Supreme Court blocking student-debt forgiveness will ‘devastate’ borrowers. No, it would ‘punish’ poor Americans. Who’s right?

The Supreme Court last Friday struck down the Biden administration’s plan to cancel student-loan debt, giving opponents and proponents of loan forgiveness the chance to square off again on a debate that’s gripped Americans for months.

Biden’s plan aimed to cancel up to $10,000 in federal loan debt for borrowers earning less than $125,000, and up to $20,000 for borrowers who met that criteria and also used a Pell grant in college. Americans owe an estimated $1.7 trillion of student loans and the White House had said that more than 40 million borrowers would have benefited from the forgiveness program. 

“Today’s decision will be difficult — if not devastating — news for millions of student-loan borrowers nationwide who have had their financial futures held in limbo for nearly a year while this plan worked its way through the courts,” said Justin Draeger, president and CEO of the National Association of Student Financial Aid Administrators, a student-affairs organization with over 13,000 members.

‘If we want to help students deal with the increasing cost of getting a degree, giving a bailout to the very colleges and universities that hike prices is not the answer.’

— The Heritage Foundation, a conservative think tank

Draeger’s comments were just one example of the chorus of voices, each with their own take on how student-loan cancellation would have been a boon or a disaster for millions of Americans.

Adam Looney, a nonresident senior fellow at the Brookings Institution, which describes itself as nonpartisan, did a deep dive into Biden’s student-loan forgiveness plan last year, and came up with mixed answers on whether the program would achieve its goals.

Ultimately, he concluded that Pell Grant recipients — those most vulnerable to default and dropping out of college, according to his analysis — should be the focus of Biden’s student-loan forgiveness. Some 89% of all Black borrowers and 84% of Hispanic borrowers, he said, have received a Pell Grant.

In a separate study published last February in the Journal of Financial Economics, researchers Sylvain Catherine and Constantine Yanneli had a slightly different take: They said full or partial forgiveness is “regressive” because, on the one hand, high earners took out larger loans and, on the other hand, the balances of low earners “greatly overstate” the benefits of debt cancellation.

Conservatives were jubilant

The Heritage Foundation, a conservative think tank, was celebratory in its response to the Supreme Court ruling. “The astronomical cost to American taxpayers of this ill-conceived program was only surpassed by its unfairness — since it would have punished millions of Americans who dutifully paid off their student loans as well as those who never took out loans in the first place,” said Heritage Foundation legal fellow Jack Fitzhenry and Lindsey Burke, director of Heritage’s Center for Education Policy.

“If we want to help students deal with the increasing cost of getting a degree, giving a bailout to the very colleges and universities that hike prices is not the answer,” they said in a joint statement. “Breaking up the monopoly of college accreditors and offering students more higher education options, while simultaneously cutting off the open spigot of federal higher education subsidies, is a start. Ultimately, students should be equipped with the knowledge and certainty that the student loans they take out can be repaid in future employment.”

An earlier analysis by the The Wharton School of the University of Pennsylvania concluded that  forgiving federal college student-loan debt would cost between $300 billion and $980 billion over the 10-year budget window, depending on the program’s details. “About 70% of debt relief accrues to borrowers in the top 60% of the income distribution,” it said.

House Speaker Kevin McCarthy, a Republican, said Biden’s forgiveness went against working families: “The President of the United States cannot hijack 20-year-old emergency powers to pad the pockets of his high-earning base and make suckers out of working families who choose not to take on student debt,” he said Friday. “The Court’s decision today deals a heavy blow to Democrats’ distorted and outsized view of executive power.”

Liberals cry foul over ruling

The liberal-leaning National Consumer Law Center, a nonprofit based in Boston, Mass. that advocates for low-income people, was in stark disagreement. Abby Shafroth, the organization’s co-director of advocacy, said, “We are deeply disappointed by this decision: It is wrong on the law and threatens the financial security of millions of low-income Americans who are struggling with unaffordable student-loan debt. They were counting on debt relief to manage their payments when bills resume in September for the first time in three years.”

(Interest on federal loans is scheduled to start accruing again in September, and payments are scheduled to resume in October.)

‘This ruling takes away a lifeline for millions of households crushed by student-loan debt.’

— Jared C. Bass, acting senior vice president for Education at the Center for American Progress

“Fortunately, the opinion on debt relief is narrow — it is limited to what the administration can do using national emergency authority under the HEROES Act,” she added. “It does not prevent the administration from pursuing debt relief under authority granted by other laws. Every option must be on the table to ensure that Americans with student loan debt can get the relief they need now. There is no time to wait — the administration must act fast to deliver promised relief to worried borrowers and prevent the federal government from sending bills Americans cannot afford to pay in September.” 

