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Beth Akers: Biden’s Costly Student-Loan Pause

While it might seem like inaction relative to the attempted debt cancellation by executive order, it is anything but. Last week, the White House announced that the pause on federal-student-loan repayments, which began at the beginning of the pandemic, will be extended yet again. This move comes as the administration's effort to cancel half a trillion dollars in student debt is mired in legal challenges and stalled in the courts. While a pause on student-loan repayment might sound innocuous, its consequences will be enormous.

The reason for the initial pause on repayment was the economic downturn resulting from the Covid pandemic and the unprecedented levels of economic uncertainty facing the nation. The Trump administration feared that existing safety nets would be insufficient to protect borrowers from economic distress should their earnings take a hit. It was probably an overreaction, but not an especially egregious policy misstep given the circumstances.

In retrospect, however, that move opened the door both legally and practically for the Biden administration to extend the pause, despite the precipitating economic conditions having resolved, at great and unnecessary expense to taxpayers. A recent report by the Committee for Responsible Federal Budget estimates that the pause on student-loan repayment costs taxpayers $5 billion per month. The administration has implied that repayment will resume either after the litigation of its cancellation effort has concluded or, at the latest, by August 2023. If the pause continues through next August, this latest extension will have cost taxpayers an additional $40 billion, bringing the total cost of the three-year pause to $195 billion.

Presently, the Department of Education is essentially offering an interest-free line of credit to every borrower with federal student debt. Since Miguel Cardona, secretary of education, doesn't have a vault of cash (\u00e0 la Scrooge McDuck) to pay for this endeavor, it must be financed as all other federal spending that exceeds tax revenue. In other words, the federal government is borrowing and paying interest on those unpaid debts to relieve the individual debtors.

If student borrowers were largely a disadvantaged group in need of economic support, the resulting redistribution of resources could arguably be rationalized. But that's not the case.

Student borrowers are a diverse group, and many are among the highest earners in our economy. According to a study by the Brookings Institution, The highest-income 40 percent of households owe almost 60 percent of the outstanding education debt and make almost three-quarters of the payments. The lowest-income 40 percent of households hold just under 20 percent of the outstanding debt and make only 10 percent of the payments. This means that many of those interest-free lines of credit are being extended to top earners — think doctors and lawyers.

You might wonder if the loan-repayment pause is necessary to protect truly disadvantaged borrowers from unaffordable payments, with the giveaway to well-off borrowers being an unfortunate side effect. But borrowers in truly challenging economic circumstances have long been eligible for repayment programs that forgive unaffordable debt and lower (or sometimes eliminate) payments. When the pause was initiated in early 2020, one in three borrowers was already enrolled in one of these programs, benefiting from reduced payments or progressing toward loan forgiveness.

The direct costs of the repayment-pause extension are concerning, but so are the unintended consequences. One implication of this de facto giveaway is that a growing number of new borrowers are likely taking on debt with the expectation that it won't need to be repaid, encouraging them to borrow and spend more for college than they would otherwise.

Moreover, the pause is putting many borrowers, even high-earning ones, on a fast track toward having their loans forgiven. The existing safety nets (the repayment programs mentioned previously) require that borrowers make a prescribed number of monthly payments in order to earn forgiveness of their remaining balances. The repayment pause has fast-tracked this process by crediting every borrower on these repayment programs with an on-time monthly payment throughout the duration of the pause. If the pause continues through next summer, some borrowers on these programs will have been relieved from nearly one-third of their payments.

Extending the payment pause is bad policy that will cost taxpayers billions of dollars. It might not sound as dramatic as the cancellation that the White House had promised to deliver, but the consequences for taxpayers and future borrowing habits are enormous. While the continued extension might seem like inaction relative to the attempted executive order demanding widespread cancellation, it is anything but. By refusing to resume the collection of federal student loans, this White House has taken a dramatic and ill-advised fiscal and policy action.

Beth Akers is a resident scholar at the American Enterprise Institute.

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Posted: November 29, 2022 Tuesday 01:54 PM