Following a speech on the economy Monday, Biden told reporters that student-debt cancellation “does figure in my plan,” after being asked about it. Indeed, on the campaign trail, Biden proposed cancelling $10,000 in student debt as a coronavirus relief measure. Still, he stopped short Monday of saying he would cancel the debt without the help of Congress. 

“The legislation, passed by the Democratic House, calls for immediate forgiveness of $10,000 in student loans,” Biden said, referring to the HEROES Act passed in May. “It should be done immediately,” he added. 

The idea of student-debt cancellation initially bubbled up during Occupy Wall Street in 2011 and has gained prominence over the past several years. By 2020, two leading candidates for the Democratic nomination for president were touting it. But the notion of cancelling student debt is controversial; even among those who agree the government should do it there are questions about how much should be cancelled and which branch of government should authorize the discharge. 

Do you think the government should cancel student debt? Let us know what you think. Email: jberman@marketwatch.com.

We’ve run down some of the major pressure points surrounding student-debt cancellation:

Who does it help and what’s the goal?

The universe of roughly 44 million people who owe a student loan is diverse. There are people who borrow $30,000 to go to college (about average for a bachelor’s degree). There are also those who borrow way more or less to attend schools that don’t provide them with a good outcome in the labor market, and they struggle to pay it off. Then there are those who borrow to attend graduate school, often accruing six figures in debt that can propel them into a lucrative career. 

Whether your goal is to target a specific subset of these borrowers with relief or to get rid of an unjust system for financing college will influence the way you think about student-debt cancellation. 

Cancelling all student debt would provide a disproportionate impact — by dollar amount — on borrowers with the most debt. The highest debt loads are often the result of graduate school, and that tends to provide one of the best labor-market returns. 

“If you were to just say get rid of all the loans, you’d be giving money to people who got ripped off by their for-profit colleges, but you’d also be giving money to doctors and lawyers,” said Matthew Chingos, vice president for education and data policy at the Urban Institute. 

To target borrowers more specifically, some advocates of student-debt cancellation have proposed setting limits on household income and/or the amount of debt cancelled. 

Research suggests that borrowers with relatively small loan amounts struggle the most to pay it off because the low debt balance is a signal that they didn’t get their degree or they got a credential that didn’t pay off in the labor market. In scenarios with a cap on income or amount of debt forgiven, these borrowers typically have the bulk of their debt discharged. 

Still, Chingos said it can be tricky to target based on income because if you want to have a smooth phase out of the cancellation, “you get up the income distribution pretty fast.” 

Focusing too closely on income or on the assumption that degrees, including graduate degrees necessarily deliver a decent return for a borrower misses a key point, said Louise Seamster, an assistant professor of sociology at the University of Iowa: The disproportionate impact our student-loan system has on Black borrowers. 

Because of centuries of racism, Black households have less wealth to draw on when paying for college, which pushes Black students typically to borrow more than their white peers, experts say. In addition, because of labor-market discrimination, among other structural issues, Black borrowers likely don’t have as high salaries to work with when paying off their debt. 

The challenges Black borrowers face with their student debt has only grown in recent years. Seamster, who, with a team, has been studying the impact of student-debt cancellation, found that based on 2016 data from the Federal Reserve, $50,000 in student-debt cancellation would get rid of college loans for 81% of Black households. But by 2019, the data indicate that $50,000 would only eliminate student debt for 73% of Black households. According to the 2016 figures, cancelling $50,000 in student debt would increase the wealth of Black households by 40%, but by 2019 that shrunk to 34%. 

“Debt can have a different meaning depending on who you are, what your opportunities are, what wealth your family has,” Seamster said. For example, even in the case of Black borrowers who attended graduate school, there’s data to indicate they’re not getting as high of a return on that degree as white borrowers. In addition, Black borrowers are less likely to have family wealth to draw on to help repay the debt — or defray other expenses while repaying it.  

The disproportionate impact of student debt on Black borrowers is in part the result of a historical trend, where, as the college going population got more diverse, the level to which the government has subsidized its cost has fallen, Seamster notes. 

“Our data shows that the system has had uneven outcomes, but also it shows the disastrous situation that is going to continue and compound if we don’t do something big about student debt,” she said.  

How it could/should be done:

One of the reasons the possibility of student-debt cancellation has gotten so much attention in the weeks since the election is that it appears it could be done without Congress. That would offer President-elect Joe Biden an opportunity to provide relief and an economic stimulus during the pandemic that doesn’t require compromise with the Senate that may remain in Republican control. 

Democratic Senators Chuck Schumer and Elizabeth Warren have said that cancelling up to $50,000 in student debt is something Biden can and should do immediately. Their urging is based in part on a legal memo written by lawyers at Harvard Law School’s Project on Predatory Student Lending, which notes:  

“The Higher Education Act gives the Secretary of Education the authority to cancel student-loan debt,” said Toby Merrill, the director of the Project and one of the memo’s authors.  

