Biden’s Student Loan Dilemma

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From The New York Times, I’m Michael Barbaro. This is The Daily.

Today: For the past two years, the U.S. government has allowed tens of millions of Americans to stop paying their student loans, a policy that was extended a little over a week ago. I spoke with my colleague Stacy Cowley about the unintended consequences of this historic experiment in debt deferral and the dilemma it’s posing for the president.

It’s Monday, April 18.

Stacy, I want to start at $10,000 feet with a current scope of the problem here. Where are we right now when it comes to student debt?

So when we talk about student debt, we’re talking about loans that students take out to go to college and university. Some of this money is borrowed from private banks. But overwhelmingly, more than 90 percent of it comes from the federal government, specifically the Department of Education.

Got it.

So right now, there are 45 million borrowers who owe $1.6 trillion in student debt. That’s more money than consumers owe on pretty much any other debt except mortgages. It’s more money than they owe on auto loans, on credit cards.

Wow.

This is the largest debt many young Americans especially have in their lives. The payments that they’re making on it are often hundreds or thousands of dollars every month.

So it’s absolutely fair to call this a crisis, a historic level of debt saddling an enormous percent of the American population.

Yes. What’s been really striking about it is how quickly it’s grown. Since 2006, the amount Americans owe on student debt has tripled. You look at the graphs and it’s just a complete hockey stick. It just goes up and up very, very quickly. So that’s why this has become such a rallying point and a real focus for people, is we’ve suddenly got people who are 22, 23 years old leaving college and owing an amount of money that you would think of as the amount of money that you would spend to buy a car or a house down payment. So it is a crisis. And it has been treated that way by lawmakers in both parties.

So explain that. How has it been treated that way by members of both parties?

So what we’ve seen under both Republican and Democratic administrations is a pause on these loans. And that started back in March 2020 under President Trump. Initially as the pandemic was starting to spread and the government was looking at relief efforts across a whole variety of ways to tackle this, they implemented what was initially intended to be a 60-day timeout on student loan payments.

And that first pause actually didn’t get a lot of attention. It was something that was done through executive order, effectively. The administration just decided they were doing it. And then a week later, Congress swept in with the CARES Act and made this pause a much bigger deal, made it last longer. And that’s when it really got on people’s radar, that oh my goodness, we’re going to have this long pause on student loan payments. There was one other thing they did, too, that was interesting. They set the interest rate to zero, which is actually a —

On the loans?

— pretty big deal. Yes, 0 percent interest rate on the loans, because what typically happens when you get some kind of forbearance or relief on a loan is you’re going to rack up a lot of interest that you’re later going to have to pay. This was the first time that in a widespread way, federal student loan borrowers were allowed to take a true timeout and know that that debt was not going to grow during this timeout.

And so the thinking — I’m trying to put myself back in that phase of the pandemic — was we are going to take as many financial burdens off of people’s plates as possible. One of them will be student loans. So what happens to what is initially seen as a temporary pause on these payments?

So this was only supposed to initially go through September 2020. But, of course, there’s an election coming up. And nobody wants to turn student loans on right as an election’s about to happen.

A presidential election.

Yes. And this had, of course, become a big talking point at this point, especially in the Democratic campaign. Elizabeth Warren in particular really made this a centerpiece of her campaign — this idea that she was going to on day one with an executive order cancel up to $50,000 per person in student debt, which was a pretty bold promise and got a lot of attention. So it forced all of the other candidates to really respond and talk about what their plans would be around this. And it really did put this idea of not just delaying or pausing student debt, but canceling it very firmly on the political radar.

Biden was definitely very lukewarm about this. It was clear all throughout the campaign, this was not an issue he was excited about. He really didn’t like to talk about it. And the most he was willing to commit to was he said he supported up to $10,000 in debt cancellation if it was done by Congress.

So Biden comes into office. And on his very first day in office, he extends this pause to buy himself some time to figure this out. And then in August —

— Biden comes in and extends it again. And then in December —

— he comes in and extends it again, which catches us up to this month —

— where he extended it for a fourth time. This now takes us to seven extensions total across two administrations on this payment pause.

So what this means is that starting under Trump and then under Biden, these tens of millions of Americans you described at the beginning of this conversation who owe all this student debt, they have not had to pay a cent of their student loans and no extra interest for how long now?

For over two years, people have not been having to make these payments.

Which must be a pretty big adjustment.

