President-Elect Joe Biden has made several ambitious proposals for student loan forgiveness that may be stymied by legislator opposition. Nevertheless, there may be a few ways he can implement at least part of his student loan forgiveness agenda.
Student Loan Debt Burden
Student loan debt has grown to record levels, spurring calls for loan forgiveness.
According to the Federal Reserve Board’s G.19 report, there’s a total of $1.7 trillion in student loan debt outstanding as of September 30, 2020. This includes both federal and private student loans.
- Federal student loan debt outstanding totaled $1.54 trillion as of June 30, 2020. Of the federal student loans, $1.38 trillion is held by the U.S. Department of Education, including $1.29 trillion in the Direct Loan program. Loans in the Federal Family Education Loan (FFEL) program that are not held by the U.S. Department of Education totaled $162 billion.
- Private student loans outstanding were about $132 billion.
Many Proposals for Student Loan Forgiveness
During the campaign, Joe Biden made several proposals for student loan forgiveness.
- Forgive $10,000 in federal student loan debt per borrower.
- Forgive all tuition-related undergraduate federal student loan debt for borrowers who attended public colleges and universities or HBCUs or MSIs. Eligibility will be limited to borrowers who earn less than $125,000 per year. Graduate student loans and loans borrowed to attend private colleges and universities will not be eligible.
- Switch Public Service Loan Forgiveness (PSLF) from a back-end loan forgiveness program to an up-front loan forgiveness program. Instead of forgiving the remaining debt after 120 qualifying payments, the new PSLF will forgive up to $10,000 per year for up to five years.
- Tax-free forgiveness of the remaining federal student loan debt after 20 years of payments in a new income-driven repayment plan. The new income-driven repayment plan cuts the monthly student loan payments from 10% of discretionary income to 5%. The definition of discretionary income will switch from the amount by which income exceeds 150% of the poverty line to the amount by which income exceeds $25,000.
- Restore bankruptcy rights to student loans, thereby allowing borrowers in extreme financial distress to discharge their student loans in bankruptcy.
These proposals are expensive, but not as expensive as calls to forgive all student loan debt because the proposals are more narrowly targeted.
The first two proposals, to forgive $10,000 in federal student loan debt per borrower and to forgive tuition-related undergraduate federal student loan debt, would forgive about a third of all outstanding student loan debt. There is a lot of overlap between the two proposals, reducing the combined cost by nearly 40%.
The change in PSLF is probably revenue neutral. Even though it accelerates the loan forgiveness for new borrowers, it also caps the amount of forgiveness at $50,000 per borrower.
The switch to a new income-driven repayment plan will cost less than $100 billion over 10 years, in part due to overlap with the first two loan forgiveness proposals. In addition, many borrowers in income-driven repayment plans already have a zero monthly loan payment. The tax debt for many borrowers who qualify for loan forgiveness at the end of their income-driven repayment plans may already be forgiven by the IRS because the borrowers are insolvent.
The proposal to restore the ability to discharge student loans in bankruptcy is among the least expensive of the loan forgiveness proposals. It will cost about $30 billion, mostly due to pent-up demand. The steady state cost will be about $1 billion a year.
Using Waiver Authority to Forgive Federal Student Loans
The Secretary of Education does not have the legal authority to forgive all student loan debt without an act of Congress, despite claims to the contrary.
Some people have argued otherwise, but their arguments depend on a misreading of the law. They point to the waiver authority provided to the Secretary of Education in the Higher Education Act of 1965 at 20 USC 1082(a). However, they ignore the preamble to this section of the Higher Education Act of 1965, which limits the waiver authority to “the performance of, and with respect to, the functions, powers, and duties, vested in him by this part.” In other words, the waiver authority is limited to operating within the confines of the statute. The Secretary of Education cannot forgive student loans for any purpose unless granted that specific authority by Congress.
After all, if the Secretary of Education could decide to forgive any and all debt, why did Congress enact specific loan forgiveness and discharge programs, such as public service loan forgiveness, teacher loan forgiveness, and the death and disability discharges? That’s a pretty clear indication of Congressional intent, suggesting that relying on the waiver authority to create a new broad loan forgiveness program will not survive a legal challenge.
In addition, the cited waiver authority applies only to Part B of the Higher Education Act of 1965, the Federal Family Education Loan Program (FFELP). It does not apply to the Direct Loan program in Part D. There is no similar waiver authority for the Direct Loan program. The parallel terms provision in 20 USC 1087e(a)(1), which requires the terms and conditions of loans made to borrowers in the Direct Loan program to have the same terms and conditions as FFELP loans, does not apply to the waiver authority.
