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Biden student debt plan fuels broader debate over forgiving borrowers

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When he heard that President Biden was canceling billions in student debt, attorney Eric Steiner immediately thought of the father of five he is defending in bankruptcy court. This client lost his job during the coronavirus pandemic and has been crushed financially by a mortgage he is unable to pay, but he has no student debt and won’t benefit from the new policy.

“When I saw the news, I felt the inequity for my clients who did not have student loans and could really use those funds,” said Steiner, 39, who often represents low-income people in bankruptcy proceedings in the Baltimore area. “I think it’s a good move, mostly — but it’s a little unfair for people who are still struggling and don’t have student loans.”

The administration’s decision to wipe out up to $20,000 in student debt for most borrowers — unveiled by the White House last week — will offer relief to tens of millions of people, but it excludes millions of others. And it’s fueling a much broader debate over debt forgiveness.

The issue raises questions that are personally and emotionally charged, hitting fundamental issues about the structure of the economy: Who deserves to have their debts forgiven? Does canceling debt reward irresponsible behavior? How come a graduate student with good job prospects qualifies for relief, while a senior citizen with medical debt does not? And how can some people who benefited from some debt cancellation — through business loans, for instance — oppose it for others?

How President Biden decided to go big on student loan forgiveness

“Always at the center of these debates is the presumed worthiness of the person whose debt is being forgiven: Is it the debtors’ own fault that they can’t get out from under their debts?” said Marshall Steinbaum, an economist at the University of Utah. “When people say there’s no precedent for canceling student loans, what they’re saying is, ‘I think these people are in this predicament at their own fault, versus those whose misfortune is deemed not of their own making.’ “

Traditionally, debtors can discharge loans they won’t be able to pay back through bankruptcy proceedings, which aim to renegotiate their obligations to be more manageable. At least in theory, the laws try to strike a delicate balance between borrowers and lenders — giving creditors enough assurances to lend the money the economy needs to grow, while still giving debtors the opportunity to escape from punitive debt loads or simply bad luck.

But these systems can fail, or prove out of step with the difficult realities of daily life, putting pressure on the government to intervene. The federal government often waives debt repayments, for instance, for people living in areas hit by natural disasters. Congress suspended student debt payments nationwide at the outset of the coronavirus pandemic. When the housing market collapsed as the Great Recession began, the Obama administration implemented a program to help struggling homeowners renegotiate their subprime mortgages, although the plan ended up helping few Americans.

Debt forgiveness is not only for individual borrowers. New York City received federal loans during its financial crisis in the 1970s that were later repaid. Many years after becoming insolvent, Puerto Rico earlier this year saw much of its debt discharged as part of a ruling by a federal court.

Many advocates say bankruptcy law makes it much less painful for corporations and the wealthy to get out of bad debt than the poor, especially after a 2005 law — designed in part by Biden when he was in the Senate — made it harder for people to discharge student debt and credit card debt. Besides having the means to hire accountants and lawyers that most people cannot, the wealthy can also secure more generous debt relief through the Chapter 11 bankruptcy process — a maneuver used by former president Donald Trump, for instance — which is unavailable to most debtors.

The White House has cast its decision to cancel student debt as similar to the relief offered to firms in crisis, with administration officials highlighting forgiven Paycheck Protection Program loans that went to some GOP critics of the student debt policy.

Analysis: White House gets feisty on Twitter, noting GOP critics’ forgiven PPP loans

Steve Rosenthal, a senior fellow at the Tax Policy Center, a nonpartisan think tank, pointed out that Congress also later approved, retroactively, more than $200 billion of relief to make expenses under the loan program automatically tax-deductible — an even less-defensible Bailout for businesses, he said.

“The short answer to the question of debt forgiveness is that it all comes down to politics: which groups are favored by elite lawmakers, and which groups are less favored,” said Bob Hockett, a public policy expert at Cornell University, who supports Biden’s policy. “Student debt forgiveness is a relatively rare instance where we are getting debt forgiveness for average people.”

Preeti Paliwal, 32, a physical therapist raised by a housekeeper in the Bronx, said Biden’s action will reduce her student loan debt from $194,000 to $174,000. She said she only makes $80,000 per year and argued that debt forgiveness is necessary as compensation for the misleading trap of higher education pushed on vulnerable young students. “If you live in a country that says you can pull yourself up by your bootstraps and then punishes you for doing that, it’s messed up. It’s cruel,” she said.

Critics see ample reason to avoid this kind of policymaking. Economists use the term “moral hazard” to describe circumstances in which someone has an incentive to take on debt without worrying about having to pay it back. In this case, many economists warn that the Biden administration has created a moral hazard: Students may take on additional debt and expect future Democratic presidents to forgive it. Critics have also pointed out that while Biden limited the plan to those earning under $125,000 per year, many of these borrowers will later earn more because they have college or graduate degrees.

“You create significant uncertainty, and you create the risk borrowers will drive up more next time around, increasing tuition and therefore the student debt burden overall,” said Tyler Cowen, an economist at George Mason University.

Many economists warn of unforeseen consequences from the policy, even if they are sympathetic towards canceling student debt. The International Monetary Fund and the World Bank, for instance, frequently lend to poor countries that then default on the loans. That drives up interest rates for these countries to borrow, potentially leaving them worse off than they would have been without the loan in the first place.

Who qualifies for Biden’s plan to cancel $10,000 in student debt?

A similar dynamic may be afflicting US higher education, said Noah Smith, an economist who formerly taught at Stony Brook University. The nation provides hundreds of billions of dollars in subsidies for colleges and universities, with no requirements that schools expand enrollment or lower tuition costs. Colleges can increase costs for students and pocket the subsidy. While the debt forgiveness is an enormous benefit to many, the move runs the risk of allowing colleges to raise prices even more.

“Addressing college costs with repeated debt cancellation might be fair, in a way, since we already do something like this for rich people, so why not do it for lower- and middle-class people, too? Yes, that’s good,” Smith said. “But the problem is: Where does this end? Isn’t this going to just drive up tuition, while making everyone take out a whole bunch more debt in the hope that another president will cancel it?”

Similarly unsettled is why students deserve debt relief but other deserving groups aren’t given it. Economists have hotly debated the extent to which the benefits of Biden’s student debt relief plan benefits more affluent Americans. But other forms of debt also afflict the poor.

For example, Americans hold about $110 billion just in medical debt that has gone to collection agencies, a staggering sum compared with other developed nations, said David Himmelstein, a professor of public health at the City University of New York. As much as 35 percent of bankruptcies are due to medical debt, although estimates vary widely, and when lost time at work due to illness is considered, that figure rises to 60 percent, according to Himmelstein. One in 20 Americans owes $10,000 or more in medical debt.

“It’s bad enough being sick without getting your finances destroyed at the same time,” he said.

The strong economy over the past year has alleviated financial pressures for people with lower incomes, leading to a nearly 30 percent drop in annual bankruptcy filings, according to the Administrative Office of the US Courts. But as the economy cools, and the federal stimulus during the pandemic fades, those numbers are likely to tick back up.

For Sparky Abraham, a California attorney assisting about 15 people with major debt who could consider bankruptcy, that process is “traumatic and humiliating,” and policymakers have an obligation to try to help.

“All debt and all debt collection is mediated by the state — there’s no such thing as a purely private debt, because the state is the one that enforces it,” said Abraham, who also works as a debt-forgiveness advocate for Jubilee Legal and the Debt Collective. “All debt is a political question, and there are always political avenues to changing how it works.”

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