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3 questions for assessing Biden’s student loan forgiveness plan

Written by Nic Dunn

September 9, 2022

Trying to make sense of the public debate on President Joe Biden’s announcement of his intent to forgive $10,000 in college student loan debt ($20,000 for Pell Grant recipients), as well as other sweeping policy proposals that top the news, can feel daunting. Here are three important questions you can use to help inform your approach: 

  1. Does the proposal fit within the proper role of the institution advancing it?
  2. Is the policy well crafted to address the right problem?
  3. Are there any long-term implications that will cause problems in the future?

Answering these questions can equip citizens to engage in the public debate in a more pragmatic, principled and productive way. Let’s go through each one and apply it to the president’s plan. 

Does the proposal fit within the proper role of the institution advancing it? 

The most important question to ask is: Is this constitutional? Even if you or I believe a given proposal will do tremendous good for many people, advancing it on that basis alone and ignoring the constitutional and legal process is dangerous. The Constitution sets prudent boundaries on the presidency, Congress, and the courts. These limits protect our system of American democracy from the impulse to simply advance whatever policies each side can push through in the name of political expediency.  

If you support a preferred outcome outside of legal and constitutional processes, imagine someone you fundamentally disagree with having the same power.  

Apply that to Biden’s proposal. Does the president alone have the constitutional and legal authority to forgive more than $500 billion worth of student debt? The administration says yes 

Its argument is that the Higher Education Relief Opportunities for Students (HEROES) Act, passed in 2003 to ensure that members of the armed forces mobilized in the War on Terror wouldn’t default on student loans, has broad authority to forgive loans in a “national emergency.” The White House points to the “financial harms caused by the COVID-19 pandemic” as sufficient justification.  

On the other hand, both the Department of Education under the previous administration (in a memo that has since been criticized and rescinded by the Biden administration), and House Speaker Nancy Pelosi have argued that the president alone does not have the authority for blanket loan forgiveness. Pelosi has since reversed course and spoken favorably of the president’s loan forgiveness plan. 

In addition, since Congress has already passed a number of specific student loan forgiveness programs into law, it could be argued that there was never an intent to grant blanket executive authority with the HEROES Act. It’s worth noting that the Biden administration has unilaterally forgiven student loan debt in other instances recently, though those were more targeted than this new plan and were tied to specific lawsuits or misrepresentations from the educational institution.  

These competing arguments illustrate the importance of this first question. Sweeping policy proposals should be on solid constitutional and legal ground. The final arbiter of this question is the federal court system, which may end up ruling on this policy.

Is the policy well crafted to address the right problem? 

In addition to being constitutional, a policy that precisely addresses the right problem – rather than just symptoms – is what leads to lasting progress.  

In the case of loan forgiveness, problems could include the role of the federal government in the student loan process, the default rate among borrowers, contributing factors to the climbing cost of college, insufficient value of a degree, or difficulty paying off the debt.  

Speaking in defense of the administration’s loan forgiveness, Pelosi said in a statement: “By delivering historic targeted student debt relief to millions of borrowers, more working families will be able to meet their kitchen table needs as they continue to recover from the challenges of the pandemic. Importantly, this action will help those most in need, easing a financial burden disproportionately harming women and people of color.” 

In addition, the White House is arguing that since most Pell Grant recipients come from families making less than $60,000 per year, and who usually have a harder time repaying debt, the full amount of loan forgiveness ($20,000) under this plan is well targeted to families in need. The administration also says that “among borrowers who are no longer in school, nearly 90% of relief dollars will go to those earning less than $75,000 a year.” 

On the other hand, there are many voices making the case that the current plan lacks a precise focus on a specific problem. 

Jennifer Graham, in the Deseret News, writes that “going forward, graduation rates need to be part of the conversation as policymakers grapple with the cost of higher education, which is the core problem and which the Biden plan does nothing to resolve.” 

Borrowers who don’t finish their degrees are much more likely to default on loans than borrowers who graduate, supporting the argument that a core problem is college completion. 

The administration says the plan’s income caps of $125,000 for individuals and $250,000 for married couples helps target those who need help, but a recent paper from the Texas Public Policy Foundation argues that blanket forgiveness is poorly targeted, since the vast majority of borrowers (more than 80%) are able to pay back their loans, and fewer than one in 10 default. 

The administration says it is targeting the right population, but critics of the plan say it doesn’t target the right problem. This can risk creating long-term unintended consequences, which leads to the third question.

Are there long-term implications that will cause problems in the future?

Well-meaning policies can often have unintended consequences that create “perverse incentives,” meaning they inadvertently encourage people to act in a way that makes the problem worse. 

One of the best examples of perverse incentives in public policy is something called the “benefits cliff” effect. This occurs when a person or family receiving public assistance like cash welfare or Medicaid turns down job opportunities because their increased income would make them ineligible for benefits. This essentially traps them in poverty. 

Beth Akers at the American Enterprise Institute points out that wiping away all student debt certainly would create perverse incentives: 

It means [students] would be smart to borrow every penny they could for school, and hope and pray for a politically inevitable second round of loan forgiveness. Maybe they would even choose a more expensive school. Why not? At the same time, colleges and universities would certainly notice this increased willingness to pay higher tuition prices and would accordingly adjust prices upward – only adding to the already out-of-control tuition inflation.”

The White House fact sheet outlined efforts to address the long-term impact of the student debt issue, which some may argue address unintended consequences. Some of these include: changes to the income-driven repayment programs to reduce the amount that borrowers have to pay each month, a shortened time frame for full forgiveness under the program, and a number of other provisions the administration says will “hold accountable colleges that have contributed to the student debt crisis.”

James Harrigan and Antony Davies writing for the American Institute for Economic Research  echo the concerns about perverse incentives even though Biden’s plan doesn’t forgive all debt:

“First, next year’s crop of new students will – understandably – demand that their loans be forgiven too. And so will those of the year after that, and so on. This program will quickly become a sort of college UBI. … Second, colleges and universities will respond to this new reality by raising tuition commensurately.”

Regardless of whether the arguments on either side of this issue are compelling to you, applying these three questions to this and future policy proposals will equip you to engage more thoughtfully on this and other important issues.

There are certainly other considerations, such as the history of the policy, the fiscal implications, issues of fairness and empathy for those affected on both sides, and more. But asking first whether a policy is legal and constitutional, is well targeted to the right problem, and avoids long-term unintended consequences provides a foundation for healthier and more productive public dialogue.

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