But, didn’t President Trump rely on the waiver authority to implement the original 60-day payment pause and interest waiver (which was rendered moot by passage of the CARES Act) and the extension through December 31, 2020?
He did, with regard to the extension of the interest waiver. The extension of the payment pause can rely on the authority of the Secretary of Education to establish criteria under 20 USC 1085(o)(1)(B) for the economic hardship deferment. But, the economic hardship deferment waives interest on just subsidized loans, not unsubsidized loans.
The President and the Secretary of Education do not have the authority to waive interest on unsubsidized federal student loans unless specifically authorized by Congress. The Heroes Act would have extended the payment pause and interest waiver through September 30, 2021, but this legislation is stalled in the Senate.
There is one important difference between using the waiver authority to extend the payment pause and interest waiver and using it to forgive all or most federal student loans. In both cases, it is an overreach, going beyond the authority of the executive branch. Only Congress can appropriate funds for loan forgiveness. But, nobody has opposed the extension of the payment pause and interest waiver because it has strong bipartisan support and the cost is low.
Using the waiver authority to forgive a trillion dollars of federal student loans, or even a few hundred billion dollars, on the other hand, will likely be met with court challenges.
Passing Legislation to Forgive Federal Student Loan Debt
Congress could pass new legislation to forgive federal student loan debt.
While Democrats tend to favor student loan forgiveness, Republicans don’t. For example, President Trump proposed repealing the Public Service Loan Forgiveness program in each of his federal budget proposals.
Overhauling the Public Service Loan Forgiveness program might receive bipartisan support because it does not increase the cost of the program, in part because it caps the amount of loan forgiveness at $50,000 per borrower. It also eliminates the moral hazard inherent in the program, where students and parents might borrow excessively because they know that their debt will be forgiven.
Making the loan forgiveness that occurs at the end of an income-driven repayment plan tax-free might demonstrate bipartisan support because the cost is low and it is well-targeted at borrowers who are experiencing severe financial distress.
Passage of other legislation, however, depends on control of the Senate. If Democrats win the two Georgia Senate seats in the runoff election, there would be a 50/50 split of the Senate, with ties broken by the Vice President.
However, Republicans could use a filibuster to block legislation in the Senate, since Democrats do not have the 60-vote supermajority required to cut off debate.
Budget reconciliation bills provide a once-a-year opportunity to pass legislation in the Senate with a simple majority and no filibusters. But, the legislation must cut the deficit, so it must offset the cost of the loan forgiveness. Otherwise, it will be struck under the Byrd Rule.
Even so, President Biden will need to convince Democrats to pass his agenda, not just Republicans. Of the 25 Democratic candidates for President, only four proposed broad student loan forgiveness. The rest proposed much more targeted student loan forgiveness, such as cancelling the student loan debt of teachers, or opposed student loan forgiveness.
What Can Joe Biden Do without Congress?
Defense to repayment. The defense to repayment rules, which were expanded during the Obama administration, allow federal student loans to be cancelled when the borrower’s college misled them concerning their student loans or education program. The Trump administration delayed processing of pending defense to repayment claims, tried to change the rules retroactively and approved only about 4 percent of outstanding claims, many with only partial discharges. The Biden administration could implement an accelerated review of borrower claims, including those denied by the Trump administration. Approval of eligible claims is long overdue.
Bankruptcy discharge. During the Obama administration, a Dear Colleague Letter (GEN-15-13) provided guidance concerning when the federal government would not oppose a borrower’s undue hardship bankruptcy discharge claims in adversarial proceedings under 11 USC 523(a)(8). The goal is to avoid fighting cases that the federal government is likely to lose. The Trump administration rescinded this guidance and issued an RFI seeking public comment, but never issued new guidance, despite receiving many public comments suggesting improvements in the policy. The Biden administration could issue new guidance that makes it easier for borrowers in difficult situations to qualify for bankruptcy discharge.
Regulatory authority. A better approach than relying on the waiver authority is to issue new regulations to forgive student loans as part of a negotiated rulemaking process, followed by a public comment period. So long as there is a reasoned basis for the new regulations, they would not violate the Administrative Procedures Act (APA). Congress can overturn new regulations through the Congressional Review Act by passing a joint resolution within 60 legislative days. However, Congress is unlikely to pass such a joint resolution due to the split control of Congress. Even if they did pass a joint resolution, it is unlikely to pass with the two-thirds majority required to override a Presidential veto. This would demonstrate that the new regulations are consistent with the intent of Congress without requiring Congress to take any action.
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