Even If Legal, Biden Should Not Forgive Student Debt

Mish

Biden faces pressure by Progressives to make bad decisions of questionable legality.

Warren Pressures Biden

Such pressure will escalate.

Is Student Debt Forgiveness Even Legal?

First Question of the Day: Is it Legal?

Biden has said he would forgive $10,000 in student debt for all borrowers, and the rest of the debt for those who attended public colleges or historically Black colleges and universities and earn less than $125,000 a year. In all, that would slash the country’s $1.7 trillion outstanding student loan tab by about a third, according to calculations by higher-education expert Mark Kantrowitz.

CNBC asked Toby Merrill, founder and director of the Project on Predatory Student Lending at Harvard Law School, how she’d explain to a 15-year-old why she believes it’s within the president’s power to do so.   

The Constitution gave Congress the authority to control property of the government, like debts owed to it,” she wrote. 

And Congress, Merrill said, granted the Secretary of Education, who works for the president, “the specific and unrestricted authority to create and to cancel or modify debt owed under federal student loan programs.”

Using an executive order to forgive federal student loans will likely be met with a lawsuit and preliminary injunction, and eventually fail,” Kantrowitz said.

“Also, trying that route immediately upon taking office would block any attempt at working with Congress in a bipartisan manner,” he added.

Ryan D. Doerfler, a law professor at the University of Chicago, can also see such a move being met by a myriad of challenges. For example, he said, opponents may say that the U.S. Department of Education can deliver relief to borrowers only in specific circumstances.

Forgiving Student Debt Isn’t a Great Stimulus Plan

Bloomberg author Noah Smith says Forgiving Student Debt Isn’t a Great Stimulus Plan.

  1. It’s an open question whether the President could forgive this debt without an act of Congress. Some legal scholars believe that if various executive agencies acted in concert, they could simply stop collecting the debt forever, meaning that it would be effectively cancelled.
  2. Whether this makes for good politics is another question. Canceling student debt might provoke a backlash among those who don’t have any loans. People who decided not to go to college because it was too expensive might be upset at a government action that invalidates their decision. Those who paid off their loans early might feel that their frugality was being punished. Parents who forked over more cash for their children’s educations to help those kids avoid the burden of debt might be similarly incensed.
  3. There’s also a moral hazard to consider. A big cancellation of student debt might convince people that such forgiveness would become a regular occurrence. That would make students more willing to take on debt, which would compound the problem in the future and push up tuition even further.
  4. Some will argue that a very weak stimulus is better than no stimulus. But given the potential backlash, legal uncertainties, and potential for moral hazard, student debt cancellation by executive fiat might not be worth it at all.

I agree with Smith on all four counts. 

Lessons From Cool Cal

Please consider Budget and Tax Lessons from President Calvin Coolidge.

  • “Economy in the cost of government is inseparable from reduction in taxes. We cannot have the latter without the former.”
  • "We are seeking to let those who earn money keep more of it for themselves and give less of it to the Government. This means better business, more of the comforts of life, general economic improvement, larger opportunity for education, and a greater freedom for all the people. It is in essence restoring our country to the people of our country. It reendows them not only with increased material but with increased spiritual values."“

“They Hired the Money, Let Them Pay for It’

Allegedly Coolidge said that, and it applies, but the quote is in dispute according to the Book of Fake Quotes. 

 Claude M. Fuess, Coolidge's biographer, who  worked hard to track down the origin of the statement, finally decided it was inauthentic. "I have tried in vain to ascertain the source of this quotation," he said, "and must, under the circumstances, regard it as belonging to the Coolidge apocrypha." When Mrs. Coolidge was asked about it after her husband's death, she said, "I don't know whether he said it, but it is just what he might have said."

How It Applies

University administrators knew that with Federal student debt they had a steady and reliable flow of money to use to inflate the number and compensation of administrators and go on binge building new buildings and upscale dorms and athletic programs. The cost of college has mushroomed well beyond almost every category of costs (e.g. healthcare, housing eye.). 

Look at the administrator to professor ratio. Most sports programs lose money, even some of the big ones, but the football or college coach in at least 38 states is the highest paid state employee by far.

University Industrial Complex

The University Industrial Complex is out of control. With all of this debt removed as a burden for many of its customers and with the introduction of moral hazard, these university presidents will all go into fifth gear in driving costs through the roof.

Moral Hazard 

In addition to the moral hazard of the administers, ponder some poor schmuck and his wife who drive old beat-up cars and defer vacations to pay off their student debt then wake up the next morning to read that Biden did this.

They look across the street at their neighbor who is driving back from the airport in his Lexus from his vacation in Cancun knowing that guy just had $150,000 in student debt cancelled for his degree in “Interpretations of Medieval French toenail clipping.”

Caution About Discharged Debt

Less Education for Your Buck

Less Education for your buck

The above chart is from US College Tuition & Fees vs. Overall Inflation.

Please note the acceleration in 2005. What happened?

