Biden’s Big Student Debt Announcement: PITOTWIU

Hey Unf*ckers, we’re back with a quick update on student debt, in light of the Biden administrations’ announcement of partial debt relief.

Considering there are 43 million Americans managing more than $1.6 trillion in student loans, it’s certainly worth revisiting how this all played out. We’re going to move past the hysteria on the left and right and take the emotion out of this discussion to dig into the policy and strategy behind this decision. But I do want to make a couple of political observations before we go further.

In our student debt essay, we made a couple of predictions. Towards the end, I mentioned that Biden was going to do what he’s going to do and it will be “marginal and somewhat helpful.” I also guessed that it would be $10,000. Speaking of the latter, I’m no psychic. This was Biden’s campaign promise. But, in fact, he sweetened the pot by adding an additional 10K for those who are Pell Grant recipients.

So, for anyone criticizing him for doing too little, it should be noted that for a significant portion of debt holders on the lower end of the income spectrum, this is really big news. In fact, it’s going to wipe out a pretty healthy amount of total debt and unshackle millions of borrowers altogether.

On the political front, the responses have been predictable.

Conservatives were locked and loaded to criticize this as a bailout to the participation trophy generation, which overlooks so many crucial points about the character and cost of debt that has accrued in the past 20 years. As the loyal opposition, they don’t have to be nuanced. They just have to be angry and prey on a perverted sense of injustice that lower income individuals and families are getting some relief while others in the past did not. I won’t patronize Unf*ckers with a long diatribe about the inconsistency of this stance, but for shits and giggles, let’s map out helpful talking points about “fairness”:

• If you own a home, you get to deduct mortgage interest. If you rent, you don’t.

• If you’re a middle income wage earner, you pay 6.2% toward Social Security. Those who earn more than $147,000 a year stop paying once they hit this number, which makes Social Security a regressive tax. Thanks, Alan Greenspan!

• More than 5 million business owners had PPP loans from 2020 completely forgiven. This money was treated as below the line income, and therefore non taxable. In other words, free money.

• So far, the average budget impact estimate of forgiveness is around $500 billion over ten years, with some assumptions we’ll review about in a minute. The Trump tax cuts cost the nation about double that amount, and potentially more.

• The increase in college tuition has doubled the rate of inflation over the past 40 years, for a whopping total increase of 1,100%. So, your old debt is not the fucking same as the new debt.

• There are senior citizens who have student debt payments deducted from their Social Security payments.

• Call back to our Corporate (Ir)Responsibility essays. It’s estimated that wealthy individuals and corporations are hiding $36 trillion offshore to avoid taxes. Of that amount, Americans are responsible for $10 trillion of it. So, do tell me again about fairness. Go on.

• And then, in the ultimate fucking HA-HA, conservatives pushed for liberalization of trade agreements so they could move manufacturing jobs offshore. Then they told workers to go to college and retrain for service jobs. But, without trade union protections, the very same conservative employers were able to pay workers less and make them at will and more vulnerable, which led to wage stagnation among middle and lower class workers who couldn’t afford the fucking student debt they were told to take on to get that mid-level management and service fucking job. And now there are even some Republicans saying the quiet part out loud that this giveaway will reduce the incentive for poor people to enlist in military, which should tell you exactly how fucking expendable poor people are in this country where Republicans are concerned!

What the Biden plan does.

Let’s dig into the meat of this thing:

• $10,000 forgiveness for anyone earning less than $125,000

• $20,000 forgiveness for anyone in receipt of a Pell Grant

Okay, so that’s the initial shot. $10K for all student debt holders, $20K for Pell Grant recipients. Going back to our original essay, we noted how the default trends along racial lines are so significant that nearly 40% of all black student debt holders who started school in the 2000s have defaulted on their loans. A sizable chunk of Pell Grant recipients are indeed from black families in the United States, so this will offer great relief to help shore up this disparity. Further, in terms of equity, this helps align with the dramatic increase in total indebtedness given the rising cost of higher education, as the average debt burden over the past decade has gone from $24,700 per student to more than $36,000.

What this implies is that there is still going to be a tremendous amount of debt in the country, but that payments will return to something theoretically more aligned with prior decades with respect to income. So, closer to parity with the past, for those screaming about fairness. There is a talking point in the ether about how this isn’t really helping the poor or the middle class because college is viewed as a luxury. But this doesn’t square with the facts, as we also pointed out in the original essay. So, remember this additional truism, should you be challenged on this idea. Wealthy people pay as they go.

Let’s get some additional perspective by adding together some real numbers here. Here are national averages for monthly household expenditures. The average household in America spends:

• $3,000 on rent

• $800 in transportation from car payments to fuel, insurance and service or public transport

• $320 in utilities from internet to heat

• $250 on personal clothing and accessories

• $600 on food

• and $430 on health insurance

Without student loan debt, that’s $64,800 in out-of-pocket expenses to run the average household. After state and federal withholding taxes, this household with zero dollars left over would have to earn $87,000 a year just to break even.

