Are borrowers worse off than before the pandemic? New analysis says no.
There's little evidence that student-loan borrowers are worse off now than they were before the pandemic.
P rogressives were calling for mass student-debt cancellation before the pandemic, arguing the debt is simply too great a burden. President Biden, in contrast, is citing the pandemic to justify the debt-cancellation order he issued in August. But a new analysis by the Department of Education refutes his justification, and a new lawsuit by the Cato Institute seeks to reverse Biden’s unwise and unconstitutional cancellation plan.
Biden announced he will cancel $10,000 of federal student debt for anyone making below $125,000 individually, or $250,000 for married couples — essentially anyone outside the top-earning 5 percent. And if borrowers received a Pell Grant — aid aimed at lower-income students that was never supposed to be repaid — they are eligible for $20,000 in cancellation.
The administration’s legal justification for turning loans into grants rests on the Higher Education Relief Opportunities for Students (HEROES) Act of 2003, a statute originally intended to protect Americans called into military service against adverse effects on repaying student loans. The law also includes anyone in areas affected by a “national emergency,” which, under Covid, was the entire country.
Under the HEROES Act, the secretary of education may act so that borrowers, as a result of the emergency, “are not placed in a worse position financially in relation to that financial assistance.”
So are borrowers worse off than before the pandemic?
The Federal Reserve Bank of Philadelphia has data on that, which Department of Education officials cited in a filing in one of several lawsuits challenging Biden’s order. The data reveal that the large majority of student debtors do not think they are worse off.
When borrowers ages 25 and over with incomes below $20,000 were asked how they feel about their income security pre- and post-pandemic, only 41 percent reported feeling less secure today than pre-pandemic. Only about 24 percent near the middle of the income distribution — $75,000 to $90,000 — felt that way, with 46 percent feeling more secure.
Perhaps the most direct reason borrowers are typically at least as well off financially today as before the pandemic was that the HEROES Act had already been in use. In March 2020, it was used to freeze student-loan repayments, a suspension that is not due to cease until the end of this year.
The freeze was implemented so that, while the economy went into lockdown, borrowers would not still face loan payments. The lockdowns inflicted a major hit, but the economy completely rebounded within nine months. The freeze, however, was extended numerous times, and not only did it stop payments, it also counted toward existing forgiveness plans.
That can have a big impact. Under Public Service Loan Forgiveness, a borrower is supposed to make ten years of on-time monthly repayments while in a qualified job, and whatever is left after that becomes the taxpayer’s problem. The freeze essentially reduced that to a bit more than seven years, or an almost 30 percent discount. Other plans are longer — 20 to 25 years — but that’s still about a 15 or 12 percent discount.
Going deeper than repayment programs, college and grad-school graduates tend to do very well financially. Average bachelor’s-degree holders are estimated to make $1.2 million more over their lifetimes than people with just a high-school diploma, and the average professional-school graduate, such as in law or medicine, will make about $3.1 million more.
College grads also have greater employment security than non-grads and were well positioned to weather pandemic lockdowns. As lockdowns reigned in April 2020, the unemployment rate hit 21.1 percent for workers with less than a high-school diploma and 17.6 percent for Americans topping out at high-school graduation, but only 8.4 percent for college graduates.
Finally, we need to understand the sheer cost of cancellation. Exactly how expensive it will be is uncertain — it depends on how many people apply, how many would have used other forgiveness programs, and more — but estimates range from the administration’s figure of about $380 billion, to the Congressional Budget Office’s estimate of $430 billion, to the Penn Wharton estimate of up to $520 billion.
To put those numbers in perspective, they are roughly equivalent to the gross domestic products of Iraq, Hong Kong, and Sweden, respectively.
Given the huge financial benefits of higher education, there is no good policy justification for mass student-debt cancellation. And as the Cato Institute has filed suit against the Department of Education to prove, there’s no good legal one, either.