Forgiving Contractual Obligations (Like Student Loan Debt)

Last week, I innocently asked my contracts students whether they had heard about the Biden administration’s play to forgive up to $20,000 in student loan debt.  My goal was modest.  Law students can get trapped in a bubble and not pay attention to breaking news.  If some of my students were eligible for loan forgiveness, I wanted to make sure that they knew about it and that they took steps to take advantage of this opportunity to escape some indebtedness. 

I was not prepared for the response I got from my afternoon session.  In short, I got roasted by my students who presented myriad arguments against loan forgiveness.  While I know that loan forgiveness is controversial, I expected that my students — the intended beneficiaries of the program — would welcome it.   

The University of Pennsylvania Wharton School’s Budget Model website suggests that the cost of loan forgiveness, under static assumptions, will exceed $600 billion.  As Juliana Kaplan and Ayelet Sheffey report for The Business Insider, that is still less than the annual military budget, which comes in at around $800 billion, but you know you are dealing with a big number when you have to compare it to our military budget.  By way of comparison, estimates of the cost of the 2017 Tax Cut and Jobs Act (TCJA) range from $450 billion to $1 trillion.  Of course, the TCJA was supposed to stimulate the economy to make up for those costs.   President Biden’s plan is not supposed to stimulate the economy; the economy is stimulated enough already.  The Fed is driving up interest rates in an attempt to slow it down.  From my students’ perspective, this is either going to increase their tax burden over time, or it is a misallocation of tax dollars.

Of course, I don’t know what the majority of my students think of loan forgiveness, but several students objected and impressively held their ground.  My students expressed concern, as did some Republican lawmakers, that debt forgiveness would fuel inflation.  That seems unlikely to me, for reasons given in this NPR analysis.  The 40 million people who will have their debt reduced under the plan are still going to be burdened by debt and are unlikely to respond with a shopping spree.  Even the 20 million people who are going to have their remaining debt forgiven entirely will not have any new money deposited in their bank accounts.  They just won’t have to write out a check every month anymore.  The end of that obligation is unlikely to stimulate the economy in ways that will fuel inflation. 

Other objections to the Biden plan seem to me to carry more weight: the benefits should have been targeted more carefully at the lower-income borrowers for whom the burden of debt is most onerous; and the plan does nothing to address the high cost of higher education generally.  It may even create incentives that cut against lowering those costs.  I’m not persuaded that one-time loan forgiveness will have much effect on the overall mix that causes higher education to be so expensive.  In my lifetime, public education was genuinely affordable.  It no longer is, and only real education policy analysts know why.  I am not one.  That said, if the policy is a good one, it seems to me to be no argument against it that it does not address problems it was not designed to address.  I have heard commentators suggest that a better solution would be to allow the forgiveness of student debt in bankruptcy.  Unless I am sadly mistaken about the separation of powers, I do not think it is within the powers of the President to reform the Bankruptcy Code.  The targeting of the benefit at people who might have annual incomes as high as $250,000 raises concerns about political compromises, which brings me to my next point.

UVA Law Prof Richard Re (right) raises a related, interesting point.  He speculates that the Biden administration may be engaged in some cynical gamesmanship.  More Americans support student debt forgiveness than oppose it, although many of those who support it think that the Biden administration’s plan is not ambitious enough . Still, Professor Re argues, the Biden administration may have timed the announcement of debt forgiveness just perfectly.  The announcement will give the Democrats a boost that they need in the midterm elections, but it won’t have the negative budgetary effects that even Democrats don’t want to deal with, because, Professor Re predicts, the Biden administration might be counting on the Supreme Court to strike down the entire thing as beyond the President’s power.

It’s an intriguing theory.  I alternate between the following quick takes (none of which are original):

• This is too clever and risky a strategy for the Biden administration to undertake;
• If this was the Biden administration’s strategy, it is a dumb strategy, because having a major policy initiative struck down as ultra vires and unconstitutional does tremendous harms to claims that Democratic Presidents, unlike Republican Presidents of recent memory, believe in the rule of law;
• Nobody would have standing to bring such a claim, or if the debt servicers do have standing, they won’t bring the claim because they do not want to bite the government hand that feeds them; and 
• Some servicer will be just ideologically-driven enough to bring the claim.

In short, thanks to my students for awakening from my dogmatic slumbers.  I was just thinking that the Biden policy would be good news for my students.  I hadn’t thought about the issue from as my angles as they had.