Unsanitized: Student Debt Cancellation Now an Anti-Austerity Measure

First Response

Since the election, the Prospect has been getting a certain degree of attention for a series we did last fall called the Day One Agenda. In it we posited a number of things a Democratic president can do without having to pass new legislation, comprising a full and robust agenda of tangible progress. Considering that Joe Biden may face a hostile legislature as president, with control of the Senate in the hands of Mitch McConnell, the Day One Agenda has taken on new importance.

One of the more high-impact (and controversial) of these measures is the Education Department’s ability to cancel student debt under something called “compromise and settlement authority.” The federal government directly issues almost all student debt, and has the discretion to reduce balances completely, or anything short of that.

Since Chuck Schumer and Elizabeth Warren have been calling for student debt relief by executive authority, it appears that the powers that be are getting nervous about something actually potentially happening, as they’re fashioning a list of reasons to shoot it down. Former Obama administration top economist Jason Furman is taking the lead on this. He started by insisting that student debt forgiveness would be taxable, which… no. There’s a long history here, but suffice to say that the government forgives student debt all the time without making it a taxable event, and the IRS has every discretion to follow its past rulings (and remember this will be Biden’s IRS) and say that student loans are a non-taxable scholarship.

Undaunted, Furman admitted “some ambiguity” with his claim (which I guess is the new way of saying “I was wrong”) but nevertheless stated that student loan forgiveness wouldn’t be worth it because it would only be a “small positive” multiplier from an economic standpoint. “Give someone $10 a year for 10 years and they won’t spend $100 more today,” he wrote.

Now, there are a million reasons to cancel student debt that aren’t economic in nature. Student debt acts like a medieval indenture and if we have the power to eliminate it we should. But on the economic point, what we’ve done with student debt during the pandemic (which maybe Furman doesn’t know about?) makes it more urgent that cancellation proceed on the first day in office.

Furman’s kernel of truth here is that there wouldn’t be a lot of economic “stimulus” from student loan forgiveness, in the sense that it wouldn’t immediately circulate more money into the economy. He’s ignoring the “wealth effect” that would come from balance sheet repair. If a student loan borrower suddenly didn’t have that burden, their credit score would improve, and they would feel more unburdened to engage in big-ticket purchases like cars or home loans. We already know that student debt causes people to be less likely to make such purchases, so lifting it should have that effect.

That wealth effect is probably low in the short-term, so what of the case for stimulus? I think that looks at things the wrong way, because student debt payments have been on pause for the past eight months.

The Trump administration put that pause in effect back in March—there’s that executive branch power flashing again—meaning that 33 million Americans have not needed to make student loan payments since then. This has been an unsung part of the economic effect of coronavirus relief: taking hundreds dollars a month (the average payment is $393) off the books of 33 million people really improves their budget.

But this is coming to an end. Last week the Education Department started informing borrowers that the freeze on payments ends December 31. At one point President Trump said he would extend it, but that was before the election was RIGGED and all non-spiteful governing stopped. So 33 million Americans will have the sudden shock of an additional large bill, with many of them out of work and having exhausted their pandemic assistance and even unemployment benefits.

Yes, there are income-based repayment plans that would not take large chunks from the unemployed, but not everyone is enrolled in them. Just managing the restart again is going to be a huge logistical hardship. And even for the employed, there would be a significant loss of discretionary income relative to the past eight months if payments resume, at a time when the economy is on the verge of locking down again from the outbreak.

Seen in this way, cancelling student debt is not just a nice theory, but an imperative, to prevent a snap-back that is sure to crush household balance sheets. The last thing we need with the fledgling recovery is another $13 billion or so flowing out of the economy every month. (That’s the average $393 payment multiplied by 33 million; the real number might be lower but not by much.) Biden has already vowed to cancel $10,000 in student debt for every borrower and all of it for those who attended public colleges and make under $125,000 a year. So he’d not only be saving the economy but fulfilling a campaign promise.

There are those who will preach about the unfairness of it all, that those who didn’t go to college or paid off their loans get nothing. This pitting of people against one another is bad even in the best of times. (There are also plenty of executive actions you can pair with this to make it broad-based; seizing drug patents to lower prescription prices, for example, or high-road contracting that would force all federal contractors to pay a $15/hour minimum wage.) In the worst of times like right now, it’s downright stupid. Forcing billions in payments back would hurt everybody. The family that has to pay again will eat out less, or put off that new piece of furniture they wanted. The entire economy will get socked.

Because Trump likely won’t budge, we’re going to have a chaotic three weeks (absent Congressional action) when student loan payments are back. Biden can make this significantly better in a very visible way. And he can do it by himself.

What’s Cooler Than Being Cool

Moderna’s announcement today that preliminary results show their coronavirus vaccine to be 94.5 percent effective is significantly better than Pfizer’s announcement earlier in the month. That’s not because there’s much of a difference between 94.5 percent and 90 percent, Pfizer’s claimed effectiveness rate. It’s because the Moderna vaccine, according to the company, can survive in a regular refrigerator for up to a month. It also can be permanently stored at minus 20 degrees Celsius, which is a common temperature for vaccines like chicken pox. Pfizer’s vaccine has to be kept at minus 75 degrees Celsius and can only survive in a refrigerator for five days.

This means that the standard methods for shipping and storing vaccines can work for Moderna’s, whereas new infrastructure would have to be built for Pfizer’s. There was a thought that dry ice could be used to keep the Pfizer vaccine cold, but there’s actually a dry ice shortage that would slow down the rollout. But that problem becomes moot with the Moderna vaccine. We have to wait for the safety results, but this is truly great news.

Days Without a Bailout Oversight Chair

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Today I Learned

• Zeynep Tufekci is right; lock yourself down while we await the vaccine. (The Atlantic)
• State-level restrictions starting to roll out; more on this tomorrow. (Vox)
• An Ohio State University poll shows 40 percent of Americans will be at a large gathering on Thanksgiving. See above, this is a really bad idea! (UPI)
• Eric Levitz has more hope than I do that a bad winter will force Republicans back to the table on stimulus. (New York Magazine)
• Doctors are quitting the profession because of the stress from coronavirus. (New York Times)
• Hospitals at capacity in North Dakota. (Grand Forks Herald)
• Minnesota GOP only sent an alert about one of its members contracting COVID to its side of the aisle. Disgusting. (Minneapolis Star-Tribune)
• The vaccine could rise and fall on the strength of this vial. (Wal