The Daily - A New Plan for Student Loans

Episode Date: August 26, 2022

President Biden’s announcement this week that he would cancel chunks of student loan debt stands to have a major impact for many of the 45 million Americans who owe $1.6 trillion for having gone to college.Who will benefit from the plan, what will the cost be to the taxpayer and the economy, and, ultimately, could the White House have done more?Guest: Stacy Cowley, a finance reporter for The New York Times.Background reading: The plan for student loan forgiveness comes after months of deliberations in the White House over fairness and concerns that it could exacerbate inflation before the midterm elections.The move has kicked off heated fiscal debate and raised the possibility of opening a deep political rift.Here’s what you need to know about Mr. Biden’s proposal.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday. 

From The New York Times, I'm Natalie Ketro-Eff. This is The Daily. This week, President Biden announced a plan to cancel significant amounts of student loan debt for tens of millions of Americans. millions of Americans. Today, my colleague Stacey Cowley on what exactly the plan does, the intense debate it has generated, and how it could transform the way Americans pay for higher education. It's Friday, August 26th. Stacey, welcome back. Hi, Natalie. Great to be here. So this is a real full circle kind of moment because the last time you were on the show in April, you described President Biden's dilemma when it came to student loans. Biden, like Trump before him, allowed tens of

millions of borrowers to stop making payments on their student loans in this policy that began during the pandemic. And you told us that there were some big questions that raised, like, would he just keep pausing those repayments indefinitely? Would he take some more dramatic action, like canceling student debt altogether? And now we have our answers. Yeah, this is a completely enormous change to the system. So we have around 45 million people in this country with student loan debt totaling $1.6 trillion. That's more money than people owe on their auto loans, on their credit cards, on any other kind of consumer debt outside of mortgage. Right. And as you told us, and as we

know, this debt is really specific. These loans are really saddling 20-somethings with a debt that follows them and shapes their decision-making for years. Right. When you think about it, people can take undergraduate federal loans for up to almost $60,000. So you have people walking out of college, young adults who owe what you would typically think of as something more like the down payment for a house or a car. So for many people, this is one of the very biggest monthly bills they face in their life. And what this action did is it's going to lead to some level of debt forgiveness for probably around 40 million people, it looks like. And it's going to entirely wipe out the balances of around 20 million people. That's enormous. So in one swoop,

nearly half the people in the system are going to be taken out of it entirely. There's never been anything like this that happened before with the student loan system. Okay, so let's get into this new debt relief plan. What's in it? So there's three fundamental provisions of this plan. The first and the sexiest that everyone's very excited about is this idea of forgiving a whole chunk of debt and just wiping it out and getting rid of it. The second is saying that we're finally going to end this payment pause that's been going on for the last two and a half years. The third piece, and this was the piece that was kind of surprising

that we didn't know was going to be in this, is this idea of an entirely new payment plan for people going forward that's aimed at making paying undergraduate loans in particular more affordable. Got it. So walk us through those three components one by one, if you can, starting with debt forgiveness. So the top line numbers here are that this plan will forgive up to $10,000 in debt for any borrower who earns less than $125,000 a year or has a household that earns less than $250,000 a year. Those aren't necessarily small income figures. Do we know why Biden picked those cutoffs? They're not. They're definitely not small. And the intent here was really to capture,

it looks like, the broadest possible swath of the middle class. That's really what they're aiming at. Biden has been pretty clearly reluctant in his remarks on this to let this relief go to high earners. I think there's a real leeriness around this idea of we're going to take taxpayer funds to bail out

lawyers and engineers and doctors and high earners. But there's also a recognition that these are fairly enormous monthly bills and that even a fairly well-off household can really struggle with them. So the $125,000 number for an individual, $250,000 for a household, appears to have been picked to hit a really broad section of borrowers. Most people are going to qualify for this while axing out the people who are truly in the highest income brackets in the country. The other piece of this, which is particularly interesting, is that Pell Grant recipients will be eligible for twice as much debt forgiveness.

So if you were a Pell Grant recipient, you're going to be eligible to have up to $20,000 of debt wiped away here. And can you just remind us what a Pell Grant is? Sure. Those are grants that are aimed at students from the lowest income households. The vast majority of Pell Grant recipients come from households that have less than $30,000 in income. They're also, by the way, a pretty significant chunk of the borrower population. So about 60% of student loan borrowers are Pell Grant recipients. And the education department is estimating that this $20,000 in debt forgiveness will reach about 27 million borrowers. Wow. So it sounds like the biggest relief here is going to those who have the least money and are the most in need.

