In March of 2020, the federal government suspended loan repayments, dropped student loan interest rates to 0 percent, and stopped collections on defaulted student loans. These changes were applied only to loans directly owned by the Department of Education, which comprise around 80 percent of all outstanding student loan balances. This student loan freeze costs around $52 billion per year, or around $130 billion for the 30 months that the freeze has been in place.

The student loan freeze is set to expire on August 31, meaning that President Biden will be forced on that date to make some decisions about what to do about student debt collections going forward. There are many options available to him, but the two key questions appear to be:

  1. Should he forgive $10,000 of each person’s student debt?
  2. Should he end the student loan freeze?

$10,000 Forgiveness

The cost and distributive impact of forgiving $10,000 of each person’s student debt are not exactly what they seem to be on first glance. In the last decade or so, the percentage of borrowers enrolled in an income-driven repayment (IDR) plan increased from 10 percent to 32 percent. Individuals enroll in these plans because their debt-to-income ratios are so high that paying a percentage of their income towards their loan is a better deal than the conventional fixed monthly payment. After making income-based payments for a certain period of time, their loans are forgiven.

For some IDR borrowers, shaving $10,000 off of their debt will bring their debt-to-income ratio low enough that they will be able to switch back to conventional repayment and therefore benefit to some extent (even if not by a full $10,000). For other IDR borrowers, their debt-to-income ratio will still be so high that they will remain in an IDR plan and receive no benefit from the $10,000 of forgiveness.

The interaction of $10,000 of loan forgiveness and the IDR system quite radically alters the actual distributive impact of the policy. In the below graph, I plot what percentage of borrowers are enrolled in IDR by loan balance.

As expected, the higher the loan balances, the more likely an individual is enrolled in IDR. What this means is that the actual benefits of $10,000 forgiveness are heavily skewed towards student debtors with lower balances. And insofar as lower balances are generally associated with lower levels of college attainment (drop outs, associate degrees, public bachelor’s degrees) and higher balances are generally associated with higher levels of college attainment (doctors, lawyers, businessmen, and grad school), this means that the benefits of forgiveness are, in a strange way, much more targeted than they may initially seem to be.

Because so many borrowers will remain in IDR even after the forgiveness, the total cost of such a program will actually be quite a bit less than it may seem on first gloss.

Overall, a $10,000 forgiveness would wipe out the student loan balances of around 31 percent of student debtors while halving or more the student debt balances of another 21 percent of student debtors.

What this all tells us about the wisdom of $10,000 forgiveness, I am not entirely sure. Some will see it and lament the fact that such a forgiveness provides no relief to those buckling under the highest debt loads while others will see it and celebrate that it targets the most sympathetic college attenders.

A forgiveness like this necessarily provides no benefit to those who have no student debt, including those who never attended college or those who already paid it off. And a forgiveness like this also does nothing to fix the college finance system going forward, meaning that debts will just reaccumulate when the next wave of people go through college

These latter points are the most tempting to make in the debate, but due to the strange procedural posture that the president is in — he can unilaterally forgive student debt but can’t unilaterally expand the welfare state or make college financing reform — they are also the least relevant to the actual question at hand.

Student Loan Freeze

The question of the student loan freeze has received far less attention in the discourse than the question of the $10,000 forgiveness. This is quite strange considering that the freeze is a form of ongoing forgiveness, costing $52 billion per year.

At this point, it is hard to understand what the COVID-specific case for continuing the student loan freeze is exactly. Economic output and employment now exceed the pre-COVID levels and all of the significant COVID economic restrictions have been lifted. The other COVID relief measures — including the extended unemployment benefits and economic impact payments — have all been wound down.

These days, it seems like the case for continuing the freeze is basically rooted in the view that all student debt should be forgiven and anything that approximates doing that, including a measure that effectively forgives $52 billion per year while eliminating most involuntary debt repayment flows, should be carried on indefinitely until such time as lawmakers work out a comprehensive college financing fix including a more comprehensive forgiveness. It’s sort of like the argument for implementing the indefinite Deferred Action for Child Arrivals (DACA) program until Congress passes comprehensive immigration reform.

What To Do

Personally, I’ve found the question of what to do about these two actions a little difficult to answer. During presidential elections and abstract policy debates, it is a lot easier to toss around different college financing reform ideas because, in such discourses, you are not constrained by what the executive can do unilaterally. Nobody would ever propose these specific actions if they could simply legislate a full solution to the overall college financing question. But in our bizarre political system, we find ourselves faced with a bizarre set of policy options that don’t fit well into any specific vision of how to create a well-designed college financing system.

In this scenario, my mind begins drifting more towards political considerations. Like it or not, 30 months of a student debt freeze has, to some extent, created a new policy baseline. It seems wrong to proceed as if simply reverting back to the pre-COVID system will not be experienced as a significant, negative policy change affecting tens of millions of individuals and their families. And doing this two months before a midterm election seems especially unwise.

During his campaign, Biden explicitly promised to forgive $10,000 of student debt, a promise that he has publicly claimed he will soon follow through on many times this year. Backing off that promise when he has the unilateral ability to enact the policy would be a straightforward betrayal.

Given these considerations, it seems that, as August 31 rolls around, the prudent course of action is probably to enact the $10,000 forgiveness alongside announcing a date for the resumption of student debt repayments. The forgiveness would carry out his campaign promise while also blunting both the practical and political impact of unwinding the repayment freeze.