a legal opinion that the executive action is authorized under the Heroes Act of 2003. That law, passed in response to 9/11 and the wars in Afghanistan and Iraq, gives the Secretary of Education the authority to “waive or modify Federal student financial assistance program requirements to help students and their families or academic institutions affected by a war, other military operation, or national emergency.” The Office of Legal Counsel considered the ongoing COVID-19 pandemic to be a national emergency within the meaning of that act.

There are, however, a few issues with that interpretation of the Heroes Act. First, during the Trump administration, the Education Department’s Office of General Counsel had reached the opposite opinion in a January 2021 memo. Of course, the timing of that memo, issued shortly before President Biden’s inauguration, casts doubt on its objectivity. Second, although the pandemic is still a formally declared national emergency, most states have rescinded their emergency declarations or let them expire and the CDC’s latest guidelines no longer reflect pandemic policies. Third, the OLC’s opinion doesn’t consider the implications of the “major questions” doctrine. That doctrine, which has been developed by the Supreme Court’s conservative majority in recent years, requires the executive branch to get explicit authorization from Congress before taking major actions with large economic and political significance.

Republican leaders who want to challenge the executive action in court will have an initial obstacle to overcome; they will need to find someone who has been harmed by the action and thus has standing to sue. Under Supreme Court precedent, merely being a taxpayer does not satisfy that requirement. However, most commentators believe that opponents of the action will find a way to meet the standing requirement and that the Supreme Court could invalidate or significantly limit the announced executive action.

Is the executive action fair?

There are a few different dimensions of equity to consider when evaluating the fairness of the executive action. The three most important are probably fairness across income, race and ethnicity, and time. As we discussed above, the middle three income quintiles are likely to benefit the most from the action. People in the highest income quintile have equally large loan balances, but most of them are not eligible for relief under the action. People in the lowest income quintile are eligible for relief, but are less likely to have student loans and have smaller average loan balances. Therefore, some Democrats have criticized the executive action for not providing enough assistance to low-income students and students working in fields with low wages.

With respect to race and ethnicity, as we discussed above, Black non-Hispanic Americans are both most likely to have outstanding student loans and have the largest average loan balances. Black borrowers are most likely to benefit both from the executive action generally and from the higher loan forgiveness for Pell grant recipients. Therefore, the action will help to address equity issues across race, although some Blacks believe that the action would not include enough forgiveness to provide meaningful relief.

The most common objection to loan forgiveness is that it is unfair to people who either never attended college or who have already repaid their student loans. Of course, that argument holds true for many social policies. Child care subsidies are unfair to people without children or people who don’t use paid child care. Mortgage tax deductions are unfair to people who don’t own homes or who buy homes without needing a mortgage. Medicare and Social Security are unfair to people who die before they qualify for benefits under the programs. If the government were limited to adopting only policies that could apply to the entire population, there would be very few policy areas available to it.

Conclusion

President Biden attempted to strike a balance with his proposed executive action. In particular, he did not go as far as many progressives wanted, by limiting loan forgiveness to $10,000 or $20,000 per borrower. The action will still likely be much more expensive than the White House has admitted, but it is not likely to add significantly to inflation. The action will help to address equity issues across race in repaying existing loans, but it does nothing to address the underlying issues affecting college affordability going forward. It is likely to be subject to legal challenges once someone can be found with legal standing to sue and there is a reasonable chance that those challenges will be successful. And although a majority of all Americans support the executive action, a narrow majority of Republicans likely oppose it. Therefore, the proposed action is satisfactory in terms of equity, but is questionable in terms of effectiveness and legal feasibility and it does not quite meet our social acceptability threshold of having majority support across parties.

A smaller, more tailored forgiveness program may have overcome some of these concerns and perhaps received more Republican support. A bill proposed by three House Republicans earlier in August sheds some light on Republican priorities. That bill would have limited the amount of interest accumulating on student loans, ended the loan payment pause, ended loan forgiveness under income-driven repayment plans, limited the amount of debt that graduate students could accumulate, and prohibited tuition and fees from exceeding the expected earnings from an academic program. So, a program tailored to forgive debt representing interest on loans and debt incurred for academic programs with low expected earnings would have been more affordable, had fewer inflation concerns, had more support from Republicans, and been less likely to be challenged in court or found to be unconstitutional.

Our grades for the proposed executive action:

Effectiveness: C

Equity: B

Legal Feasibility: C-

Social Acceptability: C

Overall Grade: C