The State of Student Loan Forgiveness

"Despite many setbacks, the administration has cancelled a massive amount of debt ($180 billion and counting), with most of the burden on taxpayers still to come from future repayments..."

By Andrew Gillen, CATO Institute

Mass student loan forgiveness is terrible policy (see this report for a comprehensive list of reasons), but that hasn’t stopped the Biden administration from trying to forge ahead. While the Supreme Court overturned the administration’s student loan forgiveness plan, every few weeks the administration announces another batch of loans that have been forgiven. The administration recently celebrated that, since taking office, it has succeeded in forgiving $180 billion of student loans for 4.8 million borrowers by transferring the financial burden from the students who took out the loans to taxpayers who did not. And they aren’t going to stop—the administration’s spokeswoman declared, “President Biden has vowed to use every tool available to cancel student debt for as many borrowers as possible, as quickly as possible.” Biden himself stated, “I will never stop working to cancel student debt— no matter how many times Republican elected officials try to stop us.”

But if student loan forgiveness lost in the Supreme Court, how are so many student loans still being forgiven? The answer is that there isn’t a student loan forgiveness plan. There are many plans, some of which are already up and running. Previous laws had already left numerous methods to forgive student loans, and many of those laws may give the Secretary of Education the ability to expand those programs.

The administration is also claiming that existing law gives it the authority to create new ways to forgive student loans. So the student loans the Biden administration already has or wants to forgive are a combination of existing programs, existing programs the Biden administration has expanded, and new programs the administration is seeking to implement.

Here’s a rundown of the administration’s student loan forgiveness plans and actions, which I’ll update monthly.

HEROES (new plan, overturned in court)

This was the big plan that got a lot of attention in 2022 and 2023. The plan was to forgive $10,000 for borrowers making less than $125,000, and $20,000 for borrowers who received a Pell Grant, at a total cost of $469 billion to $519 billion. The alleged authority for the plan was the 2003 HEROES Act. While designed to alleviate loan-related hardships for soldiers and reservists serving in Iraq and Afghanistan, the law also covered national emergencies, and the Biden administration argued the COVID-19 emergency gave it the authority to forgive virtually everyone’s loans.

Most observers were skeptical of this supposed authority, but it was not clear who had standing to sue (standing is the requirement that those filing the suit have a concrete injury from the policy). The companies that service student loans would be the most obvious injured party. But there was a perception that the Biden administration would punish any servicer that challenged the policy in court, a perception that now appears accurate.

Fortunately, the Supreme Court ruled that Missouri had standing to sue (due to a quasi-public student loan servicer that would lose revenue under the plan) and that the plan violated the major questions doctrine (which holds that there needs to be clear congressional authorization for programs of substantial economic or political significance), preventing the policy from being implemented.

Higher Education Act (new plan—forthcoming, partially paused by courts)

Immediately after losing on HEROES, the Biden administration announced a new effort that would use authority under the Higher Education Act. The administration announced the new plan split into two parts.

HEA Plan Part 1

The first part would

• Waive unpaid interest;

• Forgive debt for those who have repaid for 20 years (25 years if there is debt for graduate school);

• Forgive debt for those who attended a low-financial value program (e.g., programs or colleges that fail the Cohort Default Rate or Gainful Employment); and,

• There is also a plan to release additional regulations soon that will forgive debt for those undergoing financial hardship.

There are a several problems with this plan, which the Penn Wharton Budget Model estimates will cost $84 billion. The public comment window on the proposed regulations recently concluded, and the administration is now considering those comments and will issue final regulations, with a goal to start forgiving debt this fall. Once finalized, this plan will likely be overturned by the courts for two main reasons. First, it is likely to run afoul of the major questions doctrine, just as the HEROES plan did. Second, the Supreme Court recently overturned Chevron deference, which held that courts should defer to executive agencies when a statute was ambiguous.

With major questions and no Chevron deference, it is hard to imagine the courts allowing the administration to stretch vague clauses in old laws into vast new powers authorizing billions of dollars in forgiveness.

However, much of this forgiveness is easy to implement, so a key question was whether a court injunction would come fast enough to prevent the administration from forgiving billions of debt before the courts can determine whether the regulations are legal. The Biden administration was preparing to move quickly to present the plan as a fait accompli the moment the final plan was released by immediately forgiving billions in loans, but fortunately, several state attorney generals saw what was happening and filed lawsuits to stop it. There has been some legal back and forth. But as things stand right now, a court injunction prevents the Department from forgiving any loans under the new regulations until the courts have ruled on their legality.