For individual people, we’re saving, again, hundreds or thousands of dollars every month. This is a really fundamental change in a lot of people’s monthly budgets. It’s also costing the government about $5 billion a month to keep doing this. So that’s $5 billion in interest payments that people are not having to make.

So two years into the state of debt limbo, you’ve basically got two camps emerging. The first says, instead of this series of last-minute reprieves, just cancel it. Just get this over with. That camp says these are debts that destroy people’s lives. Just make official what you’ve been unofficially doing and get rid of this.

Wipe out the debt, forgive it.

Exactly.

Make it go away.

And the second camp says the opposite. It’s time to start collecting payments again, folks. Why are we not ending this moratorium right now?

So given those pressures, Stacy, what is the rationale for President Biden to stay the course, as he has been, of just extending the pause, extending the pause, rather than doing one of the two things you just mentioned — cancel the debt or force people to resume paying?

The thing that has kept them from pulling the trigger and going one way or the other on this — resume payments or cancel some debt — is that there’s really big obstacles to either of those courses of action. They fall into three buckets. There’s political obstacles, there’s economic obstacles and there’s logistical obstacles.

Got it.

And those exist on either of those paths of action. Whichever way you choose, cancel debt or restart payments, you’re going to have to confront those problems.

OK, let’s start with the political obstacles. What are the political factors behind why President Biden keeps just deferring these payments rather than picking one of those two paths? And let’s start with why he won’t just cancel debt.

So one of the popular talking points here is that Biden can do this with the stroke of a pen. That’s actually a little legally murky. There has been an argument put forward, Senator Warren has certainly made it, that the Higher Education Act gives the president the authority to do this, that he can —

The Higher Education Act.

The Higher Education Act. It’s a 1965 law that controls federal student loan debt, basically. And the legal argument for doing this is that that act gives the president the power to direct the Secretary of Education to modify that very broadly, including canceling it. And there are very detailed legal memos from scholars making the argument of why that would be legal. If President Biden tried to do this, though, it would absolutely end in court. There is not a clear-cut answer to that question of is this legal.

Interesting.

So that’s one hesitation he has. It would be a lot cleaner for Congress to do it, which has been overwhelmingly his preference all along. It would also give him some political cover. If he could get Congress’s buy-in to do this, that would be for him a preferable way of going about this than him doing it single-handedly.

OK, and what would be the politics of trying to do this in Congress?

They don’t have the votes for it at the moment. That’s part of why we haven’t seen it happen in Congress. The House has passed a version of this, but it has basically died in the Senate.

And that’s because, first of all, the Republicans are pretty much universally against this. They’re very concerned about the cost of it. We’re talking about hundreds of billions of dollars here.

There’s also concerns about is this a giveaway to well-off college-educated folks? This gets perceived as you’re potentially subsidizing loan payments for people who took out expensive graduate degrees, went to professional schools. Is that really the best use of taxpayer dollars? So that’s the concern you hear a lot from the Republican side of the aisle.

OK, and what about among Democrats, who control both chambers, House and Senate?

And you also hear that concern from some Democrats, which is why this is not gone anywhere in the Senate — is the progressives are very much in favor of this. But some of the more moderate members of the party do have real concerns about spending this amount of money on this particular problem. There is a sense of people took these debts on willingly. Is this really the best use of our dollars, especially at a time when we’re trying to expand our appeal to working-class voters? Should we be dumping money into people who attended some college or have degrees and redirecting the taxpayer dollars from the working class folks to them?

Interesting. So a fear among some Democratic lawmakers is that canceling student loans would appear to be the party subsidizing highly-educated Americans, and potentially alienating those who didn’t go to college who happen to be some of the most important voters the Democratic Party has struggled with throughout the Trump era and who have been decisive in the Rust Belt, for example, in presidential elections.

Yes, although I should also note that there are midterm elections coming up in just a few months. And this is an issue that’s become particularly important to a voter bloc that Biden really needs to retain, which is Black voters. This is an issue that Black voters and Black advocacy groups have really seized on, because it does have significant ramifications for the racial wealth gap and for the finances of these households.

Just explain that concept of racial wealth gap and the role of student loans.

So Black student borrowers and student borrowers of color are typically disproportionately burdened by student loans. They both typically leave college with higher debt loads and they carry those debt loads for far longer than white borrowers. And this has a really pronounced effect in the data. You can see it on household wealth. This has been a real factor in the wealth gap between white households and other households.