The average household income in 2022 is estimated to be… wait for it… $87,000 a year. To this end, in his press conference, President Biden made sure to acknowledge that more than 90% of those in line for relief make under $75,000.

If we evaluate the actual monetary impact on the monthly basis, it’s nothing to sneeze at. The average student loan payment, according to the old NY Fed data, is about $393 a month. EducationData.org updated the data with a current estimate of $460. Other sources estimate that the number is closer to $300 for those “actively paying” their loans, which implies to me that they’re accounting for defaults to drive down the average. So let’s just say $400, for argument’s sake. (And that assumes that in this average household, there’s only one person with student debt.)

Student debt is just one of myriad reasons why households incur credit card debt. Those figures I rattled off don’t include any additional money for out-of-pocket expenses or retirement savings. We’re just talking about the bare fucking minimum to get by. That’s why even $125,000 isn’t such a fantastic number anymore in the United States, which is a ridiculous thing to even say out loud, because it should be. Even at $125,000 and the bare essentials we described above, you’re talking about $25,000 a year left over to go toward paying down debt, discretionary spending, emergency spending or saving for retirement.

We want that. That’s the point of working.

So, the fact that Pell Grant recipients are potentially having their debt almost entirely wiped or that the vast majority of borrowers are going to have some relief, doesn’t mean that we’re minting new millionaires who beat the system. This plan gives Americans a little bit of breathing room to make better, healthier decisions. And, for all of those yelling and screaming about inflation and how this undoes everything the Inflation Reduction Act accomplishes to bring down inflation, let’s all remember a couple of key points.

First off, extra money in the pockets of low income and middle class Americans didn’t cause inflation to skyrocket. We’ve covered that, so Unf*ckers have this down. Wall Street’s commodity gambling habit to find yield in the markets and corporate greed from “taking price” contributed to the lion’s share of inflation on most household goods and transportation costs. Supply chain issues from the shut down in China contributed to the bulk of inflation on raw materials. None of this came from Americans with a little spending cash from government checks. In fact, we also demonstrated that the vast majority of stimulus funds to American households went to paying down credit card debt, catching up on mortgage payments and rent or buying more food. So please, please, please don’t let anyone get away with saying that not paying student debt is going to unleash such outsized consumer spending that it will drive prices higher. It’s just not true.

No one will pay more than 5% of their income to service the monthly debt moving forward.

Okay. So, my initial prediction was that we wouldn’t do anything to fix the structural issue of the system. I’ll explain where this was right in a bit, but I have to give the administration credit on this point. This is a really important piece of the puzzle. Right now, it can’t exceed 10% of household expenditures, and they’re proposing to cut that in half. Important caveat, this doesn’t appear to be settled. It’s a proposal, but there’s nothing yet to indicate that it isn’t within the power of the executive branch to do this.

After 20 years of payments, your obligation will be considered fulfilled if it hasn’t already been.

Impressive. One last thing. If you did happen to catch our original essay, you might remember that we ripped apart the farkakte (Yiddish for ‘fucked up’) process that public service employees like charity workers and military service members have to go through to get their loans forgiven. This is definitely still being worked out, but Biden has promised to streamline the process and give retroactive credit for service in order to qualify. Suffice to say, if they can really get this done, it will be a blessing.

So, the top level part is easy to digest. But these other features he’s touting are still being worked out, so it’s important not to get too ahead of ourselves. The 20 year cap on payments, 5% income threshold and public service streamlining are all important, but remain open questions until they become official policy or withstand challenges from yet-to-be seen sources.

And there are more questions.

It’s estimated that the size of student debt forgiveness will cost the government anywhere between $320 billion and $600 billion over ten years. There’s no official CBO analysis as of yet, nor do I expect that the analysis will be done until key aspects of the program are defined.

Which income years will apply? As of now, it seems as though the government will evaluate your income from the prior year’s tax return.

Well, what if you lost your job since then?

Will this extend over the ten year budget window, which is what most of the budget models assume? If so, this assumes that new borrowers will be eligible for relief as well.

But how often? How many times can you apply for it?

There’s a lot for the budget folks to argue about. Unf*ckers know from our MMT coverage that this kind of revenue loss to the federal government is fucking meaningless. No government spending initiative is waiting on student debt payments to survive. That’s not how it works. And, all things being equal, what hasn’t been factored as of yet—which I assume the Congressional Budget Office (CBO) will model at some point—is what kind of pickup there will be from a reduction in defaults.

