President Joe Biden’s announcement Wednesday that the federal government would cancel a big chunk of student loan debt represents the biggest break student debtors have had in decades.
Americans can seek a fresh start when they’re overwhelmed by debts by filing for bankruptcy in a federal court. But borrowers can get rid of debts owed to credit card companies, health care providers or hotel bondholders more easily than they can escape their student loans.
“Congress has been tightening the screws on student loan discharge in bankruptcy for decades,” said Robert Lawless, a bankruptcy expert at the University of Illinois College of Law.
Meanwhile, student debt has become a bigger and bigger mess. Some 45 million borrowers together owe $1.6 trillion, a sum that has steadily risen with the cost of higher education. Most of these borrowers weren’t making any progress on their loans before President Donald Trump put a freeze on payments as part of the federal government’s response to the coronavirus pandemic early in 2020.
Only 37% of student borrowers were reducing their balances at the end of the 2019, according to data from the New York Federal Reserve. Nearly half had rising balances, while 15% were behind on payments or in default.
Under the student loan cancellation Biden announced Wednesday, the federal government will cancel as much as $20,000 in debt for current or former student borrowers who also received need-based Pell Grants. As many as 43 million should benefit, and 20 million could see their debts completely erased.
Republicans slammed Biden for the proposal, describing it as a handout to Ivy League liberals and a waste of government money that hurts the economy.
“President Biden’s inflation is crushing working families, and his answer is to give away even more government money to elites with higher salaries,” Senate Minority Leader Mitch McConnell (R-Ky.) said Wednesday. “Democrats are literally using working Americans’ money to try to buy themselves some enthusiasm from their political base.”
Antipathy toward college grads might help explain why federal law makes student debt almost as permanent as child support obligations or civil liability for injuries caused by drunk driving.
Starting in 1978, Congress passed a series of laws making it progressively more difficult for borrowers to discharge student loan debt in bankruptcy. That year, according to the Congressional Research Service, lawmakers said they feared student borrowers filing for bankruptcy right after graduation “and then enjoying a lifetime of income that education provides, but without the expense of paying back the loans.”
Bankruptcy filers could still discharge student loan debt if repayment presented an “undue hardship” and the loan had come due five years prior to the bankruptcy filing, but Congress got rid of that option in 1998, essentially making student loan debt permanent.
Proving undue hardship, meanwhile, is notoriously difficult, with courts requiring debtors to show continuing their payments would wreck their lives and that there’s “a certainty of hopelessness” they’ll ever be able to handle the expense.
“This treatment wasn’t the result of any careful analysis,” said Abby Shafroth, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project. “It was just based on this false idea that student loan borrowers were more likely to abuse the bankruptcy process compared to other people.”
In another notable change, lawmakers made private student loans nondischargeable as part of a 2005 bill that made the bankruptcy process less favorable to regular people in general.
Sen. Elizabeth Warren (D-Mass.) — at the time a Harvard professor and an expert on bankruptcy law — was one of the bill’s most visible opponents, arguing that it would harm people impoverished through no fault of their own by medical expenses. Warren even faced off against then-Sen. Joe Biden (D-Del.) during a Senate hearing, where Biden said it was unfair for credit card companies and other lenders to be unable to recoup the money they’d loaned to people with high medical bills.
For his entire presidency, Biden hesitated to cancel student debt using executive action, having previously said Congress should do it amid doubts over his legal authority to go it alone. Warren has been one of the most vocal proponents of the idea, pushing Biden to cancel $50,000 of debt per student.
Progressive Democrats and activists outside of governments said this week that Biden wouldn’t have taken action if it hadn’t been for all the pressure from the political left.
And Warren said Thursday that the student debt crisis wouldn’t have gotten so bad if it hadn’t been for such strict bankruptcy rules.
“One of the reasons that we have created this horrible situation with debt is that the bankruptcy laws were changed years ago to make it virtually impossible to discharge debts in bankruptcy,” Warren told NPR.
Biden’s move isn’t the federal government’s first effort to help struggling student debtors. Trump paused payments in 2020, and both the Biden and Barack Obama administrations have taken piecemeal steps to ease the student debt burdens on people with low incomes and borrowers who work in public service jobs.
And Lawless said that as overall student debt has continued to balloon, bankruptcy judges have begun to show a bit more willingness to let student loans go unpaid.
“The conversation around student debt has really shifted over the last couple of years,” said Rachel Gittleman, financial services outreach manager for the Consumer Federation of America.
Another part of Biden’s announcement Wednesday will set in motion rule changes for borrowers in income-driven repayment plans, reducing the monthly amount owed and preventing balances from growing.
Republicans criticized Biden for doing nothing directly about the underlying problem of skyrocketing higher education costs, but a lot of advocates said his action could spur Congress to action.
“That’s a conversation that hopefully will start happening, because I think student debt is just an enormous burden on consumers and can have really lasting impacts on consumers’ ability to gain financial security and build wealth,” Gittleman said.