Got it.

So doing something to alleviate this burden would make a significant difference for that demographic. And it’s been something that a lot of them are paying very close attention to. So this is, obviously, a voter bloc that Biden really doesn’t want to alienate right before the midterms. Turning payments back on without taking some kind of action around debt cancellation or something like that would be a pretty lethal move.

So given everything you’ve said, it’s starting to make sense why for Biden, the path of least political resistance, perhaps the most obvious thing to do is to not really do anything, to just keep pausing these loans.

Yeah, to keep kicking the can down the road a little bit longer.

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We’ll be right back.

Let’s turn to the economic factors at play here. Let’s begin with the economic case against canceling student debt.

So one of the arguments that gets made against it is that it’s regressive, that if you did just a blanket widespread cancellation, it could disproportionately favor well-off people with professional degrees and doctors and lawyers and things like that.

So this dovetails with the political critique, that loan cancellation ultimately benefits those who have high earning capacity.

It does. And it’s also not always actually true. People tend to forget that 40 percent of the people with student debt didn’t finish college. Those are often the people that are in the worst situation. They have incurred the debt but do not have the professional and career advantages of having this degree.

So that is one of the demographics that proponents of canceling student loan debt say, hey, let’s not forget those people. By wiping out those balances, you would help people who are still very much working class workers who just also have this debt that they are dealing with. But that is one of the arguments, that there is a regressive element to this, especially if it was done in a very widespread, untargeted way.

Got it.

There is also a moral hazard argument. There is real concern about if you do this, you are not addressing any of the underlying systemic problems here. One of the key drivers of student debt having soared over the last 20 years or so is that tuition has skyrocketed. Also a lot more people are going to school. If you simply do a debt wipeout, the clock starts over tomorrow on this exact same problem happening again.

Interesting. So this is an economic critique that says, wiping out student debt doesn’t really solve any of the instigating problems that have led to it. And, therefore, it’s ultimately useless.

Exactly. You would just be doing a one-time get-out-of-jail-free card on this without dealing with the actual structural problems that created the situation.

Got it.

And the final economic concern around this is around inflation. Right now, we’re dealing with really high inflation. And even the pause was something that economists tended to look at and go, eek, that’s going to make our problems worse.

And just explain why.

Sure. By telling people you don’t have to pay your student loans, that’s putting more money in their pockets. That’s money that they can go out and spend. And the whole problem we’re having with inflation right now is too much money chasing too few goods. So people who don’t have to make their student loan payments can turn around and spend that money on household furniture, home repairs, fixing their cars, all the things that we are currently feeling constrained on.

That problem gets even worse if you talk about widespread debt cancellation. We just came off the effects of the stimulus spending. This would be its own form of stimulus. And there’s concerns about doing that kind of thing right now when we’re battling this high inflation.

That makes me wonder, is there a purely economic-based argument for doing the opposite, which is asking people to start repaying their debt? Because it would moderate against inflation.

That is an argument some economists have made, that the best thing you can do for inflation right now is get people paying more bills. And consuming hundreds or thousands of dollars a month in student loan payments would definitely keep that money out of spending on goods and things like that.

Right, which I’m sure is not welcome news for —

— to certain borrowers.

— the borrowers, but it’s an interesting argument.

Yes.

OK, we’ve now gone through the political and economic reasons why Biden is choosing to stay the course here. What are the logistical reasons why he’s unlikely to choose any other option?

So the logistics of this are challenging, and by that we mean the machinery of the student loan collection system. Restarting that after a two-year timeout is its own enormous challenge. That’s been part of the reason I think we’ve seen these continued pauses, is every time we get close, they realize they’re not ready yet. There is a lot behind the scenes that has to start here before students start getting bills in the mail again and paying them.

The way this works is that the Education Department is the lender for students. They directly own this $1.6 trillion in debt. But they hire outside companies to do the work of servicing the loans and actually collecting the payments on it. At the tail end of last year, two of the major contractors that the department uses for that work quit.

Because it didn’t have anything to do?

Because they decided this was too tricky and they weren’t getting paid enough for it.

Interesting.

So they pulled out, which means that the Education Department, amidst everything else going on, has to transition millions of borrowers to new servicers, which is its own really tricky complicated process. So one of the challenges of this is that that’s going to take them about through the end of this year to complete. If you tried to restart the system before that was done, you’d be introducing this whole added element of confusion on the part of both the borrowers and the servicers.