We have some questions, but we covered a lot of positive things so far. So you might be wondering why I included PITOTWIU* in the title of this episode.

Where the plan falls short.

Okay. So we covered the good. And there’s a lot of it. And for all those who want to criticize Joe Biden, the one thing you can’t say is that he broke a promise. In fact, it’s becoming increasingly apparent that Joe Biden might be the most honest public servant to occupy the White House since Jimmy Carter. Establishment Democrats are going to play this up to the hilt for the midterms and beyond, and they have every right to do so.

If you’re conservative, you don’t like him because he’s keeping these promises. It’s these promises that made you vote against him.

And if you’re progressive like me, you never liked the promises to begin with. And on the last point, with respect to student debt and the progressive point of view, here’s why.

Beyond student debt relief, there is a bigger challenge. A systemic challenge. Every single promise kept by the Biden Administration essentially helps to maintain the status quo. Prevents us from backsliding further in terms of income, infrastructure, carbon emissions and so on. But to affect real change, we can’t simply ventilate a bad system. We have to change things at a foundational level.

Even if debt relief is baked into the ten year budget cycle, it remains at the whim of the next president. What can be given can be taken away. And that makes this a fragile, and possibly temporary, fix.

The real structural changes we identified originally aren’t even being discussed. Like being able to discharge student debt in bankruptcy. Why does this class of debt deserve protection? It doesn’t make any sense.

The more fundamental and logical financial play here was to also refinance all government student debt at near zero or, at a minimum, the federal funds rate. Students should be able to borrow at the same rates as banks. Or lower. This shouldn’t be a money maker for the government, and I stand by the assertion that a reduction in interest rates that puts payments more within reach would also contribute to lowering the default rate, which would more than offset the reduction in payments.

There is also nothing that attempts to deal with the principal problem. And I don’t mean primary. By principal, I mean the principal amount. The actual loan total.

The reason loans have increased so dramatically is because the cost to attend college and university has gone up by unfathomable amounts. Why? Because so many people are taking out student loans. They charge more for the simple reason that they can.

That’s why we spoke about devising a way to force these institutions to put skin in the game. And on this, I still think that LBJ’s proposal that Josh Mitchell detailed in The Debt Trap makes the most sense. Create a shared risk pool that all colleges and universities pay into if they want to be eligible to receive federal loan payments for their students.

The greater the percentage of debt required to pay for tuition, the greater the premium colleges should have to pay to participate. These funds could be used to A) offset any defaults so the government isn’t left guaranteeing these loans, and B) to help subsidize community colleges in the same states the private colleges are located.

And, before you balk at this notion, understand something that we didn’t cover originally. Not a single college or university in this country pays property taxes. Not one.

Some pay taxes on investment properties they own for non-academic purposes because they’re so fucking flush with cash. As an example, Boston has been begging their higher ed partners to participate in pilot programs to help subsidize city services, and not one has chosen to do so. Harvard, BU, BC, Northeastern, MIT, etc. They all thumb their noses at their home city. These aren’t good neighbors. So fuck ‘em.

Let’s review. These three fundamental changes, in order, change everything:

1. Refinance all outstanding debt. That not only reduces the burden on individuals and offers loans at the same rate banks get, it helps put private predatory lenders like Sallie Mae and others out of business. Fuck ‘em.

2. Force colleges and universities to pay into shared risk pools that are tiered based upon the amount they have to take on per student. This will force colleges to slow the rate of tuition increases. Want to build that new fucking wellness center, stadium, movie theater and restaurant pavilion? Use your fucking endowment. Use this pooled money to offset defaults so the government isn’t on the hook, and send the balance to community colleges to make them more competitive. Community college should be 100% free, pay competitive salaries to professors, and offer a quality education.

3. And the last simple policy change is to allow the discharge of student debt in bankruptcy. This is just stupid and the most regressive part of this whole mess. Oh, and automatically forgive 100% of any senior debt that is being deducted from Social Security. For the love of god.

Last point. I promise. This one is for my progressive Unf*ckers.

Did we get everything that we want? Not even close. Was it a start? The fulfillment of a campaign promise by a moderate Democrat that we didn’t want? Yes. But here’s the most important thing to remember. There is no fucking way that this—even as a campaign promise, let alone an actual fucking thing that’s happening—happens without progressives.

I know this shit is hard. And it takes time. And you want to grab these motherfuckers by the collar and shake them. But know this: It’s working. You’re getting through. Inch by inch.

We’re getting there because you fought like hell for it.

You yelled about it on social media.

You made progressive candidates competitive in major races and put the fear of god into the establishment.

You took to the streets.

Nettie would be proud. But she wouldn’t be satisfied.

*PITOTWIU is an acronym we often use that stands for “pissing in the ocean to warm it up.” We even have a theme song for it that acknowledges how stupid it is.