Flashback 2005

On April 15, 2005, I penned The Deflation Guarantee Act of 2005.

Today Congress passed the “The Deflation Guarantee Act of 2005” currently known as the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005”.

Twenty years from now economists are going to be studying legislation from this Congress and signed by this administration and be wondering: “What the * were they thinking?”.

Anytime this administration passes a law with the “protection” in it, assume it will do just the opposite. 

This was a bill written by loan sharks, and bought via payoffs (otherwise known as campaign contributions) to those voting for this bill. It has NOTHING to do with “Consumer Protection”.

I believe this will backfire in many ways, and not all of them are fully understood yet.

Emphasis added. 

I discussed debt deflation. Debt that had no chance of being paid off.

What Did the Law Do?

  1. It made student debt not dischargeable in bankruptcy. 
  2. In the process it made debt slaves out of millions of students.
  3. Colleges promoted useless degrees with impunity. 
  4. Tuition costs soared. 

Confusing Cause With Result

Proposal Worth Consideration

Make Colleges Eat Their Own Student Loans

I believe this to be a curious mix. I side with Ann Coulter and Noah Smith.

Mish

Comments (44)
Sechel
Sechel

Why treat college debt differently. Every type of debt can be handled via the bankruptcy code but lobbyists for the banks went to Congress and the Senate and made this unique type of debt non-voidable. It's obscene. Even A Wayne Johnson an official of the Trump Administration under Betsy Devos called for student debt to be voided saying the current situation is untenable.

Tengen
Tengen

Right or wrong, I don't see Biden forgiving student debt. Progressives will try to pressure Biden on numerous things, but at this point the DNC believes firmly that they can blow them off with impunity. Things would have to get really dicey before they even begin to question that assumption.

Sechel
Sechel

There's a really simple solution to all this. Allow bankruptcy judges to renegotiate student debt if the borrower can't manage it. It could be restructured or partially voided just like consumer debt. We have a system in place it just needs to be permitted to work. I don't see why we need to across the board grant relief. Allow the court system to do what it was designed to do.

ShowMeTheData
ShowMeTheData

No mention of decreased funding from state government? That has been well documented to be the primary driver of increased tuition costs.

EGW
EGW

They should treat student debt like any other debt, but if the student defaults, then the schools that sold the education to the student should eat the loss. That should incentivize the schools to charge students in accordance with expected future income.

Greenmountain
Greenmountain

Could we possibly consider why student debt has an interest rate of 5 or 6% when prime is at what 2%. Lets do all student loan a favor and reduce interest rate. Second - there is a whole industry out there that is making money off this by buying student loans and offering 50 basis point lower rates. Such a rip off. So much can be done with a few changes. Yet we get buried in the whole or none. Drives me nuts. The middle can be pretty sweet.

Realist
Realist

Another fine mess where corporations, or in this case private educational institutions, benefit from a US government program, while the intended beneficiary, the students, suffer. This seems to be commonplace in the US. Its the same with your health care system, which costs double what other countries pay, only covers part of the population, and causes large numbers of personal bankruptcies.

Americans could look elsewhere for examples of better systems, but they won't, because the US arrogantly thinks they know best.

Mish
Mish

Editor

tedr
tedr

Exactly. If you borrow money pay it back. Let these damn kids start learning responsibility.

Sechel
Sechel

@Mish so you were against the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 but you don't want to see it ended?

Sechel
Sechel

If a lender forgives debt it is income that should be taxed. If a bankruptcy judge were to do that it should not.

Felix_Mish
Felix_Mish

Those loans were payoffs to those who supported the legislators who created them. Money for nothing.

Remember, the opposition predicted exactly what both sides now say happened. Prices went up to match the loans and a lot of kids were saddled with debt for no extra value to themselves.

Now, golly, those who created those loans want to "forgive" them. Well, duh! You bet you "forgive loans" to your most solid political supporters (outside of civil servants and those who work in "education").

The scam: Fool the kids in to taking out a loan. Then be a great guy and tell the kids to forget the loan. Screw those who made those loans. Kinda nice playing with OPM and having no fiduciary responsibility, ain't it?

Education was already a bubble. Those loans pumped it.

ajc1970
ajc1970
  1. first step is to allow any debt to be discharged in a bankruptcy proceeding. Including student loans. And for the government to stop guaranteeing student loan debt.

  2. for those of you not familiar with "Section 1112 of the CARES Act" (now law), check that out... Congress allocated funds to pay 6 months of SBA loans. The HEROES Act (not law... yet) doubles down on that, paying an additional 12 months of SBA loans.

I bring up #2 because... the loan wasn't "forgiven." It was paid with tax-free income. No 1099-Cs, no liabilities incurred.

Yeah, Biden can't do that alone for student loans, but it can be done.

"Should it?" That's another question... but the logic behind the SBA loan forgiveness in the CARES Act was that most of those businesses were shut down by government and would default on those loans because of it. The same logic applies to young folks working to pay off their student loans. And there's a fairness argument to be made.

