Seth Wenig/AP Photo
The White House has indicated that they expect 1 out of 4 student loan borrowers eligible for debt relief will not receive it.
The White House let slip a very revealing tidbit about its student loan debt forgiveness program. Asked about the total cost of debt forgiveness—an impossible and ridiculous thing to quantify, as it’s based on a series of useful fictions and made-up numbers about how much the government should profit from higher-education financing—National Economic Council deputy director Bharat Ramamurti estimated about $24 billion per year. (For context, the government expects $4.4 trillion in revenue in fiscal year 2002.)
But Ramamurti based this on an expected “participation rate” of 75 percent, which the White House deemed consistent with past debt relief programs. What this is saying in kind of bloodless language is that the White House expects 1 out of every 4 student loan borrowers eligible for debt relief to not get it.
Why would that be, if the government made the loans and knows the names of all the debtors, and can simply reduce the accounts accordingly? Because of an income test, of course, requiring most borrowers to fill out an application for relief, so a tiny handful of people with outstanding debt who make over $125,000 per year ($250,000 for married couples) don’t get “undeserved” help. And based on how well this has gone in the past, the White House estimates that will leave behind 1 in 4 eligible borrowers.
This would be a shocking failure, and would confirm that the U.S. government simply cannot be effective in the 21st century. Signature Biden policies like infrastructure and climate action and semiconductor manufacturing will play out over years, and not touch as many individuals directly. Cutting drug prices would, but the Inflation Reduction Act irresponsibly delays that help for years. Meanwhile, the administration rather controversially gave millions of student borrowers some help. The cost of any failure to deliver that help will spur anger among a key Democratic support base, and be pounced on by critics. They have to get this right, and in a real way the future of activist government is at stake.
It’s actually three implementation challenges in one. First, they must cancel the actual debt: $10,000 for all borrowers, $20,000 if you ever received a Pell grant. Most borrowers will have to fill out a form; the Education Department only has income data for less than 20 percent of borrowers, and by statute they cannot just get it automatically from the IRS.
Ramamurti, who more than anyone inside the White House is responsible for Joe Biden agreeing to the plan, has said that the application will be ready in October. Some activists remain apoplectic that the application wasn’t ready to roll out the day of the announcement; after all, the White House had nearly two years of deliberation. But borrowers can sign up at StudentAid.gov now to get a notification when the application is released. This site has already seen crashes and delays.
Ramamurti told me the application will have just a couple of questions: your student loan account number, how much you make a year, and whether you ever got a Pell grant. He said that it shouldn’t be looked at as a logistical challenge on the order of HealthCare.gov, a nightmare that set back the Affordable Care Act, but more like CovidTests.gov, the simple form that allows people to get free tests mailed to them through the U.S. Postal Service.
Loan servicers were barely functional before the pause, and now they have had nearly three years of doing essentially nothing.
But of course, you have to let people know that there’s debt relief available, and that they must fill out a form to get it. If you’re reading this website, you are politically engaged enough to have known this for years, but not everyone is in your position. This is going to take significant publicity to maximize the reach.
The Education Department is promising to complete forgiveness on every application within four to six weeks. They want people to apply by mid-November, so the debt discharge will happen before the restart of the student loan payment pause on December 31. If it doesn’t, you can imagine situations where someone owes $18,000 and got a Pell grant, but hasn’t had it extinguished yet, and when January rolls around they won’t know whether to pay or not.
Fortunately, the White House does have ideas. They plan to implement a “hold harmless” period, where debtors who haven’t yet gotten their expected full cancellation will not be held responsible for skipping the January payment. In addition, the White House has already instituted a process where anyone who made loan payments after the payment pause began in March 2020 can simply get their money back. Anecdotally, this has been working well.
But that brings us to the second challenge: restarting the payment pause. The White House sees restarting payments as a good hook to get applications in and complete debt relief. But that means they’ll have to step on a potential land mine regarding the for-profit companies contracted to manage federally issued loans, known as loan servicers.
These servicers were barely functional before the pause, and now they have had nearly three years of doing essentially nothing. They are not equipped today with the proper staff to handle the return of payments, let along the crush of calls from borrowers asking about debt relief. Nelnet, one of the larger servicers, literally asked people to stop calling them last week, and several other websites are down.
Adding to the chaos, several servicers have decided to get out of the student loan business, meaning that many borrowers will have new companies as their loan servicer. Keep in mind that this is the front door to the administering of the debt relief. These companies must properly deduct the amount from the accounts, re-amortize the payments, and send statements to the borrowers, after sitting idle for years and being pretty awful at their jobs before then. And they have to do it all during the holidays, when they are traditionally short-staffed anyway.
“It is operationally impossible for them to restart payments on January 1 and have it go smoothly,” said Thomas Gokey, an organizer with the student loan activist group Debt Collective. “Everything that can catch fire will catch fire.”
The positive case is that Richard Cordray, the former Consumer Financial Protection Bureau director who has enforcement experience cracking down on bad servicers, is the head of the chief enforcement agency, the Office of Federal Student Aid (FSA). In addition, the Education Department will be renegotiating servicer contracts at the same time as this is going on, which will supply the government leverage for servicer compliance.
Then there’s the third implementation challenge: the income-driven repayment (IDR) changes, which are likely to cut undergraduate loan payments in half. Ramamurti told me that the formal proposal for these changes will be released as soon as this week. But the proposed rule change must go through administrative procedure, including a notice and comment period and a finalization process.
Administrative procedure can take years. But the goal is to have the IDR changes up and running before payments resume. That’s a short four-month window. And implementing those changes on the 32 percent of borrowers currently enrolled in IDR—a number that should go higher now that it’s more generous—is just another challenge for the relatively dysfunctional loan servicers to manage.
Those are a lot of plates spinning in the air. And millions of debtors and activists will be watching. “Everyone knows we can cancel the debt now,” Gokey said. “Trying to turn this back on is not going to be easy for them.”
The White House is taking heat for trying to cancel this debt at all. Any foul-up will be magnified. And there are a lot of options for mistakes, most of them a function of adding unnecessary layers to the process. The perils of means testing, of outsourcing government functions like debt payment collection, of promising swift action and under-delivering are all implicated here.
The eerie parallel is to the foreclosure crisis, where government aid came in the form of private mortgage servicers who used the program to squeeze borrowers and take their homes. That set activist government back years, and we cannot have a replay here. I know that the White House is focused on implementation and those carrying it out understand its importance. Failure is not an option.
