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Biden Admin’s New Student Debt Relief Plan Before the Election

Biden Admin’s New Student Debt Relief Plan Before the Election

Days before the election, the Biden-Harris administration rolled out another student debt relief plan — this time aimed at repaying the loans of millions of borrowers across the U.S. who are experiencing “hardship.”

The timing is noteworthy: Since a significant portion of young voters have student debt, some might say this is a strategic move to galvanize them just in time for Election Day.

under a proposed rule published Thursday in the Federal Register, the Department of Education outlines two new paths for student loan cancellation.

The first would allow for a one-time review of federal loans, forgiving the debt of borrowers with an 80% probability of default within two consecutive years.

The second option would open an application process in which borrowers experiencing “hardship” could apply for cancellation. What qualifies as “difficulty”? The rule lists 17 factors, ranging from income and debt balances to broader categories such as assets.

If the Department of Education determines that the borrower qualifies, his or her debt may be canceled.

This proposal raises serious questions about liability, fairness and financial implications. Let’s analyze some of the main concerns:

Existing options are now available: Federal borrowers already have tools such as forbearance or deferment. Depending on their situation, they could temporarily defer or reduce their monthly payments. The borrower may ask for forbearance due to financial difficulties, medical expenses, job change, among others. suspension of monthly repayments for up to 12 months, with a cumulative limit of three years.

Alternative deferment options include, but are not limited to, cancer treatment, military service and economic hardship, during which time payments will be temporarily stopped. If borrowers can already adjust payments during difficult times, why introduce another path to debt relief?

Also take into account that from March 2020 to August 2023 a student loan repayments were subject to administrative forbearancewhich means all payments have been processed suspendedand the interest rate was set at 0%. That pause alone almost added $208 billion to public debt due to the cancellation of interest.

Once payments resume, the Department of Education implemented a 12-month “on-ramp” program through September 30, free from credit reporting and default status consequences for missed payments.

This begs the question: Haven’t borrowers already received significant relief?

Subjective hardship clause: Room for moral hazard? Among the proposal’s 17 hardship indicators is a vague clause allowing the education authority secretary to consider “any other indicators difficulties.”

How – noted the Wall Street Journal.this could allow “high car loans or credit card payments” to qualify as a hardship. Such freedom risks creating a “moral hazard” by signaling to borrowers that loans can be made without ultimate liability.

Taxpayer costs and consequences for non-borrowers: The proposed rule could come at an eye-watering price. The Ministry of Education estimates that the cost of approx $112 billion over 10 years. However, the Committee for a Responsible Federal Budget suggests it could be closer $600 billion— a burden that would fall on taxpayers.

And consider this: even when loans are in default, remedial action is usually taken yield about 80 to 85 cents per dollar, even after taking into account debt collection costs. This means that through collection efforts, a significant portion of the loans could be recovered rather than being burdened by taxpayers. However, in the event of immediate cancellation, taxpayers bear the entire cost.

What’s more, this plan ignores a fundamental question: why college costs are skyrocketing twice as much inflation? Instead of addressing root causes, debt cancellation encourages universities to keep tuition fees high because students and institutions know that taxpayers may foot the bill.

Historically, every dollar added to federal student loan subsidies has increased tuition by about 60 cents.

With the public comment period opening soon, Americans will have 30 days to weigh in on this plan. Depending on who is elected, it could be finalized by mid-2025.

Does it hold up? judicial review This is another open issue that the courts are struggling with blocked cancellation based on this rule because the department tried to enforce it before it was even finalized.

Previous administration attempts cancel student debt To have repeatedly faced legal obstacles. Will this proposal also suffer the same fate?