In the 2020 CARES Act, Congress gave student-loan borrowers a temporary break from repaying their loans. President Trump extended that twice and President Biden once, with loan payments now set to resume Oct. 1, 2021.
Borrowers could have kept paying if they wanted to, but almost nobody did. As Tom Lee of the American Action Forum recently explained, the portion of borrowers repaying their student loans dropped from 46% at the beginning of 2020 to 1% today. The portion of borrowers in forbearance rose from 10% to 57%. The rest include borrowers who are still in school, who have gotten deferments or who have defaulted.
There’s no shame in accepting an emergency benefit the government offers during a pandemic. It’s also financially shrewd to put off repayment of a loan, as long as there’s no penalty. But the massive student-loan deferment may have set the stage for a chaotic resumption of payments this fall, or politically explosive intervention by the Biden administration that could impact upcoming elections.
Some Democrats, including Senators Chuck Schumer and Elizabeth Warren, want Biden to extend the repayment deadline into 2022. Another group of Democrats wants Biden to forgive $50,000 in debt for every student-loan borrower. Biden has said he might consider canceling up to $10,000, but it’s not clear he has the legal authority to do that, and the high cost could torpedo funding for other priorities if he did.
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America’s $1.4 trillion in federally backed student debt has become a cultural and generational flashpoint as politicians debate what, if anything, to do about it. Liberal Democrats feel some or all of the 40 million student-loan borrowers deserve relief, since the average amount owed per borrower has exploded to nearly $37,000. The growth in average balances has far exceeded inflation or income growth. The hardest cases are students who take on debt but never get a degree or the extra earning power that comes with it.
'A terrible thing to do'
The economic case for canceling student debt is extremely weak, however. It would be a massive handout to a subset of Americans with better economic prospects than others, with no similar benefit for those worse off or those who already paid what they owe. "It would be a terrible thing to do,” says Sandy Baum, a senior fellow at the Urban Institute. “Making those handouts and excluding the people who have never been to college is totally inequitable. What about people who start borrowing tomorrow? Are we going to forgive debt every few years?”
Even if Biden cancels no student debt, there’s still a hidden cost to taxpayers of deferring it, as Congress has done. The government would normally collect interest on money it has loaned, which it is not doing at the moment. Perhaps more important, the government cancels outstanding debt for qualifying undergraduate borrowers after 20 years if they make the required income-based payments. The deadline for borrowers with graduate-student debt is 25 years. Those deadlines have not changed, so the moratorium has effectively shortened them by nearly a year and a half. A borrower paying $300 a month in undergrad loans who hits the 20-year limit with more than 18 months of payments left would save $4,800 in today’s dollars by taking advantage of the moratorium. For the borrower, that’s a no-brainer—but the cost falls on future taxpayers.
Nobody is sure what will happen if student-loan payments resume as now scheduled at the beginning of October. Congress created the grace period at the beginning of the pandemic, when it seemed mass layoffs were imminent and a prolonged recession was likely. There were huge job losses in the second quarter of 2020, but the economy bounced back faster than many economists expected. By some measures—such as overall GDP—the economy is back to where it was before the pandemic.
There are still 6.8 million fewer jobs than before the pandemic. But some of those people have deliberately pulled out of the labor force, to care for kids or return to school. Some are still worried about Covid in the workplace. Others are holding out until unemployment benefits expire. At the same time, virtually all the pandemic relief has come from borrowed money that adds to the national debt, which Republicans are sure to use as a cudgel against Biden and his fellow Democrats in the 2022 midterm elections.
For all the attention their financial woes get, student debt borrowers are better off than the population at large, since they’re more likely to have a college or graduate degree, or be in the process of getting one. College grads were much more likely to remain employed during the pandemic than those without a degree, so most borrowers who were able to pay off their loans before the pandemic will probably be able to do so once the grace period expires. That would still leave more than 5 million borrowers in default and others on the verge.
Still, resumption of payments could be rocky. A group of Democrats has warned that “student loan borrowers risk being thrown into extraordinary financial hardship when the current pause on payments ends.” At a minimum, there could be bureaucratic snafus that create paperwork headaches, and some borrowers could miss payments if automatic restarts misfire. The pause in payments surely helped, but the test now is how well those borrowers prepared for the end of the pause.
Rick Newman is the author of four books, including "Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips, and click here to get Rick’s stories by email.
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