During the pandemic, the government enacted a student loan payment pause, suspended interest payments, and temporarily set the interest rate to 0% on eligible federal student loans. This student loan moratorium has been extended six times since March of 2020 – twice by the Trump administration and four times by Biden. Last week on April 5, the government extended the moratorium for a sixth time to August 31, 2022. This might not be the last extension.
The Biden administration also announced a fresh start initiative, which will return delinquent and defaulted borrowers to a current status when the repayment of federal student loans eventually resumes. This “fresh start” will remove the delinquencies and defaults from the borrowers’ credit histories.
In addition, the federal government might soon provide full or partial student loan forgiveness to federal student loan borrowers. Progressive Democrats have been calling for $50,000 in student loan forgiveness per borrower. President Biden has reaffirmed his campaign promise to cancel $10,000 in student debt per borrower. As such, broad student loan forgiveness is more likely now than ever before. If student loan forgiveness will happen, it is likely to happen before the mid-term elections, when it can benefit Democrats in the polls.
Congress has not yet, however, enacted any legislation to forgive student loans. They have also not restored bankruptcy rights to student loans, despite ongoing discussions on Capitol Hill.
The Likelihood of an Additional Extension
The most recent extension to the payment pause and interest waiver is driven more by politics than by policy.
Borrowers are no more likely to experience financial difficulty repaying their student loans now than they were before the pandemic. Unemployment rates have returned to pre-pandemic norms, and delinquency and forbearance rates on student loans that are not eligible for the payment pause and interest waiver are better now than they were before the pandemic.
Of course, inflation rates are elevated, there is war in Ukraine that may be the start of World War III, and there will always be another coronavirus variant of concern. But nobody is calling for a moratorium on credit card debt payments. The restart of student loan repayment will not be the start of a financial apocalypse for borrowers.
Delinquency rates will increase temporarily at the restart of repayment, just like they do after the end of the 6-month grace period after graduation. After all, anything is greater than zero. Of course, some borrowers will struggle to make the payments on their student loans – just like they did before the pandemic.
There will probably be another extension to the payment pause and interest waiver until after the mid-term elections, even if broad student loan forgiveness is announced before the August 31, 2022 expiration of the current extension. It would be political suicide for Democrats to restart repayment two months before an election.
Why Not Extend the Payment Pause Indefinitely?
Extending the payment pause forever is not a viable backdoor approach to student loan forgiveness.
The legal authority for payment pauses and interest waivers is based on the Heroes Act of 2003. This authority is in effect only while there is a presidential national emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. As soon as the president rescinds the national emergency declaration, the legal authority to suspend repayment of federal student loans will end.
The Limited PSLF Waiver, which is also based on the Heroes Act of 2003, has an October 31, 2022 deadline. That’s an indication that the president will not rescind the national emergency declaration before that date. So, the president can easily implement a seventh extension until sometime after the mid-term elections.
The seventh extension may be the last since there will no longer be as much of a political advantage to further extensions after the mid-term elections – unless they set their sights on the 2024 elections.
Three Paths to Broad Student Loan Forgiveness
These moratoriums already provided borrowers with a significant amount of loan forgiveness.
The paused payments count as qualifying payments toward Public Service Loan Forgiveness (PSLF) and the 20 or 25-year forgiveness at the end of an income-driven repayment plan. The 30 months of paused payments reduce the 120-payment requirement for PSLF by a quarter, to just 90 qualifying payments.
A total of more than $145 billion in interest will have been waived by the August 31, 2022 expiration of the payment pause and interest waiver.
President Biden has also forgiven more student loans than any previous president. He has provided almost $17.5 billion in student loan forgiveness and discharge through programs previously authorized by Congress, including Public Service Loan Forgiveness, the Total and Permanent Disability Discharge, Closed School Discharge, and the Borrower Defense to Repayment Discharge.
But some borrowers and policymakers want more financial relief. They want broad student loan forgiveness, not targeted based on income or occupation.
