Student Debt Relief Fight Shows Need For Permanent Solutions To Rising Debt
Bobby Matson is founder/CEO at Payitoff, consumer debt infrastructure for businesses to offer customers debt expertise & better outcomes.
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President Biden’s student loan forgiveness plan wallowing in legal limbo reinforces the need for more than a band-aid solution to Americans’ skyrocketing debt problem.
In August, the president introduced a student debt relief program that would cut $10,000 from the balances of federal student borrowers, and up to $20,000 for Pell Grant recipients, with a few exceptions based on household income. The program also came with a cap on repayments, limiting them to 5% of the borrower’s monthly income.
The announcement would have provided much-needed relief to the 45 million Americans who owe a combined $1.75 trillion. It offered a response to ballooning costs of higher education and a debt burden that follows an increasing share of the population for an increasing amount of time. Between 1980 and 2019, the cost of higher education skyrocketed by 169%, while earnings for those aged 22 to 27 increased by 19%. Students have had to borrow more to make up the gap, with loans jumping from $481 billion in 2006 to $1.75 trillion at the end of 2021.
Debt Relief Plan Faces Opposition
The Biden administration’s student debt relief program was poised to offer a lifeline to Americans drowning in student debt, but in recent months Republican lawmakers have stymied those efforts with a number of legal challenges. They argue that the president doesn’t have the power to cancel debt without congressional approval. A second legal challenge brought by two borrowers—with support from the Job Creators Network Foundation, a conservative advocacy organization—argues that the loans are unfair to those with commercially held loans, and discriminates against non-Pell Grant recipients.
While the program was originally set to kick off at the start of 2023, American borrowers remain without relief. The Supreme Court will consider these legal challenges in February.
The ongoing legal battles are just the latest demonstration of how American borrowers need a more permanent fix. Programs like the student debt relief plan and Public Service Loan Forgiveness (PSLF) address a real need, brought on by decades of rising costs, but they fail to get at the root of the problem. Even if these programs do survive the legal challenges they now face—and there is no guarantee that they will—it won’t be long before another program is needed to address ballooning debts, and another, and another.
It’s Not Just Student Debt
Furthermore, student loans are just one of many forms of debt that’s reaching unsustainable levels. In the second quarter of 2022, American households added $312 billion to their $16 trillion debt burden, the biggest jump since 2016. That includes $46 billion in credit card debt alone, the sharpest increase in more than 20 years. That’s on top of the $11.39 trillion they own on their mortgages as of the end of June.
All this debt is making it harder for Americans to maintain financial stability in the short term, especially in the face of inflation and rising interest rates, but the effects will be long lasting. For example, research has found that student loan burdens reduce retirement savings for all age groups.
The Secure Act, which was signed into law by President Trump in 2019 and expanded by President Biden in late 2022, was designed to help address the shortfall in retirement savings. It requires employers to automatically enroll their staff in a 401(k) plan, at a rate of at least 3%, though they can still opt out. The update also broadened 401(k) plan match options to allow companies to make matching contributions for employees paying down their student loans instead.
The program, like the student debt relief program, PSLF and others represent some important steps toward reducing Americans’ unsustainable debt levels, but they largely fail to address the root cause of the problem. As the costs of housing, healthcare, child care and education continues to rise much faster than earnings—and with inflation requiring many to borrow more to cover the cost of necessities—these short-term solutions need to give way to more lasting changes.
The Private Sector Steps Up
Federal and state governments can do a lot more to tip the balance of power back to borrowers on a more lasting basis. Cracking down on unfair fines and fees, enacting laws that give borrowers more legal protection from creditors, expanding access to employer-sponsored repayment plans, and addressing the housing shortage and the rising cost of education, healthcare and other necessities are just a few potential solutions.
As lawmakers drag their heels on household debt solutions, however, new innovations have emerged from the private sector to provide some relief. In recent years, financial technology companies have stepped up to provide leadership in debt management, education and innovation. With powerful tools, large amounts of data and advanced technologies, the industry has demonstrated leadership in helping Americans get out of debt and prevent others from falling into a predatory situation in the first place.
Student loan forgiveness is a significant and positive step toward relieving unsustainable debt burdens in America, but the ongoing legal challenges it faces, coupled with skyrocketing household debt of other kinds, demonstrates a clear need for a longer-term solution. The private sector is stepping up while we wait for more consistent leadership from the government, but at some point the system will need reform.
Otherwise, we’re at risk of falling into a pattern of applying short-term solutions—which are vulnerable to legal challenges and delays—to fix systemic problems that are only getting harder to solve.
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