The latest student loan cancellation proposal could be the biggest yet

The Biden administration unveiled its fourth major Student loan cancellation scheme last week. Although the government’s past three cancellation plans have suffered defeats in court, officials apparently hope things will be different this time.

The new plan offers loan cancellation to borrowers who experience “hardships.” If you’re wondering what “hardship” means, I am too. It is unclear who exactly would be eligible for loan waivers under the latest scheme, and much is left to the subjective determination of the bureaucrats at the Ministry of Education (ED). If these bureaucrats adopt a maximalist definition of “hardship,” the new plan could easily be the most expensive the government has proposed yet.

When ED officially publishes the loan cancellation plan in the Federal Register, the public will have 30 days to submit comments. ED should then read and consider these comments, revise the plan as necessary, and finalize it sometime next year. The process is likely to continue beyond Inauguration Day, meaning Tuesday’s elections could determine the ultimate fate of the loan forgiveness plan.

What’s in the latest loan cancellation plan?

The latest plan takes a two-pronged approach to loan forgiveness. One half of the plan would automatically provide relief to current borrowers who ED believes are likely to default on their loans. In the second half, both current and prospective borrowers would be able to apply to cancel their loans by claiming a “hardship.” Let’s take a closer look at each of the two pillars of the plan.

Automatic cancellation: The auto-cancellation component is more defined. The Secretary of Education would conduct a “predictive assessment” to determine which borrowers are likely to default on their loans by at least 80 percent within the next two years. Borrowers in the likely default category would see automatic loan forgiveness.

Unlike the Biden administration’s original proposal, which limited forgiveness to $10,000 or $20,000 per borrower, ED would likely forgive the entire loan balance to affected individuals. The new proposal states that ED will “assume a rebuttable presumption that the full amount is eligible for forgiveness” because “we believe that full relief would be warranted in most circumstances.”

Request-based cancellation: ED will automatically forgive the debts only once. Future borrowers, as well as current borrowers who do not automatically see an exemption, can take advantage of the second half of the scheme at any time. This section would allow borrowers who claim they are experiencing some “hardship” to file for debt forgiveness. The applications would allow borrowers to explain their “hardships.” Again, it is likely that most borrowers who seek relief through the application process will see their debts wiped out completely.

How would ED determine ‘hardship’? It’s unclear. In theory, the borrower’s hardship should result in “severe adverse and persistent conditions,” where “other payment relief options would not adequately address the borrower’s ongoing hardship.” This is of course very subjective. ED’s proposal provides a list of 17 factors that could indicate hardship, but the list is not exhaustive: There is also a comprehensive provision that allows for consideration of “any other indicators of hardship identified by the Secretary.” In practice, the question of whether a borrower is in “dire circumstances” and deserves relief is left to the subjective judgment of the bureaucrats at ED.

How much would the new plan cost?

The Department of Education’s impact analysis estimates that the agency would automatically forgive the debts of about six million borrowers, or about one-sixth of the total. The application-based component would forgive debt for an additional one million borrowers today, plus a million future borrowers over the next decade. ED’s figures put the budgetary cost of the scheme at $112 billion: $70 billion for automatic cancellations and $42 billion for application-based cancellations.

But there are many reasons to think this is a significant underestimate. ED’s previous analyzes have done so accessible the costs of its loan cancellation schemes through unrealistic assumptions (for example, by assuming that borrowers will apply at impossibly low rates). The danger of underestimation is even greater here. Subjective decisions will determine the extent of cancellation, particularly for the application-based part of the scheme.

Much concerns the definition of ‘hardship’. Where will ED bureaucrats draw the line? For example, ED’s proposal says that loan cancellations are justified when the “hardship is likely to impair the borrower’s ability to fully repay the federal government.”

But millions of borrowers are not expected to repay their loans in full as they seek loan forgiveness under the form of Public Service Loan Forgiveness (PSLF) or Income-Driven Repayment (IDR). Are borrowers in this situation eligible for immediate loan cancellation? Borrowers who collectively own $740 billion (nearly half of the federal loan portfolio) participate in IDR plans. Theoretically, by ED’s standards, most of that money could be forgiven right away.

ED claims that it will “conduct a fact-specific analysis of individual borrowers” ​​to rigorously grant loan cancellations only to applicants who truly need it. But no serious person should take them at their word. Political realities would pressure ED to approve almost all loan forgiveness applications. Example: the department did that approved more than 98% of the applications it has processed are intended to defend the borrower against repayment, another loan forgiveness program.

There are additional concerns about ED’s loan forgiveness plan. For the most part, ED has no means of verifying whether the information it receives in applications supporting claims of hardship is actually true. The help may not go to the neediest applicants, but rather to the most gifted creative writers. Moral hazard is another concern, as a borrower’s “repayment history” is a factor that underpins trouble (i.e., if you don’t pay your loan, it indicates you’re in trouble). Clearly, rewarding applicants who don’t pay their loans on time can go wrong.

The official cost estimate also assumes that one of ED’s other loan cancellation programs, the SAVE plan, will be in effect, even though courts have repeatedly blocked It. This way, if the SAVE plan ends, fewer loans will be forgiven — which likely means more debt will be forgiven under the new proposal.

For these and other reasons, independent analysts believe the cost of ED’s new loan cancellation scheme could be much higher than the government claims. The Committee for a Responsible Federal Budget thinks the cost could reach $600 billion, which would make the new plan more expensive than any other plan the Biden administration has proposed. But the group’s analysts warn: “As there is no limiting principle on this provision in any direction, the potential costs are therefore virtually unlimited.”

What’s next?

The new plan faces an uncertain future. If ED can’t finalize the proposal before Inauguration Day, and if the next administration isn’t up for it, the plan will never see the light of day. Even if the rule becomes permanent, state governments are likely to challenge it in court – and past experience suggests they will be successful. But even if the chances of implementation are slim, the enormous cost of the Biden administration’s buyout scheme means it’s worth taking seriously.