ToInfinityandBeyond
ToInfinityandBeyond

There is no doubt student loan debt has gotten completely out of hand. Even so there is no way I can condone forgiving student loan debt under any circumstances. I would however be open to reducing the interest rate on student loan debt to a more reasonable level more in line with 30 year mortgage rates. Would still require some level of government subsidies but a far better idea than giving away the store.

Webej
Webej

To ask people relegated to Wallmart jobs and 3-4 precariate janitor stints to effectively bail out people earning <$125,000 is a monstrous injustice. Surely people on 120,000 or more can afford to pay back at least $10,000. Absolutely monstrous.

Rarely will I ever say something positive about America, but the possibility of having debts discharged in bankruptcy and getting a new start in life (pre 2005 Protect Act) -- I am not aware of any country where such forgiveness is as well anchored in law as in America. Americans should cherish this freedom, inscribed on their liberty bell. Nothing is more important to keep citizens from falling into slavery than the possibility of discharging debts for those who cannot pay.

SpeedyGeezer
SpeedyGeezer

Any plan must address the ongoing problem. These loans are made every year, tuition and other costs keep going up and the quality of education keeps going down. The Federal programs could reduce the rates to help borrowers, but the real answer is that the programs themselves must be reduced. University degrees are good value for many, but not all students. Also, many borrowers never graduate. The non-grads are induced to take on massive, non-dischargeable debts and get little or no income benefit (they lose time working and building "on the job" skills, in fact).

The Feds employ virtually no credit screen and their infantile rules around "for profit" schools were not effective. Yet the "low info loudmouths" in Congress demand that taxpayers fix the problem in the rearview mirror without addressing the burgeoning problem in front of them.

Six000mileyear
Six000mileyear

Instead of whining about not being able to pay off their student debt, they should enlist in a branch of the armed forces to work off that debt. My college roommate in her senior year signed up for the Army and had a job waiting for her after graduation. They paid off her college loans because she was already a graduate. It was in the opposite order of the GI bill, but the outcome was still the same; an honorable way to repay a student loan.

PreCambrian
PreCambrian

I understand why you do not want student debt forgiven. I don't agree with you that the causes are only pensions, unions, etc. although they certainly are a part. A large part of the unpaid loans are to private, for profit "colleges" and "universities" which make a lot of money for a few owners which basically push predatory loans to unsophisticated students. Republicans have protected these interests every time changes to the student loan programs are proposed.

It would be great if Republicans would support meaningful changes to the student loan program including:

a) Removing loans for "for profit" schools
b) Promoting junior (or community colleges) with low cost or free tuition
c) Reserving student loans for the most academically prepared students
d) Reserving student loans for students that have successfully completed two years of school (most likely completed at a community college).
e) Fight the myth of the college degree (with both employers and students) as the best way to succeed in a career.

I don't believe that a free higher education for everyone is going to payback for the country overall since our economy has changed and there just are not enough college level jobs to give to everyone with a college degree.

Eddie_T
Eddie_T

Hello, what about the banks who made the loans?

I already mentioned that the numbers being discussed (forgiveness of $10K in student debt) is basically a gift to the lenders.....because it instantly makes them whole on just about all the DEFAULTS...the government is on the hook for that anyway, but it would wipe it all off the books in one fell swoop.

I’m not a derivatives expert, but my expectation is that would make the rest of the student debt a much higher grade product on the resale market.

Most of the loan defaults are not even to universities. Flagship state universities have very low default rates....to the tune of 2% or less. The problem is a shit-ton of money funneled by these student loan conduit schemes went (and still goes) to trade schools that were invented to suck up the government money.

Look at the SCHOOLS with high default rates. Look at who owns them. A very high percentage are “minority owned businesses.”

Just like the mortgage defaults in 2008, there is a story behind the story. It involves race....and it’s an ugly story that nobody is about to write about, because it doesn’t fit the narrative the Democrats are peddling.

All the headline articles about the orthodontist in Utah who owes a million bucks? It makes it sound like nobody can pay....but the truth is that he’s an outlier...and also....he could pay if he wanted to....he’s holding out to get his loans forgiven....manipulating the system.

The average DEFAULTED student loan is somebody who went to a school to learn to be a hairstylist...and this group typically owes around $10K that they can’t pay because they can’t even get a job in that oversupplied niche.

The moral hazard was on the front end....giving loans to people who werenver going to be able to pay them back, because they were throwing the money away.....being had, actually, by poor quality predatory trade schools who don’t put very many people to work.

EKnowingly
EKnowingly

Let the Federal Reserve buy up the promised student debt in the same way it has purchased 100’s of billions of dollars in bad investment products and CDA’s. What’s the difference? Transparency? Certainly not legality. -eek

davebarnes2
davebarnes2

JoBiden could force the interest on the loans to be reduced.
Student debt at 8 is absurd. How about 1%.
That would be a good start.


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