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Of All The Downsides With Biden’s Student Loan Debacle, This Is The Most Significant

Biden just announced that he intends to forgive $10,000 of student loan debt for those earning $125,000 or less, and $20,000 for those who received Pell Grants.  It is unclear whether the Pell Grant recipients have to pass the means test of income under $125,000 per year. There are millions of Americans in these two categories.

Pell Grant recipients demonstrated financial need beyond that for the student loans of which there are those with lower interest rates, and those with higher interest rates, those from the Federal Government, and those from private entities.  When my daughter was in law school, and while I was teaching high school until 2019, the higher interest rates were about 7% even when 30-year fixed-rate mortgages were below 4%.

Student loan repayment was halted because of the COVID pandemic shutdowns, and Biden just extended this moratorium until the end of 2022.  The need for this extension is dubious given that unemployment rates are very low, and anyone who wants to work can do so because there are millions of employers seeking candidates willing to work.

Halting payments made sense in 2020, and into 2021 because so many were forced to stay home, and for some, this meant no paycheck from their employer.  This was a shot in the arm to the COVID economy because repayment money could be spent on other things. For many, alternative revenue sources were put in place by states and the federal government.  A retired friend who was earning $800 per month working part-time received $800 per week during the pandemic, plus the money she would have received on unemployment from the state.  Her income went up by a factor of four times because there was no means testing in order to qualify for the COVID relief money.  She put an addition on her house and purchased furnishings with her COVID windfall.

Since many with student loans did not make payments for over two years, their loan payments were not curtailing their spending.  Interest was not accruing during the pandemic years for those with Federal student loans.  Forgiving a portion of their loans will not put cash into their hands.  However, there will be a psychological component to “feeling wealthier” which might lead to more spending and incurring of debt in 2022 and beyond as a result of the loan forgiveness.

The huge downside of this debt relief program is that it will further divide the country.  Those who became tradespeople and worked their way through their apprenticeships, not going to college for a degree and not incurring debt, and those who did go to college for a degree, but who worked hard and repaid their loans, possibly living at home with parents to allow for the cash flow to quickly pay down their debt, and those who entered the military to get the educational benefits available to those who serve the USA in our armed forces will be forced to subsidize low-income earners who went to college and never completed a degree, and those who got degrees but don’t earn high salaries.  These latter people include teachers, social workers, police officers, EMTs, and even nurses.  In fact, most college graduates in the early years of their careers earn well under $125,000 per year.  In this regard, this program is a way to buy the youth vote which has been turning away from Biden and Democrats.

I did not hear whether earning any money at all in 2021 is a factor in qualifying for this benefit.  I also did not hear any discussion of the tax implications of this debt forgiveness.  If you file for bankruptcy and so get relief from a mortgage you can no longer pay, you incur taxable income in the amount of the mortgage debt forgiven.  Those receiving the loan forgiveness may find the IRS at their door to collect a few thousand dollars or more for the forgiven debt that suddenly turns into taxable income.  This alone could keep 87,000 new IRS agents busy, but somehow I do not think these people will be the ones targeted.

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If your credit rating was shot by failure to repay student loans, and the government forgives all your debt by means of this program, does your credit rating suddenly spike up as if you were not a deadbeat?

I fear that this Program’s consequences have not been thought out, and its cost estimate as between $300 billion and $900 billion is another indication of this lack of adequate analysis.

Pelosi stated in 2021 that the President does not have the authority to forgive debt because it is the equivalent of spending money, and Congress holds the purse strings of America.  The argument has been made that the Emergency declared due to the COVID pandemic that has not been lifted yet can legitimize this action by Biden.  No doubt, the courts will get involved to decide this matter, but the November election will be long past by the time it is adjudicated.

The positive feelings engendered by Biden’s action to reduce student loan debt may influence student debt-holding voters in November even if Biden’s action does not stand the legal litmus test.  If those in Congress attempt to revoke this action, it could reflect negatively on them because their student debt-holding constituents would no doubt like to see the amount of their debts reduced.  Biden’s Executive Action is a very tricky one to navigate for the upcoming election in November.  Conservatives better be very careful what they say and do as it relates to student loan forgiveness!

By Jennifer Mitchell Towner

Jennifer Mitchell Towner worked in the computer industry from 1979 to 1998. Under a program called Encorps, she became a high school math, French, and Consumer Finance teacher in 2009, retiring in 2019. She holds two BAs from U.C. Berkeley in Math and French and an MBA from Stanford University. The books she published in 2021, Good Boots and Kipper the Nipper are on Amazon.

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Featured photo by David Shankbone, CC BY 3.0 <https://creativecommons.org/licenses/by/3.0>, via Wikimedia Commons