That seems to go back to what you said about finding a middle ground, that Biden has been trying to wipe out a lot of debt for those who are most hurting with their student loans while avoiding giving a handout to the wealthiest Americans. Yes. And this also goes to an issue that's been really part of the equation here around racial and economic justice. Pell Grant recipients are disproportionately Black borrowers, people from communities of color, first-generation college students. And it's clear that it was pretty important to Biden to try to make this part of his racial equity agenda, to try to aim this at communities of color that have traditionally been stuck with far higher student loan debt burdens

than white students. Got it. So let's move on to that second part of the plan around restarting payments. What do we need to know there? Starting January 1st, these bills are going to be due again. Over the last two and a half years, people have gotten pretty used to not having to pay them. Remember, this started back in March 2020 as a pandemic relief measure. It was intended to take this monthly bill off of people's plates while we dealt with this economic crisis. And it's been extended over and over and over since then. And there's been this haze of uncertainty around when they were really going to pull the trigger and actually restart payments.

And that's the message we're getting here this week is January 1st is the real date. These bills are coming for you again. Explain to me why finally having this date is so important. This is pretty critical for both borrowers and for the back end of the system. Borrowers have been getting these extensions and people have gotten comfortable with this idea that, oh, they keep delaying this date. I don't really need to pay this bill. This is intended to send the message that, no, really start adjusting your monthly budget. You're going to have to pay this bill again come January. It's also important for giving the government itself and the loan servicers it hires on its behalf to collect these bills time to ramp up.

This is going to be a huge logistical undertaking to restart the student loan collection machinery. loan collection machinery. Millions and millions of people are going to be calling their loan servicers and trying to get guidance on what their payment is, what they need to know about it, all of these things. That means that those loan servicers have to hire a lot of people, have to put a lot of systems in place. So there's a lot of legwork that has to happen, and this is intended to give everyone involved some finality around what the real deadline here is. Okay, so Stacey, talk me through the third part of this plan, the changes to how student loans will actually be repaid. What's Biden proposing there? This was the most surprising piece of it, because I don't think this was widely expected

to come down the pike. And it is a pretty major change that we're going to see playing out over the coming years. Under the current payment system, there is a whole hodgepodge of different ways you can pay your loan. You can pay it on a 10-year plan. You can pay it on a 20-year plan. You can also pay it on a plan that's called an income-driven plan, where what you pay each month is tied directly to what you're earning. What Biden is proposing is an entirely new income-driven plan that would have a few really beneficial features, including it would cap your monthly payment for an undergraduate loan at 5% of your discretionary income. That's about half of what you would currently pay under the most generous income

driven plan. Right now, under those plans, you're expected to pay up to 10 percent. So just to make sure I've got this, Biden is trying to incentivize people to pay their loans by cutting in half the amount that they're actually paying. Right. And there's another major change he's proposing here, which has to do with interest. What he's proposing is that if you are making your monthly payment, the government will fully pay the interest on your loan so that your balance won't keep increasing. This is intended to address one of the biggest problems with the existing income-driven payment plans, where people make their monthly payment and still see their balance going up and up and up. So this is basically the

government saying, don't worry, as long as you make your payments, we'll make sure the interest on your loan isn't actually causing your debt to grow larger. Yes. There's also one other aspect of this that's kind of important to flag. Under the existing plans, whatever balance you have left after 20 years gets eliminated. Under this plan, for people who originally borrowed $12,000 or less and make their payments for 10 years, their balances would be eliminated at that point after 10 years instead of having to wait 20 years. And that's, again, really intended to help people who have small balances, often the lowest income borrowers, get out of this debt sooner. So Stacey, when taken all together, these changes to the income-driven payment plan

seem like Biden's best attempt, right, at fixing problems, not just for current debt holders, but also for future borrowers. Absolutely. This is the best effort he can do with the tools he's got at his disposal to reduce the likelihood that this problem reoccurs. Because the last thing we want to see happen is we do this enormous debt forgiveness, and then a whole bunch of new students go off to school in September, and the clock just starts over again on this entire problem recurring. And so this is something of an attempt to try to reduce that. Am I right that when you put it all together with the other components here, the forgiveness, a restarting of loan payments, overall, this plan is a big win for a lot of borrowers. For millions of individual people, this is going to be life changing. There was so much jubilation and celebration yesterday.

