Federal Reserve says student-loan delinquencies will go up if Biden's loan forgiveness plan is scrapped

 Last August, President Biden announced his plan to forgive between $10,000 and $20,000 in student debt to individuals who make less than $125,000 a year. He also extended the pause on making student loan payments until at least midsummer.

Who could object?

Turns out, a lot of folks objected. The NAACP didn't think Biden's plan was generous enough, calling it "a slap in the face." Senate Minority Leader Mitch McConnell called the plan "wildly unfair" because it forces taxpayers to subsidize a government program that mainly benefits high-income individuals. 

Several state governments are also unhappy. A group of states sued the Biden Administration (Nebraska v. Biden), seeking a court ruling that the President's loan forgiveness program is illegal. The Eighth Circuit stopped Biden from implementing his plan pending a judicial ruling on its legality.  The Supreme  Court is reviewing the controversy and is expected to give a final decision on Biden's giveaway by the end of June.

A few days ago, the Federal Reserve Bank of New York weighed in with a highly technical report buttressed by multiple charts, graphs, and mathematical formulae. Here's what the New York Fed concluded about Biden's debt-forgiveness plan:

The plan will cost $441 billion and grant debt relief to 38 million eligible college borrowers. In the Fed's view, Biden's proposal is progressive. In other words, it does not disproportionately benefit rich people. The Fed also estimates that almost fifteen million borrowers with low loan balances will see their student debt wholly erased. 

Ominously, the Fed also noted a recent uptick in credit card and auto loan delinquencies, a sign that student borrowers are struggling to make ends meet even though they've been excused from making student-loan payments for almost three years.  The Fed predicts that the student-loan delinquency rate will rise if college borrowers don't get debt relief and are forced to resume making their monthly student-loan payments next summer.

Here's my take on President Biden's student-loan forgiveness plan and the litigation it triggered.

First, I support modest debt relief for some student debtors. Many college borrowers with low loan balances are college dropouts who took a few courses but never got a degree.  Given all the helicopter money the government dumped on the business community during the COVID crisis, forgiving $10,000 or $20,000 in student debt seems reasonable. 

However, if Biden's proposal is such a good idea, why didn't Congress initiate the plan through legislation? It's Congress's job--not President Biden's--to preside over what the Fed called "the largest mass discharge of consumer debt in modern history."  I think the Supreme  Court will likely strike down Biden's loan-forgiveness scheme when it rules on Nebraska v. Biden later this year.

Finally, as the Federal Reserve Bank pointed out in its report, loan forgiveness will not solve the growing crisis in college affordability. 

This one-time forgiveness event [the Fed report stated]does not directly address the rising cost of post-secondary education that led to ever-exploding balances in the first place. In fact, if borrowers expect future debt cancellation events, they may borrow even more if there is some chance it will be forgiven in the future. 

Let's face it. A college education costs too damn much. It's nuts to ask students to pay $50,000 a year in tuition to get a college degree in liberal arts or the social sciences. 

Unfortunately, our nation's politicians and policymakers aren't even asking universities to reign in their costs, and college leaders inexorably raise their tuition rates year after year. 

We will never get the student loan crisis under control until we get college costs under control. But the federal government is not doing that. Instead, it subsidizes the increasingly dysfunctional and irrelevant college industry and forces college students to pay the bill.

 

 

Crocodile Tears: Congress Tinkers With Bankruptcy Code But Forgets Student Debtors

 President Biden signed the Bankruptcy Threshold Adjustment and Technical Corrections Act yesterday, and congressional leaders are patting themselves on the back. 

According to Senator Chuck Grassley, one of the Senate bill's sponsors, the new law will remove some hurdles to the bankruptcy process and "assist small businesses and working families to weather financial hardship and emerge stronger."

Senator John Cornyn, another sponsor, agreed. "For small businesses and families who fought their way through the pandemic and are now facing economic hardship, our complicated bankruptcy process can be another barrier to survival. I'm glad we could come together on this reprieve from burdensome [Bankruptcy Code] requirements . . . .