HEA Plan Part 2

The second part of the plan focuses on forgiveness for students experiencing economic hardship. The administration’s proposed plan involves two pathways to forgiveness.

Under the first pathway, the Department would forgive loans for any borrower that it estimates is likely (80 percent chance or greater) to default on their loans within the next two years. This raises several new problems, in addition to the standard arguments against student loan forgiveness. One, the Department would be forgiving loans today based on what it thinks will happen in the future. This Minority Report approach to spending billions of dollars is a bad idea. Two, if their crystal ball is wrong, there could be lots of debt forgiven that shouldn’t be, and lots of debt that should be forgiven that isn’t. Three, to estimate the likelihood of default, the Department would use 17 data points. Most of these are already known before the student even takes out the loan. As Jason Delisle notes, the estimate is “based on many factors known when the loan is made, taken right from the FAFSA and school’s data … people will now ask if those loans should be made in the first place. It’s like the Biden admin is saying ‘We can look at the FAFSA and the school and program you’re attending and determine if you qualify for our new loan forgiveness program before you even borrow $1.’” If that’s the case, shouldn’t the government stop making those loans?

Under the second pathway, students could apply for forgiveness by claiming hardship, and the Secretary could approve forgiveness based on a holistic assessment. The current Secretary would likely approve any application, given that the administration’s stated goal is to “cancel student debt for as many borrowers as possible, as quickly as possible.”

The Committee for a Responsible Federal Budget estimates that part two of the HEA plan could cost up to $600 billion.

The proposed rules are still open to public comment until early December. After that, it will be a race against the clock to see if the Department can finalize the rule before President Biden leaves office in January. Much like the part one, much of this forgiveness can be done very quickly once the rule is finalized, so state attorney generals need to be ready to sue immediately upon finalization (or like with part one, before finalization if the Department again appears to be trying to forgive debt the day the rule is finalized).

SAVE (new plan, paused by the courts)

Before diving into this one, it is important to understand the concept of income driven repayment (IDR). Under traditional (mortgage) style loan repayment, the amount and length of repayment are fixed (e.g., $200 a month for 10 years). For the past few decades, the federal government has been introducing IDR plans in which the amount repaid each month varies based on the borrower’s current income and the length of repayment varies based on how fast they repay their loan. The key features of an income driven repayment plan are:

• the share of income owed each month (e.g., 20 percent);

• the income exemption that is protected from any repayment obligation (e.g., the poverty line); and,

• the cap on length of repayment (e.g., 25 years).

IDR is a great idea, providing borrowers with better consumption-smoothing across their lifetime and flexible repayment, which helps avoid defaults due to short-term liquidity constraints.

But we’ve also botched the implementation. To begin with, a cap on the length of repayment is completely inappropriate. Income driven repayment ensures that payments are always affordable, and borrowers who make so little they do not repay will receive de facto forgiveness even without the cap, so there is no justification for a cap on the length of repayment.

The other problem with how we’ve implemented income driven repayment is political: the plans are tailor-made to allow politicians to give constituents big benefits today while sticking future taxpayers with the bill. It is, therefore, no surprise that these plans have grown more generous over time. The first IDR plan, introduced in 1994, had an income exemption equal to the poverty line, a share of income owed of 20%, and a cap on length of 25 years. Very few borrowers would receive forgiveness under these terms, and of those who did, they really wouldn’t have been able to repay regardless of whether they received forgiveness. The Obama administration introduced plans with an income exemption of 150% of the poverty line, a share of income owed of 10%, and a cap on length of payment of 20 years.

The Biden administration’s Saving on a Valuable Education (SAVE) plan took an existing plan (the REPAYE plan) and made it much more generous. It changes the share of income owed from 10% to 5%; increases the income exemption from 150% of the poverty line to 225%; and caps the length of repayment at as little as 10 years for some borrowers. By cranking every possible lever to the most generous settings in history, this plan would impose massive costs on taxpayers, estimated at $475 billion for just the next 10 years.

The legal questions facing this plan are the reverse of the HEROES plan. For the HEROES plan, the main obstacle was standing. Once that hurdle was cleared, it was fairly obvious that the plan was well beyond what Congress had authorized. But for the SAVE lawsuits, this is reversed. Standing is easily established (for Missouri at least), but the plan does have a much stronger argument of being within the parameters of the law.

