President Biden announced his long-awaited “backup” loan cancellation plan this week, a successor policy to the one-time loan forgiveness that the Supreme Court struck down last summer. The new scheme, which aims to cancel some debt before the November election, is framed as less ambitious than the original plan, as only certain categories of borrowers will be eligible. But those categories are defined so broadly that the new plan could wind up being just as costly as the original.
The administration proposes cancelling loans for:
- Borrowers experiencing “hardship” in paying back their loans. “Hardship” is left undefined; the Secretary of Education would have near-unlimited authority to decide what constitutes “hardship” and therefore which borrowers are eligible for relief.
- Borrowers who owe more on their loans today than they did upon entering repayment because of accrued interest, a category including 25 million people. The administration proposes cancelling up to $20,000 of accrued interest for all borrowers and the full amount of accrued interest for a subset of borrowers.
- Borrowers who first started paying their loans before 2005 (if they have only undergraduate loans), or before 2000 (if they have some graduate loans). Two million borrowers in this category could see their debts completely wiped out.
- Borrowers who enrolled in a degree program that later lost eligibility for federal funding due to poor performance or fraud. The rule that determines which programs are booted for poor performance bizarrely exempts public and private nonprofit colleges, so this plank is mainly targeted at borrowers who attended for-profit colleges.
- Borrowers who might be eligible for an existing loan cancellation program, but who haven’t applied.
Of these five groups, by far the most concerning from a fiscal responsibility perspective is the “hardship” category. What constitutes a “hardship” that justifies loan cancellation? The administration is deliberately vague on that point. The proposal allows the Secretary of Education to develop a black-box model that can consider virtually any measure of “hardship” the Secretary deems appropriate. Some borrowers experiencing “hardship” will receive automatic loan cancellation. But others will be invited to submit applications describing their own “hardship” and why that merits relief.
If borrowers submit loan forgiveness applications en masse, it’s difficult to imagine the Education Department turning most of them down. The “hardship” category is likely to become a convenient backdoor for mass loan cancellation. Even more troubling, there is no cap proposed on amounts cancelled through the “hardship” category, and the language appears to allow cancellation for future along with current borrowers.
The upshot is that a larger volume of debt could be cancelled this way than would have been cancelled under the administration’s original plan, which capped relief at $20,000 per individual and limited eligibility to current borrowers. The ongoing nature of the relief could also have downstream moral hazard effects, if colleges induce students to borrow more to fund tuition hikes, with the knowledge those loans will be forgiven.
The other planks of the loan-cancellation plan should also dispel any idea that the relief program is targeted. Thirty million borrowers could see some loan cancellation under these plans, according to the White House, including those who have received relief under existing loan-relief initiatives. And there is no estimate yet for the number of borrowers who would receive relief under the “hardship” category, so the true figure could be even higher.
The administration plans to release a formal proposed rule in the coming weeks, after which there will be a comment period during which the public may offer feedback on the rule. A final rule will publish this fall, and the White House has implied that it will initiate some of the cancellation programs before the general election.
That timeline speaks to the political nature of the loan cancellation plan, while more serious reforms to higher education have fallen by the wayside. Millions of students are pursuing college degrees with no return on investment, paid for with federal loan dollars. While cancellation will give the administration some good headlines, the only way to solve the student loan crisis for good is to stop making so many loans that turn bad in the first place.