That's all bullshit. As the law's title says, this legislation does nothing more than make "some technical correction" to the Bankruptcy Code, and the law expires in two years.

If Congress is so interested in the welfare of working Americans, why doesn't it tackle the student-loan crisis--the $1.7 trillion elephant in the room?

Instead of tinkering with the Bankruptcy Code, why not remove the "undue hardship" language that prevents most distressed student borrowers from discharging their loans in bankruptcy?

If that task is too daunting, why not at least allow Parent Plus borrowers to discharge their student loans in the bankruptcy courts? Why not allow people who are overburdened by private student loans to shed that debt through the bankruptcy process?

President Biden hints that he will forgive student-loan debt to the tune of $10,000, an amount so small that the NAACP calls it a "slap in the face." 

Meanwhile, Congress pretends to care about the little guy, but it has done nothing substantive to address the student loan crisis, which grows bigger by the day. It hasn't even banned the Department of Education from garnishing the Social Security checks of elderly student-loan defaulters.

Our political leaders cry crocodile tears over the student debtor's plight, but they won't do anything significant to bring relief because the higher education industry likes the status quo.

Why are Progressives Criticizing Biden's Student-Loan Forgiveness Plan?

 President Biden promised college borrowers $10,000 in student-loan forgiveness when he was on the campaign trail. He has yet to deliver on that promise.

Some progressives urge Biden to forgive more student debt. The NAACP said, "$10,000 is not enough, We're calling on our elected officials to cancel federal student loan debt with no means-testing." Senators Elizabeth Warren and Chuck Schumer want Biden to forgive $50,000  per person in student debt.

Surprisingly, some progressives criticize the very idea of blanket student-loan forgiveness.  The Washington Post, perhaps America's most progressive newspaper, published an editorial saying Biden's plan "is yet another taxpayer-funded subsidy for the middle class." The Brookings Institution, a left-of-center think tank, stated bluntly, "One-off, across-the-board forgiveness is capricious and unfair."

USA Today, another progressive newspaper, expressed concern that Biden's student-loan forgiveness plan is complicated by "soaring inflation." And CNN, which is generally supportive of Biden's policy agenda, recently reported that Biden's student-debt cancelation plan "might not be such a great idea."

Why are influential progressive organizations backing away from President Biden's plan to give $10,000 in debt forgiveness to the vast majority of student borrowers?

I think there are two reasons:

First, $10,000 in student-debt forgiveness is a pittance when the average student borrower leaves college with three times that amount of debt, and several million college graduates have debt exceeding $100,000. 

As NAACP President Derrick Johnson put it, canceling $10,000 in student debt would be "like pouring a bucket of ice water on a forest fire. In other words, it won't do anything, especially for the Black community." Johnson called Biden's plan "a slap in the face."

Secondly, I think there is growing concern that the federal student loan program has run amok and that the Department of Education is concealing the true default rate. The feds have already allowed student borrowers to skip their monthly loan payments for two and a half years at great expense to taxpayers. Granting blanket student-debt forgiveness might plunge the program even further into insolvency.

It is disappointing that congressional critics of Biden's debt forgiveness proposal have offered no alternatives other than even more extravagant debt forgiveness.

In my view, our nation won't begin to get the federal student loan program under control until Congress enacts these three reforms:

• The federal government should bar the venal for-profit college industry from participating in the student-loan program.

• The Parent Plus program, which has brought so much suffering to minority and low-income families, should be abolished.

• Distressed student borrowers should have reasonable access to the bankruptcy courts.

If enacted, these reforms won't solve the student-loan crisis overnight, but they will help keep it from worsening. 

But universities must do their part by lowering the cost of going to college. Unfortunately, the universities are doing the opposite-- raising their tuition rates and forcing students to borrow more and more money to get a college education.