As Michael, Jim, and Charlie have detailed, it would be a moral and political catastrophe and an act of gross, goonish unfairness and class warfare — and inflationary, to boot — for Joe Biden to unilaterally forgive federal student-loan debts by executive order. Doing so would not, of course, eliminate the debts; it would shift the cost of repaying them to the public at large, including many people who either didn’t go to college, scrimped and saved to avoid taking on debt, paid off their own loans, or borrowed from private lenders not covered by the debt-forgiveness (potentially including people who refinanced federal loans with private lenders while interest rates were low). There are likely to be legal challenges as well to him doing this by presidential fiat. As even Nancy Pelosi said in July, “People think that the President of the United States has the power for debt forgiveness. He does not. He can postpone, he can delay, but he does not have that power” absent “an act of Congress.” Then again, those of us who lived through DACA, DAPA, and the CDC eviction moratorium know that a Democratic White House will still try things that even it admits it has no legal power to do.
But what if the courts uphold Biden’s actions — what then? The next step will be wrangling over whether the forgiven debts are taxable. Normally, if someone forgives a loan, the forgiven debt is treated by the IRS and state tax authorities as taxable income. The rule exists in part to prevent tax evasion by people who are given “loans” that are really just disguised compensation, then not asked to pay them back. For many federal student-loan borrowers, this would be a crushing tax burden that could even exceed the amount they would normally repay in a single year. This being the tax code, there are exceptions upon exceptions. Even if Biden has and uses the authority to get the IRS to treat the loan forgiveness as non-income, he would not be able to compel state tax authorities to do the same thing.
But let us assume that Republicans, representing voters furious at this move, would not want to retaliate with punitive sanctions against the borrowers, which could be politically ugly. There is another, legal way for them to shift the cost of loan forgiveness off the backs of ordinary taxpayers and onto actors more responsible for the existence of those debts: a special assessment on colleges and universities proportional to the forgiven debts that were accumulated by each institution’s students. Would that be constitutional? There are limits under the Takings Clause and Due Process Clause to retroactive assessments, but the Supreme Court has repeatedly upheld assessments that aimed narrowly at shifting costs to private actors for the particular conditions each employer created. In Usery v. Turner Elkhorn Mining Co. (1976), for example, the Court rebuffed a challenge to the Black Lung Benefits Act of 1972. The act provided federal benefits to dead or disabled coal miners or their surviving families from black-lung disease, and compelled each mining company to pay the benefits for its former employees. The Court concluded that “the imposition of liability for the effects of disabilities bred in the past is justified as a rational measure to spread the costs of the employees’ disabilities to those who have profited from the fruits of their labor” and “to allocate to the mine operator an actual, measurable cost of his business.” The Court rejected the mine owners’ complaints that this would provide an unfair competitive advantage to new entrants in the industry without retroactive obligations. Similar approaches have been taken in challenges to federal pension plan and Superfund cleanup rules. While the Court has since noted the limits of that principle to “disproportionate” retroactive liabilities, in Eastern Enterprises v. Apfel (1998), there is a strong argument that colleges who set the tuition, collected the tuition, and arranged the loans can properly be charged with responsibility for their repayment.
Moreover, such an assessment could potentially be structured through the tax code in order to pass the Senate through the reconciliation process. Of course, Biden might veto such a provision, but that may depend upon whether Republicans manage to attach it to something he wants. Even if vetoed, it sets up a political battle on favorable terms, and could be passed again once a Republican is in the White House. Even many young voters who hate student-loan debt are as likely as not to blame their colleges.
The colleges, with their bloated administrative staffs and outlandish tuitions, are a ripe target. Republicans should not lash out at them indiscriminately, but forcing them to pay back the ordinary taxpayer for repaying debts that were taken out to fill the colleges’ coffers would be fair and just, and it might send a message against repeating this sort of thing in the future.