My phone was blowing up with texts. I shed a tear when I saw this earlier. This is like iconic and truly historic. I spoke to one borrower who, when she heard the news, said she literally started screaming. She was standing in her dorm room crying and shaking. She was so excited about what this was going to mean for her future. It's a start, so anything helps. I think that was the reaction a lot of people had.

For me, it's not just like a financial lift. It's even like a mental lift. Definitely feels good to hear. Makes me happy. I'll certainly take what I can get. Say what you want about Biden, but he did it. This has been talked about for so long that actually seeing it become real was really a shattering and happy moment for a lot of people. But there's also a flip side to this. Not everyone is thrilled about these changes.

We'll be right back. We'll be right back. Stacey, you said not everyone is happy about this plan. Explain that. Well, as with any big sweeping plan, there's some criticism coming in from various wings. It's hard to imagine a worse policy, a policy that solves few of our problems and harms much more people.

Certainly the Republicans are generally pretty unhappy about this. I worked two jobs through college to be able to pay my tuition as I went along. So it's not about me, but just in general, people are very outraged, I think is the best word. Taxpayers that pay their bills and maybe even never went to college are just hardworking people. They shouldn't have to pay off the great big student loan debt for some college student. What a lot of this boils down to is concerns over the cost of this. The people that should pay for it are not the American taxpayers. It should be the university should be responsible.

Because this is going to be a very expensive plan. How expensive? The White House hasn't released numbers yet, but the Committee for a Responsible Federal Budget put out an estimate on Thursday, and they believe this is going to cost around $500 billion. So a lot of money. Do we know how the administration plans to pay for this? So in this case, because this is debt held on the education department's books, they're able to basically just wipe this out and eliminate it. But obviously, that means there's billions and billions of dollars that the government's not going to be bringing in.

There's typically three things they can do to offset that loss. You raise taxes, you borrow more money, or you cut your spending somewhere else. So ultimately, one way or the other, taxpayers are going to bear the brunt of this. There's also an interesting element here of this debt forgiveness, the billions of dollars we're writing off here. A good chunk of those borrowers were never going to pay that money back, actually. Before the pandemic, one in five student loan borrowers who had a payment due was in default. So it's unclear exactly how much the government would have gotten back from those borrowers anyway. Exactly. Those borrowers were already

not repaying those loans, were probably never going to repay those loans. So it's another thing that makes figuring out the actual true cost of this fairly tricky. And there's another issue at play here, which is inflation and the possibility that this could make that worse. Right. I remember when you were on the show back in the spring, you said inflation was one of the biggest concerns around canceling student loan debt. But remind me why. around canceling student loan debt. But remind me why. The concern is that if you're not paying your student loan debt,

that gives you more money in your pocket to go spend on other things. And the whole issue we've been having with inflation is too much money chasing too few goods. So the concern here is that by effectively putting more money in people's pockets, this can exacerbate that problem. The argument the White House has made

is that, look, for the last two and a half years, people haven't been paying these bills. This is already the reality we're living in. So their belief is that by restarting the payments at the same time as they're doing this debt relief, those two things will basically offset each other. And how sound is that logic coming out of the White House that this won't spur faster inflation? Well, we're going to find out. There's certainly a lot of economists who have concerns about this. On the other hand, this is a very unusual form of stimulus. It's not like we're handing people checks. The White House is pretty convinced that pairing these two things,

restarting payments at the same time as you're doing this, will make it kind of come out as a wash. So it really remains to be seen how this is going to play out. So tell me about some of the other criticisms of this plan. Well, there's concerns about fairness. Why are we picking this particular group of people to deliver this enormous bundle of relief to? The Republican National Committee described this as Biden's bailout for the wealthy. There's concerns that this population is people who got the opportunity to go to college. Why should those who didn't end up essentially subsidizing that? The flip side of that is that when you delve into who the population of people who owe for college actually are, there is an awful lot of truly

low-income people in there. It's a really diverse group. That number we talked about before where about 60% of borrowers are Pell Grant recipients who come from very low-income families. So in that sense, this can be a way of really targeting some relief towards a population that is truly often in real need. Stacey, I can also imagine, though, that for someone who worked really hard to pay off their massive student loan debt bit by bit, it might feel unfair to then ask them to help foot the bill to cancel the debt for all these other people. Absolutely. Certainly someone who paid off their college loans in the past can look at this and say, OK, why is this generation getting a handout? Why is this the political issue that we're going to put all this money into?

