Joe Biden’s new plan to cancel student debt as misguided as old one

President Joe Biden is pushing to cancel debts by other means. (Source: Bloomberg)

With his signature student-loan-forgiveness plan struck down by the Supreme Court, President Joe Biden is pushing to cancel debts by other means. His latest proposal aims to relieve nearly 30 million borrowers, on top of those who’ve received forgiveness under previous initiatives. Regardless of whether it survives the inevitable legal challenges, Biden’s Plan B is as misguided as the original.

The policy announced last month would cancel up to $20,000 in accrued and capitalized interest for those who owe more than they originally borrowed. Those making less than $120,000 ($240,000 for couples) would have their entire balances above the principal wiped out, so long as they had enrolled in an income-driven repayment plan. The government would also cancel all remaining debts for people with undergraduate loans older than 20 years, or 25 years for graduate borrowers, with no conditions attached.

The administration has portrayed this approach as more “targeted” than its 2022 plan, which eliminated $10,000 in debt for borrowers making $125,000 or less and $20,000 for the poorest students. It projects that about 28 million borrowers would get relief under the revised plan, down from 40 million in the earlier version. Plan B may cost anywhere from $85 billion to $150 billion over 10 years.

By its nature, such debt forgiveness is inequitable, rewarding college-going Americans at the expense of the rest of the public, most of whom don’t have degrees. Even by those standards, the current proposal is egregiously regressive. About 16 million borrowers with accrued interest, who have an average household income of $82,000 — slightly above the national median — will receive an average benefit of $3,600. But a smaller group benefits from Biden’s elimination of debts from older loans, many of which were for grad school. As a group, they have average incomes that put them among the top 5 percent of all earners.

In effect, the revised plan delivers limited aid to middle-class families while providing a disproportionate windfall to the wealthiest few. Because the plan gives immediate relief with virtually no application requirements, it risks worsening inflation, compounding the costs to poorer Americans. More likely, the policy will be put on hold while opponents again challenge the president’s authority to unilaterally wipe out such debts — a legal fight that could well lead to another rebuke by the Supreme Court.

Either way, the administration’s pursuit of loan cancellation is bound to result in more time-consuming litigation and distract officials from more urgent priorities. Republican lawmakers say that the Department of Education’s focus on student-loan forgiveness caused it to neglect the disastrous rollout of a new federal financial-aid form, which has left millions of prospective college students in the dark about how much they’ll have to pay, causing many to forgo attending college at all. Retroactively canceling debts also does nothing to address the runaway cost of higher education or to promote viable work-based alternatives to a traditional degree; if anything, student-loan forgiveness encourages borrowers to take out bigger loans and removes incentives for colleges to demonstrate value and hold down costs.

Democrats hope that by continuing to promise student-loan relief, Biden can bolster his support among younger voters. But with polls showing Americans split on the issue, the cost of these policies far outweigh any potential political benefits. The sooner Biden changes course, the better.

Credit: Bloomberg