Student Loans and the Supreme Court

Since I’m a recovering political scientist and longtime college administrator, the fate of President Biden’s student loan forgiveness program at the hands of the Supreme Court is very much on my radar. Without having either a crystal ball or a mole on the court, I’ll offer a few thoughts.

The usual burden to bring a case to the court is “standing.” That means being able to show that you were actually harmed in some way, and that the harm can be fixed via a court decision. For example, if you owned a home near the site where a train derailed, setting off an airborne toxic event of catastrophic proportions, you’d probably have standing to sue the railroad. You were harmed, and financial awards could help you pay off the mortgage on a house that has become uninhabitable and possibly help you find a new one.

In the case of loan forgiveness, one would think that standing would be a tough nut to crack. Simply being an offended taxpayer isn’t enough. A standard of actual harm exists to prevent political disagreements from gumming up the judicial system and/or to prevent the judicial system from becoming an unelected super-legislature. If my neighbor’s loan is forgiven and mine isn’t, I might be annoyed, but I’m not any worse off financially than if nobody’s was forgiven.

However, this court has shown a willingness to invent doctrine (“major questions”) when necessary to get the result it wants. A court that played by the long-standing rules of the game would dismiss the case, but this court applies those rules selectively. So it may grant someone enough standing to move to the merits.

The merits are tricky. The Biden administration used the HEROES Act, which allows the Department of Education to waive repayment for people impacted by a national emergency. The previous administration declared COVID a national emergency, and the current administration has maintained that status. On the letter of the law, again, the challenge should be dismissed.

But it isn’t quite that simple, and not only for partisan reasons. Most people, upon hearing a description of the HEROES Act, probably imagine something like an earthquake, a tornado or an airborne toxic event. Those are usually brief, and they typically affect a relatively small number of people. Common sense suggests that extending some grace to folks whose homes got flooded out in a hurricane is a good idea; under those circumstances, student loan payments shouldn’t be anybody’s top priority. Most people probably wouldn’t picture a population-level event that lasts for years. The administration is right on the letter of the law, but the spirit isn’t as clear. It feels like a stretch. Whether that matters is another question.

As policy, I give it a shaky thumbs-up. We know that the borrowers most likely to default are the ones with the lowest balances; they’re often the ones who only attended for a semester or two before dropping out. Financially, they may be worse off than if they had never attended at all. Forgiving those low balances promises to make those folks’ lives better in a concrete way. For the mostly apocryphal comparative lit grads with six-figure balances, the forgiveness would make only a small dent in what they owe. (It’s capped at $10,000 for students who weren’t Pell eligible.) Allowing lower-income people to put bad debt behind them and get on with their lives is likely to result in positive outcomes all around. Besides, thanks to decades of disinvestment, college costs have gone up much more in real terms than incomes have, so recent students have a reasonable claim to having been gouged.

Still, the forgiveness program has a few major flaws that an easily available alternative doesn’t.

The first flaw is that it offends many people’s moral sensibilities. This is often what’s behind questions like why a student loan is forgiven when other loans are not. (Many business loans were forgiven during COVID, and for much higher amounts, but they tend to get a free pass culturally.) Adults pay their debts, this argument goes, so wiping out those debts creates a moral hazard.

As an argument, it doesn’t really work. “Moral hazard” refers to rewarding bad behavior. Being alive when a pandemic strikes is not bad behavior. It also ignores that most other debts can be discharged through bankruptcy, but student loans can’t. If we want to treat the different kinds of debt equally, then we need to make student loans dischargeable through bankruptcy. Until then, the argument doesn’t hold. But many people’s uneasiness remains.

The second is the “now what?” problem. Bailing out students who’ve taken out loans in the past does nothing to help next year’s students. A few years from now, student debt would be right back where it started.

To my mind, the answer to the “now what?” problem is both straightforward and so clearly within the administration’s power as to be immune to even the silliest of judicial challenges. Allow students to refinance existing loans at zero percent, and charge zero percent on all student loans going forward. As I’ve mentioned before, Representative Joe Courtney (D-Conn.) has sponsored a bill to allow this to happen. The Department of Education is empowered to set interest rates on loans and has changed them serially over decades; there’s no question about its ability to do that.

At zero percent, every penny a borrower repays goes to reducing principal. That will help the ones stuck on the negative-amortization treadmill to make real headway. Converting income-based repayment plans would require some math, but it could be done. And every student who gets, or needs, a loan would be eligible for the same break.

Ideally, of course, we’d have both. But if the court decides that textualism only counts when it benefits its preferred party, this would be an excellent alternative that would benefit millions of students and take the court out of the picture. Had the administration opted for this approach last year, students would already be benefiting. It can still be done.