Canceling Student Debt Is Easier Than It Sounds

Jan 14, 2020
Originally published on January 20, 2020 5:26 am

Sen. Elizabeth Warren, D-Mass., has pledged to cancel up to $50,000 of debt for 95% of student loan borrowers if she is elected president. Sen. Bernie Sanders, I-Vt., has proposed an even more generous plan if he's elected.

Both are bold, controversial pitches that would have a hard time making it through a divided Congress. But on Tuesday, Warren announced she would use a little-known shortcut and wouldn't need Congress. As president, she says, she could cancel the debts of tens of millions of student borrowers all on her own.

It turns out, she's probably right.

"Our country's experiment with debt-financed education went terribly wrong," Warren wrote in a statement. "Instead of getting ahead, millions of student loan borrowers are barely treading water."

About 43 million student borrowers owe the U.S. government $1.5 trillion, according to the U.S. Department of Education. And until now, the department has only offered student loan forgiveness or cancellation to borrowers who meet certain criteria.

"Maybe it's because they've been working in a public service position or because they become disabled or because they're saying that their school fundamentally cheated them," says Eileen Connor, legal director of the Project on Predatory Student Lending at the Legal Services Center of Harvard Law School.

"Those pathways exist. And I think what Sen. Warren's proposal is pointing out is that there's also this freestanding power that the secretary of education has to cancel debts, not for those reasons, but really for any reason at all."

Connor wrote an analysis that found Warren's pitch is both lawful and permissible.

But is it a good idea? That debate has been raging since last year, when Warren first unveiled her plan. One critique, from Adam Looney of the Urban-Brookings Tax Policy Center, says Warren's plan would disproportionately benefit the wealthy, with the bottom 20% of borrowers by income reaping just 4% of the savings. As such, Looney asks: "Why are those who went to college more deserving of aid than those who didn't?"

The space race

This authority may be news — and poorly understood — but it isn't remotely new. It dates back half a century, to 1958, and the U.S. government's frenzied response to the Soviet Union launching Sputnik.

Under then-President Dwight D. Eisenhower, Congress passed the National Defense Education Act, which poured federal dollars into U.S. colleges and universities — and into students' pockets — all in the name of playing academic catch-up with the Soviets.

Included in the legislation is one tightly packed sentence that says the government's appointed student loan commissioner (there was no education secretary back then) "shall have the power to agree to modifications of agreements or loans made under this title and to compromise, waive, or release any right, title, claim, or demand, however arising or acquired under this title."

Put another way: The education secretary has the same kind of discretion as a criminal prosecutor, says Luke Herrine, a lawyer and Yale Law School Ph.D. student who has studied this authority extensively. (He's also a full-throated advocate for what he calls a "student debt jubilee.")

"So in the same way that a prosecutor of criminal claims has discretion to determine whether to offer a plea deal, whether or not to pursue a case against somebody who may or may not have committed a crime, the secretary of education can determine not to enforce student debts basically for whatever reason," Herrine says.

This authority was further expanded and codified in the landmark Higher Education Act of 1965. And because Congress has already bestowed this power on the education secretary, canceling student debt does not require additional say-so from Congress.

Potential roadblocks

There are a few potential roadblocks. Such a move would more than likely trigger lawsuits. It could also have tax implications. Traditionally, canceled student debt has been considered taxable income (with some exceptions), and so any effort to erase hundreds of billions of dollars in student loans would require a sympathetic reading of the tax code. Otherwise, many students with large loans but small, income-based monthly payments could face a sudden and impossible tax bill. Still, Herrine says, a new administration could almost certainly find a legal workaround, and Warren pledged in her announcement "that loan cancellation will not result in any additional tax liability for borrowers."

Perhaps the most interesting question surrounding this provision that's been hidden in plain sight is this: Why are we only now hearing about it?

Connor says she first took note of the provision — and studied it as a means to help borrowers — several years ago, when students began claiming they had been defrauded by their for-profit colleges. "Just because something has never been done before isn't an argument for never doing it," Connor says. "And it's definitely not an argument that it can't be done."

But should it be done? That's a question voters will have to answer.

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DAVID GREENE, HOST:

So right now, more than 40 million borrowers owe the U.S. government $1 1/2 trillion in federal student loan debt. And two presidential candidates, Senators Elizabeth Warren and Bernie Sanders, say they want to erase most or all of that. Now, whether or not you think that's a good idea, NPR's Cory Turner says doing it might actually be easier than you'd think.

CORY TURNER, BYLINE: Up to now, the idea that Congress would ever agree to this kind of wholesale student debt forgiveness didn't just feel unrealistic. It made me think of this moment in "Star Wars."

(SOUNDBITE OF FILM, "STAR WARS: EPISODE V - THE EMPIRE STRIKES BACK")

ANTHONY DANIELS: (As C-3PO) Sir, the possibility of successfully navigating an asteroid field is approximately 3,720 to one.

HARRISON FORD: (As Han Solo) Never tell me the odds.

TURNER: Yeah, asteroid fields, student debt forgiveness, both the longest of long shots. But then Senator Warren made headlines last week when she said forgiveness is not such a long shot. Eileen Connor is legal director of the Project on Predatory Student Lending at Harvard.

EILEEN CONNOR: What Senator Warren's proposal is pointing out is that there's this free-standing power that the secretary of education has to cancel debts for any reason at all.

TURNER: Any reason at all. And Connor says if Warren becomes president, she wouldn't need approval from a divided Congress to do it. Luke Herrine is a lawyer and Yale Law School Ph.D. student who has studied this free-standing power.

LUKE HERRINE: So in the same way that a prosecutor of criminal claims has discretion to determine whether to offer a plea deal, whether to not pursue a case against somebody who may or may not have committed a crime, the secretary of education can determine not to enforce student debt.

TURNER: And Herrine says this power isn't even new.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED REPORTER: On every continent and in every land, the story of Sputnik 1 dominated the front pages.

TURNER: In 1958, in response to the national freakout over the Soviet launch of the Sputnik satellite, Congress created the National Defense Education Act, and in it said that the then-equivalent of the ed secretary shall have the power to compromise, waive or release student debt. Today, using this authority may be surprisingly simple and would help tens of millions of borrowers, but it would almost certainly cause problems. It could trigger lawsuits and have tax implications if the erased debt is considered taxable income, though Warren has pledged that it won't. Forgiveness would also disproportionately benefit wealthier Americans and, obviously, cost hundreds of billions of dollars.

CONNOR: The legal analysis is not really designed to answer the question of whether that is a good thing to do or a wise thing to do but simply whether it's a legal thing to do.

TURNER: Eileen Connor, the attorney we heard from earlier.

CONNOR: And in my analysis, the law clearly allows for that kind of action to be taken.

TURNER: Connor says it's true this authority hasn't been used in this way before, but...

CONNOR: Just because something has never been done before isn't an argument for never doing it, and it's definitely not an argument that it can't be done.

TURNER: As for should it be done, that's a question voters will answer later this year. Cory Turner, NPR News, Washington.

(SOUNDBITE OF LACK OF AFRO'S "THE OUTSIDER") Transcript provided by NPR, Copyright NPR.