With each extension of the federal student loan payment and interest freeze, the President has gradually backed himself into a corner.
At this point, some limited federal loan forgiveness may be the most logical path forward for the Biden Administration. In fact, canceling some loans may be less expensive than continuing the interest freeze.
A quick look at the options available for President Biden shows that some forgiveness could be the answer for both borrowers and taxpayers.
Ending the Interest Freeze on May 1st, 2022
As things stand right now, the payment and interest freeze officially ends on May 1st.
Presidents Trump and Biden pointed to the Covid-19 epidemic to justify the creation and subsequent extensions of the federal relief. At some point, the Coronavirus numbers will hopefully drop. By May 1st, President Biden could have a hard time using Covid-19 as the reason for continued student loan relief.
Practically speaking, Biden’s big problem is political. A recent poll of over 5,000 student loan borrowers showed that only 29% expected payments to restart on May 1st. The majority expect another extension or some form of forgiveness or cancellation.
If payments resume, voters may blame Biden and the Democrats.
With midterm elections coming up in November and Democrats holding razor-thin majorities in the House and Senate, upsetting the 41 million federal borrowers currently enjoying 0% interest would be a huge mistake.
Democrats vs. Republicans: Democrats could draft legislation to cancel some loans. This move would force Republicans to either pass the bill or vote against helping borrowers.
However, this move wouldn’t solve the Democrats’ political problem. Borrowers know the President can extend 0% interest without Congress acting. If it doesn’t happen, voters will blame Biden.
Making 0% Interest Permanent
The interest and payment freeze has provided tremendous relief to borrowers.
At a certain point, the President and Congress may have to admit that 0% interest is objectively better for the country and make it permanent.
I’m a huge fan of this solution, not just as a borrower but as a taxpayer. Setting student loan interest rates at 0% is an excellent investment for the government.
If Biden announced that payments would officially resume on May 1st but that the government would no longer charge interest, he could restart payments without upsetting millions of borrowers.
Loan Cancellation or Forgiveness: The Cheapest Way to End the Freeze
If Biden and the Democrats are unwilling to accept the political fallout from resuming payments, limited loan cancellation might be the least expensive option available.
The Department of Education estimates that the payment and interest freeze costs about $5 Billion per month.
Canceling all debt is obviously even more expensive. However, canceling some debt for some borrowers might be cheaper than another extension.
Biden could cancel $10,000 for the borrowers who need it the most. If forgiveness was available to lower-income borrowers who struggled with defaults or delinquencies, it could make a huge difference.
Politically, Biden could argue that he wants to forgive $10,000 for all student loan borrowers. However, under the current law, he can’t do it for everyone. Thus, he has chosen to cancel the loans of distressed borrowers and called on Congress to help the rest. At that point, Democrats can say they did what they could, and Republicans got in the way.
Forgiving $10,000 of student debt for 1.5 million borrowers would cost the same as another 3-month extension of the federal interest freeze. Biden and the Democrats should seriously consider this route.
More 3-Month Extensions for Borrowers
Politicians are not known for their forward-thinking approach to problem-solving.
This could be a situation where the President continues to offer extensions to the interest freeze in 3-month increments until something happens to force a different action.
Between unprepared servicers, new Covid variants, and changing economic conditions, Biden may find the justification he needs to stretch the relief until it becomes someone else’s problem.