There are three paths to forgiveness: legislation, executive action, and new regulations.
pass a law authorizing broad student loan forgiveness. However, Republicans generally do not support student loan forgiveness, so Democrats would need to pass the legislation through a budget reconciliation bill that would require only a simple majority and avoid a Senate filibuster. But with Democrats controlling the Senate by the slimmest of margins, every Democrat has a veto – including the likes of Joe Manchin and Kyrsten Sinema who have a reputation for being financially conservative.
Some Democrats are uneasy about the high cost of student loan forgiveness. Forgiving $50,000 per borrower – as proposed by Senators Warren and Schumer – would cost more than $1 trillion and erase the federal student loans of 80% of borrowers. President Biden’s proposal for $10,000 in student loan forgiveness per borrower would cost more than $375 billion and erase the federal student loans of 34% of borrowers. A previous proposal for $10,000 in loan forgiveness as part of the Heroes Act of 2020 passed the House but got stalled in the Senate.
Limiting student loan forgiveness to borrowers who owe $10,000 or less would reduce the cost to $75 billion, but still erase the federal student loan debt of a third of borrowers. That might reduce the cost enough to address the financial concerns of policymakers. The limited amount of student loan forgiveness would also address concerns about the potential for moral hazard – an implicit or explicit promise that someone other than borrowers will bear the cost of student loans moving forward.
So, legislation to implement broad student loan forgiveness is likely to be limited in eligibility and amount, which might upset borrowers who don’t qualify. Otherwise, policymakers just don’t have the votes needed to push the legislation through Congress.
Some lawmakers have urged the President to use executive action to forgive student loan debt with the “swipe of a pen,” sweeping the cost of forgiveness under the Oval Office rug. But the President does not actually have the legal authority to forgive student loans through executive fiat. Only Congress has the power of the purse.
Proponents of broad student loan forgiveness have made specious arguments based on looking cross-eyed at various waiver authorities in the Higher Education Act of 1965. The most cogent of these, based on the Heroes Act of 2003, argues that the national emergency waiver authority allows the President to waive any statutory or regulatory provision concerning Title IV federal student aid, including federal student loan repayment.
But the Heroes Act of 2003 limits the national emergency waiver authority to ensuring that “recipients of student financial assistance under title IV of the Act who are affected individuals are not placed in a worse position financially in relation to that financial assistance because of their status as affected individuals.” Not placing borrowers in a worse position does not mean ensuring that they are better off. The waiver authority must also be narrowly targeted at affected individuals who have “suffered direct economic hardship” as a result of the national emergency.
Attempting to use executive action to forgive $1 trillion in federal student loans will be met with a court challenge and likely fail. But perhaps policymakers will pursue this route to establish a sharp contrast between Democrats and Republicans ahead of the mid-term elections. The viability of this approach depends on a political calculation.
The income-driven repayment plans are all student loan forgiveness plans, forgiving the remaining debt after 20- or 25-years’ worth of payments. One of them, Income-Contingent Repayment (ICR), provides the U.S. Department of Education with such broad regulatory authority that it can be remade into a broad student loan forgiveness program, albeit with means-tested targeting of the loan forgiveness.
The Biden administration could create a new income-driven repayment plan by modifying ICR to have a shorter repayment term, a smaller definition of discretionary income, and a smaller percentage of discretionary income. By law, the repayment term must be at least five years, but borrowers would be able to switch to the new income-driven repayment plan and have previous payments made under any income-driven repayment plan or standard repayment count toward loan forgiveness.
This is not just a theoretical exercise, as the ICR regulatory authority has already been used twice before to create the PAYE and REPAYE income-driven repayment plans. The PAYE and REPAYE income-driven repayment plans cut the repayment term from 25 years to 20 years and the percentage of discretionary income from 20% to 10%. The definition of discretionary income was also reduced.
Regulatory change is the slowest approach to broad student loan forgiveness, taking several months for negotiated rulemaking and the notice-and-comment period, but it is also the most likely to survive a legal challenge.
Congress has the authority to overturn regulations under the Congressional Review Act (CRA) but is unlikely to do so, yielding evidence that the regulations are consistent with the intent of Congress. A lawsuit under the Administrative Procedures Act (APA) is unlikely to find that the regulations are arbitrary and capricious if the Biden administration follows proper procedure, including a reasoned consideration of the pros and cons and alternatives to the regulations.