Mark Kantrowitz thinks SAVE will be upheld, while Michael Brickman did yeoman’s work digging up details on page 18,909 of the 1993 Congressional Record that may lead to SAVE being scrapped. Jason Delisle also recently released a fascinating report on the legal foundation of SAVE. He argues that “the Biden administration has claimed legal authority far outside what Congress intended when it enacted the law.” In particular, he argues that

• “Lawmakers assumed that the IDR plan the secretary would create would entail minimal or no budget costs” whereas SAVE may cost up to half a trillion dollars over 10 years.

• “Lawmakers assumed that the secretary would set loan forgiveness at 20 or 25 years, but not earlier as SAVE does. Moreover, loan forgiveness was clearly an afterthought in the original debates” whereas it is the central feature of SAVE.

• “Lawmakers believed that appropriate monthly payments in an IDR plan should be much higher than those in the SAVE plan.”

The Supreme Court’s overturning of Chevron deference is also likely to affect these cases in a major way. Now that courts are no longer required to defer to executive agencies when statutory language is ambiguous, it will be much harder to convince courts that the president spending close to half a trillion dollars over the next ten years on this plan is consistent with congressional intent.

Parts of the SAVE plan have already been implemented, and full implementation was scheduled for July 2024. The plan has already forgiven “$5.5 billion for 414,000 borrowers.” However, there are two lawsuits that seek to overturn the plan, one by Kansas and ten other states (though a court ruled that only three of the states had standing to sue), and another by Missouri and six other states. An injunction from the 8th Circuit Court of Appeals (in the Missouri case) has paused implementation of the entire SAVE plan pending resolution of the case.

In sum, the chances of SAVE surviving the court challenges have declined dramatically over the past year. When it was first introduced, many analysts thought it had the best chance of being upheld in court, but the recent injunction, the overturning of Chevron deference, and the work by Brickman and Delisle on congressional intent leave SAVE much more vulnerable legally than most thought would be the case a year ago.

Student Loan Payment Pause (Existing and extended plan, now expired)

When COVID-19 hit in March 2020, student loan payments were paused. The pause was supposed to last two months but ended up lasting three-and-a-half years after Trump extended it once and Biden extended it six times.

The payment pause resulted in two costs to taxpayers.

First, while no interest accrued on student loans (around $208 billion of interest was waived), the government had to borrow more money to make up for the lack of payments (recall that the government is the lender for student loans) and the government paid interest on that extra borrowing. Thus, even if students eventually repay everything, there is still a cost for taxpayers.

Second, recall that IDR plans (unnecessarily) cap the length of repayment, and the pause counted towards that cap. In other words, for any student that does not fully repay before they hit the length of repayment cap, payments weren’t paused, they were waived. We won’t know for many years how many students had their payments forgiven rather than postponed.

New research from Sylvain Catherine, Mark Pérez Clanton, and Constantine Yannelis finds that the substantial inflation and counting of the pause towards the cap on repayment reduced the present value of future student repayments by around 25%.

There is virtually no chance for this burden on the taxpayer to be reversed. The only good news is that the payment pause ended, with most borrowers restarting payments in October 2023.

Public Service Loan Forgiveness (Existing and extended plan, still active)

The Public Service Loan Forgiveness (PSLF) program was established during the George W. Bush administration and allowed for public and nonprofit workers to receive forgiveness after 10 years of repayment when they used an IDR plan. While I object to PSLF in principle (as a distorting and non-transparent subsidy for the government and nonprofit sectors) and due to the windfalls these borrowers receive (an average of over $70,000 per beneficiary), because PSLF legally exists, it should operate as seamlessly as possible.

The Biden administration granted many waivers and other changes to increase the number of borrowers who could benefit under PSLF. For example, the administration introduced a waiver that allowed for payments made under non-IDR plans to count toward the payment limit (previously, only payments made while enrolled in an IDR plan counted). Some of these changes were good in the sense that they more faithfully implemented the law, but the administration crossed some lines too.

In particular, it started counting some types of deferment as payments (borrowers can get deferment when they cannot afford to make payments, which generally allows the borrower to temporarily postpone payments though interest continues to accrue). The whole point of deferment is to temporarily avoid making payments. So for the Biden administration to give borrowers credit for making payments when they were in deferment is logically, morally, and potentially legally wrong (Cato was part of lawsuit seeking to end this abuse, but the case was thrown out when a court ruled the policy didn’t directly affect Cato enough to satisfy standing requirements). The administration also waived income requirements, making more people eligible for the program.