The reality here is why that's happening is that there has been this enormous grassroots mobilization around this, and it has become a major political issue for a powerful constituency. This is an issue that is overwhelmingly of concern to young voters. It's also an issue that a number of groups have described as really critical for Black voters, and the politicians had to respond to that. Yeah, I want to talk about the timing of this. It's about two months before midterm elections that could determine who controls the House and the Senate. And I'm sure for a lot of people, it's hard to not see this as a political ploy to benefit Democrats in November and possibly beyond. So there's definitely a very real political reality that, yes, this is happening right

ahead of a midterm election. This is kind of the rare major public policy move that has a very tangible and real and direct impact on people's lives. One of the challenges of a lot of the relief spending around the pandemic is that it was kind of invisible, even to the people's lives. One of the challenges of a lot of the relief spending around the pandemic is that it was kind of invisible, even to the people it helped. It was hard to see sort of how that was paying off. This one's very direct and very clear. And that can be, the Democrats certainly hope it will be, a very powerful motivational tool specifically for some constituencies that the Democrats really want to reach. I do wonder, though, Stacey, how sustainable this is. Am I right to think that the next president, a Republican maybe,

could come in and reverse this on day one? Well, we're certainly expecting some legal challenges here. So the timing of how this actually plays out and when this relief actually gets delivered to people is potentially in flux. One issue for any politician opposing this is this is pretty broadly popular. I mean, more than 60 percent of the American public supports some form of widespread debt cancellation. So I think it's going to be hard for someone to come in and say, I'm going to take away this benefit that you personally have been promised. Where we could see some changes is around things like this income-driven payment plan that Biden wants to roll out and make really widespread. That's something that

a future administration could take a different approach on, especially because none of this really takes aim at the underlying structural issue here, which is the spiraling debt burdens and the cost of college. Yeah, it's not doing anything to really address that deeper issue of college just being so incredibly expensive and forcing people to take out those loans in the first place. Stacey, was there any way that this plan could have addressed those concerns? That's really difficult to do without Congress. That's part of why we've seen it being addressed this way, is this is what they could do unilaterally,

operating through the Education Department's power to forgive debt. It's a much trickier problem to tackle the front end of this. That probably requires things like more spending on public education. And that's the kind of thing you need Congress to do. But while these changes don't get at the underlying structural issues directly, what Biden's rolling out here changes something pretty fundamental about how people pay for higher education. And what is that? Since 2010, the government has been the direct lender for student loans and the reason it was done that way is this has been a profit center for the government they make money off the interest on student loans but we're sort of changing this system from being something that is a money maker

for the government to being something that is a clear area of subsidy for the government this really is a sort of fundamental change in the system and throws into sharp relief this political question that we're all going to have to grapple with about what is the government's responsibility and our responsibility as citizens to fund higher education, to treat this as something that we invest in as a civic good. And I think that's something that's going to be more of a focus area going forward as we start to really grapple with all of these changes. Stacey, thank you so much.

Thanks, Natalie. We'll be right back. Here's what else you need to know today. On Thursday, a federal judge in Florida ordered that a redacted version of the affidavit used to obtain a search warrant for Mar-a-Lago be unsealed and made available to the public by noon today. It's unclear how much the redacted document will reveal, but it will offer the most in-depth look yet at the government's justification for searching President Trump's Florida residence earlier this month. And in Russia, President Vladimir Putin ordered a major expansion of the nation's armed forces, calling for 137,000 additional active duty

service members, raising the total to over 1 million by January of 2023. It was the first time in five years that Putin had changed the headcount of the Russian armed forces, a sign that despite heavy battlefield losses, he is planning for a long war in Ukraine. Today's episode was produced by Nina Feldman, Rob Zipko, and Luke Vanderplew, with help from Michael Simon Johnson. It was edited by Anita Batajow and Mark George,

contains original music by Marion Lozano, and was engineered by Chris Wood. Our theme music is by Jim Brunberg and Ben Lansberg of Wonderly. That's it for The Daily. I'm Natalie Kitcheweth. See you Monday.