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As Late Summer Deadline Looms, What Would Student Loan Cancellation Look Like?

To cancel or not to cancel — that is the question facing President Joe Biden when it comes to federal student loan debt. 
So far, rather than make any permanent moves, he has opted to extend the pandemic-era moratorium on federal student loan payments and the associated pause on the accumulation of interest. The most recent announcement came in April when Biden announced he would extend the moratorium through August.
In the weeks after the announcement, The Washington Post reported that Biden told members of the Congressional Hispanic Caucus behind closed doors he might be open to taking action to forgive some debt in the near future.
There are a handful of options at Biden's disposal. It is so far unclear which one he will choose.
The surest method for broad student debt cancellation would be for Congress to pass a law. Lawmakers alone have the so-called "power of the purse" and are the only federal officials who can appropriate new money.
Biden could also continue to forgive debt on a smaller scale through changes to the regulations of loans. He has already canceled over $20 billion of federal student debt for certain borrowers without any congressional input. Most recently, he canceled $5.8 billion in debt for 560,000 borrowers who attended the now-defunct Corinthian Colleges chain of private for-profit schools.
Despite the billions in canceled debt, Biden's moves have come through changes to specific programs or targeting specific schools. The amount is also a drop in the bucket of the more than $1.75 trillion in total student debt, over 90 percent of which the federal government holds in its portfolio. 
What he's done so far only affects a fraction of all borrowers. Because of that, much of the discussion since Biden took office has focused on canceling large chunks of debt via executive order. 
The legal grounding for an executive order is still unclear. Supporters of cancellation argue the president's powers under the Higher Education Act of 1965 allow him to forgive student debt without an act of Congress. They say he's already used this authority to pause federal loan payments and the accumulation of interest.
"[T]he President can do it with a flick of the pen," Schumer said earlier this year at a town hall hosted by several groups promoting student debt forgiveness. "All he has to do is sign an executive order. He doesn't need a single senator. He doesn't need a single Congress member on his side. He just has to do it."
Questions remain beyond the legality of canceling debt without Congress. One of the questions almost certain to touch every borrower is deceptively simple: Which loans would get canceled?
President Joe Biden speaks in the South Court Auditorium on the White House complex in Washington, April 28, 2022. Biden needs to make a decision about canceling student debt. For student loan activists, the past week began with hope as Biden gave his clearest indication that he was considering canceling federal debt rather than simply allowing borrowers to defer payments during the pandemic. But that soon gave way to disappointment when Biden signaled days later that any debt relief would be much less than activists wanted. (AP Photo/Susan Walsh, File)President Joe Biden speaks in the South Court Auditorium on the White House complex in Washington, April 28, 2022. Biden needs to make a decision about canceling student debt. For student loan activists, the past week began with hope as Biden gave his clearest indication that he was considering canceling federal debt rather than simply allowing borrowers to defer payments during the pandemic. But that soon gave way to disappointment when Biden signaled days later that any debt relief would be much less than activists wanted. (AP Photo/Susan Walsh, File)

In the Interest of Cancellation

Federal student loans have fixed interest rates. Congress tied the interest rates to the 10-year Treasury yield plus a premium, and they are reset every July. Rates on federal student loans will increase later this summer for loans disbursed from July 2022 to July 2023.
Take a hypothetical undergraduate student who needs loans to pay for a four-year program. If this student takes the maximum $5,500 in direct subsidized loans every year, she will leave school with $22,000, if she takes no other loans. 
Because of the interest rate system for those loans, the $22,000 she owes will not behave like one lump sum. It will appear that way in her payment portal, but it is actually four sums of $5,500, each accumulating interest at a different rate.
That raises serious, practical questions for borrowers wondering whether Biden will cancel some amount of student debt.
Biden told reporters last month that he is not considering canceling $50,000, leaving the door open on the $10,000 he first floated on the campaign trail. According to 2020 data from the Federal Student Aid office, if the federal government canceled Biden's proposed $10,000, 15 million borrowers would have their debt completely eliminated.
That would leave nearly 30 million borrowers with remaining debt. But it remains unclear which of those borrowers' loans would be canceled.
Vice President Kamala Harris, left, next to Education Secretary Miguel Cardona, announces the cancelation of all federal student loans borrowed to attend any Corinthian Colleges, Thursday, June 2, 2022, at the Department of Education in Washington. (AP Photo/Jacquelyn Martin)Vice President Kamala Harris, left, next to Education Secretary Miguel Cardona, announces the cancelation of all federal student loans borrowed to attend any Corinthian Colleges, Thursday, June 2, 2022, at the Department of Education in Washington. (AP Photo/Jacquelyn Martin)

How Much Is Enough?

Mark Kantrowitz, a higher education expert and contributor to Forbes, said the Heroes Act, a COVID relief bill that passed the House in 2020 but died in the Senate, included additional relief for student borrowers. Part of that relief was canceling up to $10,000 in student loan debt, starting with borrowers' highest-interest loans.
Biden has already taken public positions in line with the Heroes Act, most notably landing on the same $10,000 figure as the preferred amount to do away with. Kantrowitz said that could be an important cue as to what Biden's plan for cancellation may entail.
"The Heroes Act aimed the relief at the highest-interest loans first," Kantrowitz said, "so I imagine any new relief would try to do that as well."
This is all assuming Biden goes the route of canceling federal student debt through an executive order, which is not guaranteed. Any executive action would face a legal challenge and would risk any canceled debt being reinstated after a months- or years-long court battle.

What's Already Working — And What's Not

In the absence of clarity on what canceling large swathes of federal student debt might look like, 
advocates have suggested automating as much of the process as possible. 
"You have to make things simple, easy to use," said Persis Yu, policy director at the Student Borrower Protection Center. "If you require paperwork, you require them to interact with their servicer. The folks who are most vulnerable are just going to slip through the cracks."
One example is the four income-driven repayment plans the government offers. Each plan requires borrowers to recertify their income and family size every year to determine their monthly payments. The process requires a yearly engagement with the student loan servicer and puts the onus of recertification on the borrower. 
Advocates say those exchanges are a prime target for introducing automation or finding other ways to make the process more efficient. They say the government has all the information necessary to automate the recertification process because borrowers file their taxes every year, which includes their information on income and family size.
"The government has [the information] in one department and needs to get it to the other one. Do we need the borrower to be the middleman between these two pieces of information?" Yu said.
The answer, for now, is yes. Kantrowitz said that government agencies dealing with sensitive income information are often reluctant to liberally share information with other parts of the government. The IRS specifically requires permission from individual taxpayers to share their information.
The solutions in this space are elusive, but Yu said one thing is consistent: The system is broken and needs some sort of major overhaul.
"The work that I've done with borrowers over the years has really solidified the fact that the programs we have are not working," she said. "I think the experiment with student debt has failed, and we need to move away from debt-financed education."
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