Biden Admin’s new student debt cancellation plan before the election

Just days before the election, the Biden-Harris administration has rolled out another student debt cancellation plan — this time aiming to pay off the loans of millions of borrowers in the U.S. who are experiencing “hardships.”

The timing is notable: With a sizable portion of young voters carrying student debt, some might say this is a strategic move to energize them just in time for Election Day.

Under one suggested Rule published in the Federal Register on Thursday, the Department of Education presents two new routes for canceling student loans.

The first would allow a one-time review of federal loans, forgiving debt for borrowers with an 80% chance of defaulting on their payments within two consecutive years.

The second option would open an application process where borrowers in “difficulty” can apply for cancellation. What qualifies as ‘hardship’? The rule lists 17 factors, from income and debt balances to broader categories, such as assets.

If the Department of Education decides a borrower is eligible, their debt can be forgiven.

This proposal raises serious questions about responsibility, fairness and financial impact. Let’s explore a few key concerns:

Existing options are already present: Federal borrowers already have tools at their disposal, such as forbearance or postponement. Depending on their situation, they can temporarily defer or reduce their monthly payments. Borrowers can request a deferment due to financial hardship, medical expenses or a job change, among other reasons, with monthly payments suspended for up to 12 months, with a cumulative limit of three years.

Alternatively, the deferment options include scenarios from cancer treatment to military service to economic hardship, and during that time payments would be temporarily halted. If borrowers can already adjust their payments during tough times, why introduce another debt forgiveness program?

Also remember that you will be a student from March 2020 to August 2023 loan payments went into administrative forbearancemeaning all payments were pausedand the interest rate was set at 0%. This pause alone almost added to it $208 billion to the national debt due to waived interest.

When payments resumed, the Ministry of Education said implemented a 12-month “on-ramp” until September 30, free from credit reporting implications or default status for missed payments.

It begs the question: haven’t borrowers already received significant relief?

A subjective hardship clause: Room for moral hazard? Among the proposal’s seventeen hardship indicators is a vague clause that gives the Minister of Education the power to consider:any other indicators of hardship.”

As The Wall Street Journal notedthis could cause “high car loan or credit card payments” to be identified as a problem. This leeway threatens to create a ‘moral hazard’, which signals to borrowers that loans can be taken out without ultimate responsibility being required.

Costs to taxpayers and consequences for non-borrowers: The proposed rule could come with a staggering price tag. The Ministry of Education estimates the costs at € $112 billion over 10 years. However, the Committee for a Responsible Federal Budget suggests this could be closer $600 billion– a burden that would fall on the shoulders of taxpayers.

And think about this: even defaulted loans usually require recovery efforts yield about 80 to 85 cents on the dollar, even after collection costs. This means that, with collection efforts, a significant portion of loans can be recovered rather than passed on to taxpayers. But in the event of outright cancellation, taxpayers will bear the full costs.

Furthermore, this plan sidesteps the underlying issue: why are college costs almost on the rise? double the rate of inflation? Instead of addressing the root causes, canceling debts encourages universities to keep tuition high because students and institutions know taxpayers could foot the bill.

Historically, every dollar added to federal student loan subsidies has done just that Tuition rose by about 60 cents.

With the public comment period starting soon, Americans have 30 days to consider this plan. Depending on who is chosen, it could be completed by mid-2025.

Whether it will hold up judicial control is yet another open question to be answered by the courts blocked cancellation based on this rule because the department had tried to enforce it before it was even finalized.

The government’s previous attempts to do so cancel student debt to have repeatedly encountered legal roadblocks. Will this proposal also suffer the same fate?