So when we think of the logistical factors at play here, they’re all related, it sounds like, to the difficulty of restarting payments. And it sounds like even if the government wanted to ask people to start paying again, the infrastructure required to make that happen has atrophied and in some cases collapsed.

Yes, the infrastructure of the student loan debt collection machinery has basically rusted over the last two years. There’s been a lot of backend changes going on, a lot of things the department has been trying to fix along the way. And they really need to get a lot of that squared away before they’re able to turn this on. So that’s one of the challenges they’re facing.

There is also this looming psychological challenge, because for two years, people have not been having to make these payments. Getting people used to the idea that yes, you have to do this again, is going to be a pretty giant task. And I think that is something that’s really weighing heavily on both the government and certainly on the loan servicers, the companies that actually have to get people to send in these payments.

Let’s talk about this. I mean, what you seem to be describing is the theory that after two plus years of not paying student loans, there are tens of millions of Americans who might not ever want to repay them.

They’re both used to this idea of not paying them. And because there’s been so much talk about debt cancellation, there’s a lot of people who are hoping, well, maybe I’ll never have to pay this. So if they suddenly get a bill in the mail, people are going to face a real choice about is that a bill they pay or not? And I think that’s an area of growing concern about how people are going to handle that.

The government worries that maybe people will get that bill and just say, no.

Yup. The fear is they will look at that bill and not pay it. In fact, this fear has become so widespread that there are people who believe, even within the Biden administration, that the only way you’re going to get students to actually start making their payments again is by giving them some sort of incentive, some sort of carrot, like debt cancellation. This idea is that you need to do something big and dramatic to get people to opt back into the system — something like forgiving $10,000 in debt per borrower.

This is fascinating. So in trying hard to not pick a side in the great student loan debt debate — cancel debt or demand payments resume — President Biden may have actually effectively started to pick a side. And the side he picked, not perhaps deliberately, was that student debt, in one form or another, might need to be forgiven.

This is a case where every extension narrows the range of choices. They have almost backed themselves into a corner in this by continuing to do in this very piecemeal fashion. Biden has almost created this situation of what life looks like without student debt. It’s been two years since people have had to pay these bills. And every time there’s another extension, that goes on longer.

Right, so that reinforces life without debt, and perhaps reinforces the idea that I don’t need to pay it.

Yeah. Every time another one of these extensions happens, my phone blows up with text from my friends, going hooray, we never have to pay our student loans, do we? So it’s getting to be really hard for them to convince people that yes, you are going to one day have to do it.

Right, so it sounds like we’re entering an almost indefinite period of grand-scale loan deferral, which in the minds of many, many American loan borrowers has effectively become a de facto form of loan forgiveness. But just to be clear, it’s not.

It’s not, which is why they need to make a decision about this eventually. So turning payments back on in September seems extremely unlikely. Virtually everyone involved in the system thinks this payment pause will be extended yet again into next year.

And at that point, you’ve just continued the problem even further. You’ve told people yet again that we’ve given you another extension, that we’re not going to make you pay your bills yet. And every time you do that, it gets harder and harder to convince people to come back in without doing something dramatic to make a change here.

Well, Stacy, thank you very much. I learned a lot here.

Thank you. [MUSIC]

We’ll be right back.

Here’s what else you need to know today. On Sunday, Russian forces appeared poised to capture the Ukrainian port city of Mariupol after a brutal and deadly months-long siege. Russian forces there now outnumber Ukrainian forces by six to one and have demanded an immediate surrender. Capturing Mariupol would represent a significant breakthrough for Russia in Ukraine’s East, allowing it to complete a land bridge to Crimea, which Russia already controls.

And the Biden administration says it will resume selling leases for new oil and gas drilling on public lands in the latest example of the president backtracking on his climate agenda in an effort to lower record-high gas prices. The White House will auction off leases to drill on 145,000 acres of public lands across nine states. That violates a signature campaign pledge that Biden made in 2020 to end the practice in order to reduce the use of fossil fuels.

Today’s episode was produced by Asthaa Chaturvedi, Rikki Novetsky, Kaitlin Roberts and Mooj Zadie. It was edited by Marc Georges, contains original music from Marion Lozano and Dan Powell, and was engineered by Chris Wood. Our theme music is by Jim Brunberg and Ben Landsverk of Wonderly.

That’s it for “The Daily.” I’m Michael Barbaro. See you tomorrow.