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Biden’s plan to fix student loans puts spotlight on debt cancellation and easier bankruptcies

Out of all the ideas to help student loan borrowers, bankruptcy may be the easiest, but debt cancellation sounds politically expedient.

Ismael Jimenez, a social studies and African American studies teacher at Kensington Creative & Performing Arts High School, speaks with a megaphone at a Jan. 4 rally outside Biden campaign headquarters at 15th and Market Streets calling for student debt cancellation. Next to him is Lauren Horner (right) with the Debt Collective Union.
Ismael Jimenez, a social studies and African American studies teacher at Kensington Creative & Performing Arts High School, speaks with a megaphone at a Jan. 4 rally outside Biden campaign headquarters at 15th and Market Streets calling for student debt cancellation. Next to him is Lauren Horner (right) with the Debt Collective Union.Read moreTOM GRALISH / Staff Photographer

There’s renewed interest in solving America’s student loan crisis, and two strategies are emerging as possible front-runners now that Joe Biden has become president.

One is simply canceling debt — Biden has proposed allowing student borrowers to cancel up to $10,000 in what they owe. He has also campaigned on a call to make it easier for college loan debtors to get out of the squeeze by declaring bankruptcy.

There is no doubt that the numbers are staggering — 44 million people owe $1.7 trillion in total debt, with $1.5 trillion of that in federal student loans.

Biden’s forgiveness plan would not wipe out all debt. Graduates who borrowed for bachelor’s degrees in 2018, for instance, left campus owing an average of $29,000 just in federal debt, according to the College Board.

Still, conservative critics point to the sheer cost of tackling the debt problem. Even while Democratic leaders such as Sen. Elizabeth Warren (D., Mass.) fault Biden’s plan for not being generous enough, writing off $10,000 per debtor could cost taxpayers $400 billion. That’s about half of the Department of Defense’s budget for a year.

Another conservative argument against debt cancellation is a well-weathered philosophical one — that to do it would be to create a “moral hazard,” incentivizing consumers to fail to pay up because they know someone else will.

And some critics says a blanket forgiveness program would be far too scattershot — rewarding plenty of well-off people who can afford paying for their children’s college degrees.

While the price tag for writing off college debt is massive, it would drop considerably — to $160 billion ― if the help was limited to economically distressed borrowers, said student loan expert Mark Kantrowitz.

Scholar Jalil Mustaffa Bishop, a lecturer in education at the University of Pennsylvania, readily acknowledges that canceling student loan debt indiscriminately won’t close the large wealth gap that exists among the races.

Even so, Bishop, both an activist and educator, says the social impact would be so beneficial that the U.S. should do it anyway.

However, he recommends that the full debt be wiped out, a figure much higher even than the $50,000 that Warren and a powerful fellow Democrat, Sen. Chuck Schumer of New York, have proposed.

In an NAACP report he cowrote earlier this year, Bishop and his coauthors found that debt cancellation for Black borrowers is especially needed simply because they hold the most student loan debt.

Warren has updated her proposed figure to $75,000 from $50,000 based on research that would translate to cancellation for 80% of Black borrowers.

“I disagree with both numbers because means-testing has been tried repeatedly in student loan policy and failed,” Bishop said.

Of a control group of debtors cited in the report, 49% of Black borrowed owed college loans in excess of $30,000 apiece. Only 29% of white borrowers held that much debt.

“Black people had to borrow student loans with a weaker economic base, use them to attend underfunded colleges and universities, and struggle to repay them in an underpaying and under-employing labor market,” the report found.

Bankruptcy options

In 2001, then-U.S. Sen. Biden (D., Delaware), long representing a center of corporate and financial power, had this to say about bankruptcy: “Unnecessary and abusive bankruptcy hurts everyone. This costs every single American consumer.’'

In 2005, he was one of only a few Democratic senators to join Republicans to vote for a bill that critics say threw up major roadblocks up so debtors could not “discharge” — write off — college loans.

Biden has said he got involved to moderate more onerous parts of the legislative package.

Still, today “there’s a very harsh standard, preventing most student loan borrowers from discharging their student loans in bankruptcy,” Kantrowitz said.

In his successful campaign, however, Biden told voters he would repeal the part of the U.S. Bankruptcy Code that prohibits such discharges. Kantrowitz argues that would be a less expensive step than providing money for forgiveness.

Bankruptcy discharge of student loans would cost about $20 billion in the first year, then less than $1 billion per year for another decade, for a total of $30 billion.

This is one of the least expensive and most well-targeted proposals, Kantrowitz maintained.

How would bankruptcy work?

Villanova Law professor Jason Iuliano agrees that changing bankruptcy rules would be a cheaper move.

Besides, he said wiping out student debt would be unfair to people who refinanced their debt to get lower rates but kept up on payments.

“They took out federal loans and refinanced with private loans,” he said. “Cancellation penalizes people who made sound financial decisions.”

It’s a onetime measure, he adds, and doesn’t solve future problems or address the crippling cost of college tuition.

He also argues that the bankruptcy rules are not as harsh as many critics say.

Well over half the people who petition the courts to get out of paying their loans prevail, said Iuliano, who started a business on this premise, called Lexria. The company matches borrowers with attorneys who will pursue their claims. If customers don’t get relief through a discharge or settlement, Lexria reimburses their legal fees.

“Student loan creditors are now participating in what are called ‘strategic settlements’ with their borrowers,” he said. “Student loan debtors are winning the vast majority of adversary proceedings” — both in these confidential negotiations or in court.

“The myth of non-dischargeability is to blame for the student loan crisis,” Iuliano said. “Because few people realize that student loans are dischargeable, everyone has focused their efforts on congressional reforms.”

Given partisan gridlock, such reform is unlikely, he contends. “These efforts have distracted everyone from the solution that already exists: bankruptcy.”