The Biden administration has forgiven $79 billion for one million borrowers under these programs, which works out to around $73,000 per borrower. By comparison, a formerly homeless student who receives the maximum Pell Grant for four years would get less than $30,000 in Pell Grants. Some of this would have been forgiven even if the administration hadn’t made any changes to the program, but not all of it. In the future, these burdens on the taxpayer can be reduced by rolling back some of the administrative changes, but eliminating the program entirely would require legislation.

Borrower defense to repayment (Existing and extended plan, still active, though recent changes are paused during a court case)

When a college engages in fraud or severely misleads students, borrowers can have their debt forgiven under “borrower defense to repayment.” This is reasonable, as victims of fraud should have some recourse. It is also extremely rare because a college would not just need to dupe a student but would also need to fool a state, an accreditor, and the US Department of Education, as all three are required to sign off on the legitimacy of a college before its students can take out student loans. As the House Committee on Education & the Workforce noted, “for the first 20 years of the rule, there were 59 claims.”

However, the federal government can claw back debt forgiven from the responsible college. This makes borrower defense to repayment an incredibly powerful tool for progressives in their war on for-profit colleges. If a for-profit college can be declared to have substantially misled students, they can be ruined financially by the claw backs. Indeed, new regulations from the Biden administration would make it much easier to conclude a college engaged in misconduct. As the White House gloated, “Less than $600 million in debt relief had been approved through borrower defense, closed school discharges, and related court settlements from all prior administrations combined, compared to the $22.5 billion approved under the Biden-Harris Administration alone.” Some of this was done outside the law. For example, $5.8 billion of debt for Corinthian College’s students was forgiven even if students didn’t submit a borrower defense claim. The administration has promised to forgo claw backs on much of it (likely in part to avoid giving affected colleges standing to oppose the changes in court).

The good news is that any further forgiveness under the new regulation is on hold due to an injunction from the 5th Circuit Court of Appeals (this injunction applies to the closed school discharge plan as well).

Closed School Discharge (Existing and extended plan, still active though recent changes are paused during a court case)

Borrowers whose school closes while they are still enrolled or shortly after they have withdrawn can have their student loans forgiven. The Biden administration imposed new regulations that loosened the requirements and has used this as an excuse to forgive other loans as well. For example, Biden forgave $1.5 billion in debt for students from ITT Technical Institute, even if they didn’t qualify for a discharge. Further forgiveness under the new regulations has been paused by the 5th Circuit Court of Appeals until courts determine whether the new regulations are legal. However, the administration can still forgive loans under the previous iteration of these regulations.

Total and Permanent Disability Discharge (Existing and extended plan, active)

Borrowers who are unable to work due to a permanent disability can have their loans forgiven. Historically this was very rare. And to protect against fraud, the income of borrowers who had their debt forgiven was monitored to ensure that they really couldn’t work. The Biden administration both expanded eligibility and dropped fraud detection efforts. In particular, in 2021, regulations were introduced that “provided automatic forgiveness for borrowers who were identified as eligible for a total and permanent disability discharge through a data match with the Social Security Administration. The Department had been using such a match for years to identify eligible borrowers but required them to opt in to receive relief.” Switching to the opt-out model dramatically increased the number of borrowers receiving forgiveness. As a result of these changes, forgiveness under total and permanent disability discharge to spike from negligible amounts to $16.2 billion for 572,000 borrowers.

Waiving Interest

Another method the Biden administration is using to forgive loans is to waive interest. This plan is somewhat unique in that it is usually a component of another forgiveness plan, but the goal and methods are unique enough to warrant its own category.

Waiving interest has been implemented primarily through three mechanisms. The first was the student loan payment pause, which as noted above waived interest for three-and-a-half years. The second were regulations that took effect in July 2023 that “ceased capitalizing interest in all situations where it is not required by statute (87 FR 65904). This includes when a borrower enters repayment, exits a forbearance, leaves any IDR plan besides Income-Based Repayment (IBR), and enters default.” And the third is the SAVE repayment plan, which waives any unpaid interest.

Conclusion

In sum, the Biden administration has been the most aggressive in history regarding student loan forgiveness. Despite many setbacks, the administration has cancelled a massive amount of debt ($180 billion and counting), with most of the burden on taxpayers still to come from future repayments that will no longer be made. And while many of its attempts to forgive student loans have been stymied, there are still many active plans in play, with more on the horizon.

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