When will we restart federal student loan payments?

On Feb. 28, the Supreme Court heard oral arguments over the Biden administration’s executive order canceling $10,000 to $20,000 of student debt for most borrowers. The court’s conservative majority sounded skeptical. Anticipating a decision to block the order, some debt cancelation advocates have suggested a Plan B: Implement an indefinite pause on student loan repayments. Doing so would be a mistake — turning a temporary, emergency measure by the Trump administration into a permanent feature of Biden administration policy.  

Although restarting payments for 40 million people risks further burdening struggling borrowers — not to mention an unenviable administrative task — the alternative is even worse. An indefinite pause would blur the lines between grants and loans, opening the door for shady schools to hike tuition with the promise that students need not worry about the extra debt. Better to turn payments on now with a concerted effort to help struggling borrowers and focus on fixing the long-term problems facing American higher education.

Payment-pause proponents emphasize the sizable minority of federal student loan borrowers who struggle to repay their debt. Most undergraduates who finish a degree (especially a four-year degree) can afford their student debt payments: Less than one in 10 bachelor’s degree graduates who borrow ever default on a student loan. However, just six in 10 undergraduate students will finish a two- or four-year degree within six years of starting school. Stop-out early and the odds of defaulting jump dramatically because borrowers must repay without the earnings bump accompanying a college credential.

The situation facing Black borrowers is particularly egregious: Almost one in two Black federal student loan borrowers will default. Behind the subprime lending crisis, this stands among the leading examples of how centuries of state-enforced racial inequality continue to influence the present day. Even a federal student aid program designed to encourage social mobility ends up leaving many Black borrowers worse off.

Proponents of an indefinite pause argue that, under the circumstances, it would simply be unfair to turn student loan payments on. Ideally, Congress would take action to fix the underlying problems, but political gridlock makes that all but impossible. The next best option, they say, is to simply limit the damage.

The well-off would gain the most from this move. By one estimate, 65 percent of the financial benefits of the payment pause goes to borrowers earning more than $75,000. That’s fine by pause proponents, who say it’s better to protect struggling borrowers at the cost of helping wealthy people (a lot).

But this view dramatically underestimates the long-term risks of an indefinite payment pause, including on the populations they are most concerned about.  While it is difficult to predict exactly what would happen if the president announced that borrowers would no longer be expected to pay student loans — at least during this administration — an alarming range of consequences loom.

One is the reaction of colleges and universities. Most school administrators and financial aid officers will continue to do right by students, but some schools will have a strong incentive to raise prices. Many for-profit colleges are notorious for urging applicants to pay exorbitant tuition with student debt. It seems unlikely that unscrupulous actors will pass up the opportunity to emphasize that with no payment pause end date in sight, students should treat loans like grants. Even some non-profit institutions at risk of losing students and revenue might feel pressure to raise tuition, taking comfort that borrowers may not be on the hook anyway.

Yet, student advocates have for years emphasized the important difference between grants and loans. Financial aid awards can be difficult to understand, particularly for first-generation students whose families do not have experience with college, and sometimes obscure the difference between money that does or does not need to be paid back. An indefinite payment pause would make it harder to communicate this distinction because it will become impossible to know whether federal student loans are in fact loans at all.

The confusion may not matter during a Biden presidency, but what happens if a future president flips on the repayment switch after taking office? In the meantime, existing borrowers may have taken out a mortgage or car loan, only to suddenly find it unaffordable. Students who were encouraged to treat loans like grants would need to make payments they had counted on avoiding. And existing inequalities would ensure low-income borrowers and borrowers of color face the worst financial consequences.

The far better option is to turn payments on as planned using newly enhanced tools to mitigate the impact on the most vulnerable borrowers. The Department of Education already has a plan to wipe clean all defaults, giving every borrower a fresh start to stay current on their debt. It also has existing income-based repayment plans and a new, more generous income-based plan that should dramatically lower monthly payments and default rates if more borrowers use them.

Over the long run, Congress will have to act to fix our problems with student debt. It has taken some limited steps to improve the student loan system through simplifying applications for federal financial aid and streamlining administrative hurdles to enrolling in income-based repayment plans. It needs to do more to address quality and costs. That means tightening requirements so that postsecondary programs eligible for federal aid don’t leave students worse off than when they started. Congress has approved bipartisan increases in the Pell Grant for low-income students recently — and approved a huge increase as part of the 2011 debt ceiling deal — so advocates should not give up on bringing costs down.

Privately, some hope that further dysfunction brought on by a permanent payment pause will force bold solutions on policymakers. Yet, recent experience tends to cut the other way — broken systems often remain that way. Failed public institutions tend to harm the most vulnerable, while wealthier people can afford alternatives.

Throwing a wrench in the student loan system is likely just to break it. Students and borrowers would be better served by a determined political and policy effort at repair.

Rory O’Sullivan is an independent higher education policy consultant, who researches and writes on higher education policy relating to student loan servicing, federal financial aid and accountability. Previously, O’Sullivan worked as the lead higher education policy staffer for the Gates Foundation and deputy director at Young Invincibles.