Now that the Supreme Court has rejected the Biden administration’s attempt to forgive $430 billion in student loan debt, it’s fair to ask whether Biden’s action was both political and reckless.
I voted for Biden, but I do think the move was cynically political, coming as it did 100 days before the November congressional elections. Forgiving loans of up to $20,000 to more than 40 million potential voters could be perceived as a crass attempt to buy votes.
Moreover, the federal student loan forgiveness program had virtually no chance of surviving judicial review by the current Supreme Court. But what is even more troublesome is that the president’s pledge, taken at face value by millions, will perversely result in economic harm to the same debtors it was intended to rescue.
We know that many with student loans did not make payments during the pandemic — from March 2020 to August 2022, in response to the Covid-19 emergency relief program, which suspended loan payments, interest payments, and collections on defaulted loans. That same August, Biden announced his program to forgive the loans. As of today, it’s been more than three years since the start of Covid, and most borrowers have not made any federal student loan payments since the beginning of the pandemic.
We will have to wait months to find how many students believed and trusted the president, then came to what they thought was a reasonable conclusion that much or all of their student debt would soon be gone forever.
I predict that we will discover that many students took their loan monthly payment dollars and budgeted them toward other life necessities, like housing and transportation. I’m sure many took on car loans, mortgages or apartment leases.
I’m reminded of a contract law class I took as a student years ago at Duke Law School. We were taught about a concept called detrimental reliance. This is when a person (in this case a student loan borrower) reasonably relies on the promise of another (the president) to act as promised (cancelling student loans) — and the failure to fulfill that promise results in harm to a person that was reasonably foreseeable.
I am sure that some student loan debtors relied on Biden’s announcement to their detriment, and now will struggle to pay their student loans, perhaps even defaulting. This in turn will materially decrease their credit scores and force some to file for bankruptcy.
The loan forgiveness plan was reckless because the Biden administration knew, or should have known, that someone would have legal standing to bring a lawsuit to prevent the student loan forgiveness program from being implemented and that this case would quickly go to a Supreme Court with a conservative majority.
In June 2022, prior to announcing the loan forgiveness program, the Supreme Court issued an opinion, West Virginia v. EPA, regarding limitations on the EPA’s ability to regulate greenhouse gases. The Court essentially decided that Congress did not delegate to the EPA sweeping powers to address climate change. The U.S. Department of Education and the Biden administration knew the Supreme Court’s revised view of the “major questions doctrine.” The administration also knew that the Court would consider the forgiveness of $430 billion in student loans to more than 40 million debtors a “major question” that is beyond the DOE’s purview.
It was reckless because sweeping loan forgiveness was never envisioned by Congress when they gave the DOE the power to forgive loans in certain proscribed emergency situations via the Higher Education Relief Opportunities for Students (HEROES) Act. In fact, this law was more focused on issues resulting from the 9/11 attack and hurricanes. Despite relying on emergency powers related to the pandemic to create this debt jubilee, less than a month after announcing the loan forgiveness program, Biden stated on “60 Minutes” that the pandemic emergency was over.
I also learned in law school about federal sovereign immunity, which means those economically harmed by the broken promise of loan forgiveness cannot sue the federal government for damages.
According to the Federal Reserve Bank of New York, default rates on student loans (federal and private) were 11.1 percent in the fourth quarter of 2019, just prior to the pandemic. As of the end of the first quarter of 2023 the default rate was 0.9 percent. I expect this default rate to increase rapidly in the coming months, possibly reaching highs that exceed what was seen after the Great Recession.
If the remarks of a president can instigate a violent attack on the U.S. Capitol, it is equally true that remarks made by a president can also result in economic harm to those who detrimentally rely on such statements.
John Pelletier is the Director of the Center for Financial Literacy at Champlain College and prior to that was chief legal officer of Natixis Global Asset Management and Eaton Vance.