But even among those who support broad-based student-debt cancellation, there is some concern about doing it through executive action. 

“If it’s done by executive action there’s a question that swirls around legal authority and what would happen if a court determined that there wasn’t legal authority,” said David Bergeron, a senior fellow for postsecondary education at the Center for American Progress and a former Department of Education staffer. “The lenders or the servicers could go to federal court to try to reverse or block the executive action. [If the debt was already forgiven] what’s the harm to borrowers of having it undone, which I see as a real possibility with executive action.” 

Bergeron also said he’s concerned about the possible tax consequences for borrowers if cancellation is done through executive action, instead of through legislation. 

John Brooks, a professor at Georgetown University Law Center, who focuses on tax law and policy, said that there are a variety of ways that student-debt cancellation could be done through executive action without borrowers facing a tax bill. The most basic: The IRS could declare that the loan relief is a payment from a government program for the general welfare and therefore is not taxable. 

“That’s why we don’t tax things like disaster-relief payments and worker-training programs and payments to the blind,” Brooks said. “You could say the same thing about student-debt cancellation, particularly if they do something now in the context of COVID, because COVID is a qualified disaster for tax purposes,” Brooks said. (For a more detailed explanation of the various ways student-debt cancellation could be done through the executive without tax consequences check out Brooks’ Twitter thread here). 

But even if the tax and other issues were to be resolved, Bergeron said he sees broader challenges with relying on executive action. For one, transformative change to the way we finance college, for example, in the form of debt- or tuition-free public college would need to go through congress. Cancelling student debt through the executive would mean that the relief wouldn’t be paired to a change in the system going forward.

In addition, robust debate in Congress surrounding debt cancellation, could actually bring more people around to the issue, Bergeron said. 

“Until we know what’s going on with the two Georgia seats,” Bergeron said of the Senate runoff in Georgia in January, which will determine control of the Senate, “I’m not giving up on it being done legislatively.”  

The politics and fairness of cancelation

A big question surrounding student-debt forgiveness is how people who wouldn’t benefit — either because they never had student debt or they already paid it off — might react to it. 

Polling indicates that the idea is popular, even among those who already paid off their debt. There’s also evidence that it’s not just progressives who believe student-debt relief could be a winning political strategy — the Pennsylvania Republican party reportedly sent out a mailer during the presidential campaign highlighting President Donald Trump’s role in pausing student-loan payments during the pandemic. 

A slew of research also indicates cancelling student debt could provide an economic stimulus, which theoretically would provide a broad boost to the country. Nonetheless, it could be hard to get excited about a nationwide economic stimulus if you’ve already paid off your loans. 

Those who have already paid off their debt or saved for college for their children successfully are more likely to be beneficiaries of systems that may not be available to those who are still repaying their loans. The government doesn’t subsidize college as much as it used to, which is why people who attended college in the past may have graduated with relatively manageable debt in comparison to their kids or younger siblings. 

But even among those who took on their debt relatively recently, borrowers who aren’t victims of the racial-wealth gap or systemic pay disparities are more likely to have paid off their loans.

Research from the think tank Demos indicates that 12 years after leaving college white men have paid off 44% of their student debt, white women have paid off 28%, while Black men and women owe 11% and 13% more on their debt respectively. 

What happens next?

One challenge that critics of student-debt cancellation have noted is that wiping away loans for current borrowers won’t do anything to change the student-loan system going forward. 

“There’s this huge practical problem with loan forgiveness, which is that if you maintain the federal student-loan program and you forgive debt you’re going to be making loans at the same time that you’re going to be forgiving them,” said Jason Delisle, a resident fellow at the American Enterprise Institute, a conservative think tank. 

Even if the nation were to move to a system of free public higher education for some, as Biden has proposed, Delisle argues that future students would still be borrowing for programs where the debt was previously canceled. 

Advocates of student-debt cancellation and free college aren’t necessarily arguing that the student-loan system be eliminated entirely going forward — for example, very few are pushing for free graduate education — instead, they envision a system where borrowing is an option, “rather than something that is thrust upon people who would do better without debt,” said Mark Huelsman, associate director of policy and research at Demos. 

“Everyone who has advocated for student-loan relief is also acutely aware that we need to address the fundamental inequities in the way we finance college,” Huelsman said. 

In addition, it’s possible to address other challenges plaguing the student-loan system — for example, the obstacles public servants and those scammed by their schools face accessing loan forgiveness that’s already on the books or the harsh consequences of student-loan default — while still providing some relief to borrowers now, Huelsman said. 

“Most people who are in favor of big sweeping action are also in favor of the incremental reforms that would make the loan program more humane,” he said.