President Biden’s plan to forgive up to $20,000 per federal student loan borrower is currently tied up in the court system.
However, even with the delay, borrowers need to consider the possibility of more forgiveness coming down the road.
Why do borrowers need to think about more forgiveness? Many of us have mountains of student debt that will take years to pay off. Thoughtful planning requires considering not just personal finances but also the possibility of changing student loan rules.
I was personally surprised when Biden made his one-time cancellation decision. I don’t want to be surprised if it happens again.
The Argument for More Student Loan Forgiveness
At its core, the plan to forgive $10,000 or $20,000 per student loan borrower is an admission of fault.
The Department of Education and its contracted servicers had a responsibility to administer the federal student loan program and guide borrowers. They failed.
The rules for repayment were so complicated that loan servicers gave many borrowers information that was either incomplete or wrong.
Does this one-time forgiveness program make borrowers whole? Has the Biden administration righted the wrongs of decades of student loan mismanagement?
Many borrowers and advocates would argue the answer is a resounding no.
A Huge Limitation on Further Loan Cancellation
The Department of Education claims to have the authority to forgive student debt under the HEROES Act, legislation passed in the wake of the September 11th attacks.
Specifically, the HEROES Act allows relief from student loan requirements during specific periods, such as a war or other national emergency. The Department of Education cites the Covid-19 pandemic as a national emergency that justifies loan forgiveness.
Notably, the Department of Education isn’t arguing that they can forgive debt whenever they want.
Under this logic, additional forgiveness would require a new national emergency or war.
Fixing the Fundamental Problem
Before going further in our analysis, it is worth taking a step back and considering the fundamental issue: college is too expensive.
We have a student loan crisis because most students can’t afford to pay for school. School is so expensive that it often takes decades to repay the debt.
College prices have grown considerably faster than inflation, and paying for college has gotten harder for each generation.
Loan cancellation doesn’t fix this problem. In fact, it could make things worse.
Setting the Forgiveness Precedent
The Biden administration has been cautious about calling the program one-time forgiveness.
A second round of forgiveness could create an expectation in the minds of many borrowers. If borrowers expect forgiveness to happen, motivations change. Instead of borrowing the minimum, people might maximize borrowing to get more debt forgiven. Those in repayment might focus on making minimum payments rather than trying to eliminate their debt.
If students and borrowers assume that more forgiveness is on the way, they could make risky decisions.
The Optics and Politics of Student Loan Cancellation
In the days and hours leading up to the decision to announce $10,000 or $20,000 of loan cancellation per borrower, there was a heated debate in the White House. The discussion wasn’t about how to help borrowers most effectively, and the discussion wasn’t about the policy or procedure. Officials argued about politics up until the last second.
Student loan forgiveness or cancellation is a decision made by politicians. If helping borrowers is risky politically, they won’t do it.
The midterm elections happen tomorrow. If Democrats get creamed — and the polling seems to indicate they will — it is a huge blow for people advocating future forgiveness. If the political consequence of loan cancellation is angry voters and losing seats in Congress, politicians will be unlikely to go there again.
Election Update: Democrats did far better than expected in the election and student loan forgiveness is getting some of the credit for the strong youth turnout and Democratic performance.
The Look of Future Student Loan Repayment Assistance
The idea of additional forgiveness for all seems unlikely. Circumstances may change in the distant future, but as things stand right now, any more cancellation seems highly improbable.
However, that doesn’t mean that there won’t be more help for student loan borrowers. It just might take a different form.
New repayment plans seem to pop up every few years, and Biden says another is on the way. Likewise, we may also see assistance for borrowers who have previously fallen through the cracks, such as those with spousal loans or FFELP loans.
The Planning Challenge for Borrowers
If you are planning a repayment strategy, it is difficult to figure things out in the face of so much uncertainty. Financial planning is already difficult, but the challenge grows when dealing with a moving target.
I’d suggest an approach that weighs the federal perks against the costs.
Federal loan borrowers have an existing list of perks and protections that go with their loans. They also have the possibility that things will get even better. If we lump the known and the unknown together, we can call it the benefit of federal loans.
However, the benefit of federal loans can come at a cost. Hoping for forgiveness and only making minimum payments means spending more on interest over the life of the loan.
The question for borrowers who are planning comes down to this: do the federal benefits outweigh the extra spending?
The hope of more forgiveness in the distant future may not justify spending extra money on interest every month.