Rep. Alexandria Ocasio-Cortez, a Democrat, sounded a defiant tone. She wrote on Twitter that the Supreme Court’s ruling “does NOT remove Biden’s ability to pursue student loan forgiveness.” The New York representative said the Biden administration can use the Higher Education Act “to continue loan forgiveness before payments resume. They should do so ASAP.”

Jared C. Bass, acting senior vice president for Education at the Center for American Progress, a policy institute that takes a liberal stance on economic and social issues, effectively condemned the Supreme Court’s decision. “This ruling takes away a lifeline for millions of households crushed by student-loan debt,” he said.

“The administration’s debt-relief plan met the urgency of the moment and restored the promise that higher education should lead to greater opportunity, not lifelong mountains of debt,” Bass added. “Stopping this plan in its tracks will only prolong the student-debt crisis. And it prevents millions of Americans from improving their financial security and creating a foundation for upward economic mobility.”

Weighing up the pros and cons

So who’s right? Some research suggests both sides have a point.

Pell Grants are means tested and so recipients come from low-income families, the Brookings Institution’s Adam Looney concluded. Some 42% of dependent Pell Grant recipients’ parents were in the bottom 25% of the income distribution when they started college, and almost none are in the top quintile, he said. Very few of their parents had either a bachelor’s (28%) or a graduate degree (11%). “They are a substantially disadvantaged group,” he said.

Many Pell Grant recipients owe less than $20,000, and many even less than $10,000, he said. The maximum Federal Pell Grant award is $7,395 for the 2023–2024 award year, according to Federal Student Aid, an office of the U.S. Department of Education, and the largest provider of student financial aid in the U.S.

“In contrast, borrowers who had never received Pell are relatively affluent — both in comparison to those who received Pell and to average American households,” he added. “Only 6% are Black and 7% Hispanic; 83% are white or Asian. Their parents are well educated and affluent.” Some 55% have a bachelor’s and 29% have a graduate degree, making them twice as likely to have a graduate degree as the average American.

His first takeaway: The aggregate dollar amount of debt relief could be misleading. “The $20,000 of relief afforded to Pell recipients costs about the same amount, on a per-borrower basis, as the $10,000 in relief afforded to the non-Pell group because of differences in how much Pell students owe and their expected ability to repay,” Looney wrote.

His second takeaway: Pell borrowers account for 90% of borrowers in default, and 79% of all dropouts were recipients of the Pell Grant. Looney concluded: “If the goal was to help these specific groups, why not spend all the money on them, rather than spending the same amount on non-Pell borrowers as Pell recipients?”

Forgiveness is ‘regressive’ because high earners took out larger loans and the balances of low earners “greatly overstate” the benefits.

— Researchers Sylvain Catherine and Constantine Yanneli

Their first main conclusion: Under a universal loan forgiveness policy, individuals in the bottom half of the earnings distribution would receive approximately one-quarter of the dollars forgiven. “Households in the top 30% of the earnings distribution receive two-fifths of all dollars forgiven,” researchers Sylvain Catherine and Constantine Yanneli added. “Patterns are similar under policies forgiving debt up to $10,000 or $50,000, with higher-income households seeing significantly more loan forgiveness.”

Their second main conclusion: “Enrolling more borrowers in income-driven repayment plans linking repayment to earnings leads to forgiveness for borrowers in the middle of the income-distribution,” Catherine and Yanneli wrote. Because IDR plans link payments to income, “borrowers with persistently low incomes will only reimburse a fraction of their debt before it is forgiven,” they added. “Increasing enrollment in IDR, or increasing these plans’ generosity is another option for targeted debt forgiveness.”

The debate will likely drag on long after the Supreme Court ruling. Advocates and activists have debated for years that the executive branch has the authority to cancel student debt under the Higher Education Act. They’ve focused on a provision allowing the Department of Education to “compromise, waive, or release,” any right to collect on student loans. Supporters of forgiveness are now urging the Biden administration to use that authority to cancel loans. 

On Friday, the Department of Education filed notice saying it would embark on a regulatory process that would seek an alternative pathway to student-debt relief. Using that process, known as “negotiated rulemaking,” the department will take comments from the general public on questions relating to debt forgiveness, and gather a group of stakeholders to discuss a proposed rule related to the waiver and compromise authority under the Higher Education Authority. 

Draeger, meanwhile, said students will need more help navigating a complex student-loan system. “Communication from the U.S. Department of Education will be critical to ensure borrowers are not left worse off as they move back into repayment,” Draeger added. “We are encouraged by reports that the Department plans to provide students an extended on-ramp to repayment, but schools and borrowers will need more information as the repayment start date quickly approaches.”

Jillian Berman contributed.

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