Can the Secretary of Education Really Wave a Magic Wand and Erase All Our Student Loans?
Congressional Democrats and President Joe Biden’s administration are at odds over how to cancel student loan debt. Sen. Elizabeth Warren (D–Mass.) and Senate Majority Leader Chuck Schumer (D–N.Y.) insist that Biden can and should cancel up to $50,000 of loan debt per borrower using an executive order. Biden’s team reportedly prefers that Congress pass a bill giving the Department of Education authority to forgive up to $10,000 of outstanding student loan debt per person.
While neither of those proposals will address the cost disease plaguing higher education in the United States, the Warren proposal relies on a rather Trumpian approach to appropriations.
The Warren proposal, which you can study here, notes that section 432(a) of the Higher Education Act of 1965 authorizes the Secretary of Education to “enforce, pay, compromise, waive, or release any right, title, claim, lien, or demand, however acquired, including any equity or any right of redemption,” as relates to loans issued under the Federal Family Education Loan (FFEL) Program; now, the Federal Direct Loan Program. Warren and other student loan forgiveness advocates interpret that clause to mean that the Education Department may adjust individual loan values down to zero if the loan is owned by the Education Department (more than 90 percent of student loans are). They say that this interpretation was shared by the Trump administration, which cited section 432(a) in justifying a temporary waiver of interest on student loans due to COVID-19’s economic impact.
Warren’s proposal to permanently forgive the debt of tens of millions of student loan borrowers (and which would cost substantially more than the revenue lost by temporarily suspending interest payments), uses an income-based sliding scale to determine the forgiveness amount: $50,000 in debt forgiveness for household incomes less than $100,000, scaling down to zero for household incomes over $250,000. The scale is tied exclusively to the prior year’s tax filing and the corresponding amount would be forgiven automatically. Her proposal also calls for the IRS to not treat the forgiven loan amount as taxable income (which it currently does for loans forgiven after 20 or 25 years of income-based repayment).
A letter to Warren from members of Harvard University’s Project on Predatory Student Lending suggests that this route is perfectly legal, and that “the only statutory limitation” on the Education Department’s authority to “compromise” a loan “is the requirement that the Secretary ‘may not enter into any settlement of any claim under
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