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US Student Debt Ends Biden Era Bigger Than When He Took Office
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US Student Debt Ends Biden Era Bigger Than When He Took Office
Alex Tanzi
5 min read
(Bloomberg) -- One of President Joe Biden’s signature promises was to ease the student-loan burden on millions of Americans. He’ll leave office with the debt pile slightly bigger than when he arrived.
It’s not for lack of trying. Biden’s administration launched a range of programs that canceled some $189 billion in loans for 5.3 million borrowers, extending the effort into his last days in office. Growth in the overall loan balance has at least slowed down, while a booming economy plus higher inflation makes those debts less of a burden relative to what people earn.
Still, with some of Biden’s headline initiatives shot down by courts and others still mired in legal challenges, the overall record fell short of promises. What’s more, interest rates have soared and protections from the pandemic-era repayment freeze expired – leaving many Americans facing a struggle to keep up, and the prospect of delinquency and a hit to credit scores that will hurt their finances more broadly.
President-elect Donald Trump, who’s set to take office next week, hasn’t given much indication that student debt is a priority. There are, however, some bills working their way through Congress – with backing from both parties – that seek to breathe life into debt relief, even if they’re not likely to move forward in the near future amid a crowded agenda.
Rather than targeted loan cancellation, the new measures generally aim for a simpler path: reducing interest rates on the debt.
‘It’s Ridiculous’
One bill, introduced to the House in November by New York Republican Mike Lawler, would slash the rate on federal student loans to just 1% — and, perhaps more importantly, retroactively apply the rate adjustment for outstanding loans. An earlier one backed by Democrat Joe Courtney, with almost 30 co-sponsors, would allow debtors to refinance their loans at an interest rate of 0%. Other drafts have backed ideas such as ending the capitalization of interest, which is often the main reason why borrowers fall behind.
Federal student-loan interest rates are set by law each spring, tied to the yield on 10-year Treasuries, and for subsidized loans they’re currently at the highest level since 2008, above 6.5%. The charges apply for the lifetime of loans, which means the students – often from poorer backgrounds — who have to borrow can end up paying far more for their degrees.
“Why should one kid pay three times as much to go to college than someone else who didn’t have to take out loans?” says Diane Jones, former deputy undersecretary of the US Department of Education.
“Interest rates are a huge problem with the student loan program,” she says. “It’s ridiculous. On the other hand, it’s unsecured credit with a long history of high default. So of course interest rates are going to be higher. So how do you balance that?”
Capping borrowing costs would have a fiscal cost for the government, since budget projections are based on full repayment at current rates. Still, backers of the idea say it would be more resilient to the legal challenges that have dogged Biden’s efforts, because it wouldn’t involve writing off principal.
Tuition Spiral
With the incoming Trump team focused on immigration, taxes and energy regulation, there aren’t many clues as to where America’s student-loan saga is headed next.
The administration may target college prices. Presiding over a student-debt conference last year, Michael Faulkender – a University of Maryland professor who’s been nominated by Trump as deputy secretary of the Treasury — noted that tuition has risen more than 1,200% since 1980, about five times the pace of goods and services overall. That’s helped push more students into debt, he said.
Another potential complication is that Trump’s team says it wants to abolish the Department of Education, which manages the government’s student-loan book and collects payments.
The latter has been proving tough in recent months. Transfers from Education to the Treasury — often seen as a proxy for student-loan collection — surged when payments resumed in October 2023, after a three-year pandemic pause, but it’s mostly been declining since then.
The department also said this week that it’s trying to rescue the Biden administration’s most widely adopted student-debt plan — known as Saving on a Valuable Education, or SAVE — by making it compliant with a court injunction.
Some 8 million people with $450 billion in debt outstanding are enrolled in SAVE, which lowers repayments by linking them to incomes. They won’t have to fork out anything this year, or accrue interest for most of it, because another freeze was imposed as a result of the court’s objection.
‘No Viable Route’
Altogether, some $765 billion of US student debt – almost half the total – is currently in deferment, forbearance or default, according to government data.
Those who couldn’t or wouldn’t pay after the pandemic freeze ended have been shielded from some of the consequences. The Biden administration enacted a moratorium that stopped delinquencies from showing up in credit scores through most of 2024, and it postponed collection from defaulted borrowers – which can involve steps like garnishing wages or Social Security benefits – until sometime this year.
That likely means there’s trouble ahead, according to a Pew Research study published in December based on research the prior summer. More than nine in ten borrowers who hadn’t made student-loan payments since the October 2023 restart said it would be difficult for them to start doing so, while about 6 million borrowers have a defaulted loan from before the freeze.
Default rates could “skyrocket” later in 2025, Pew warned. “Many more borrowers could suffer from the harsh consequences of collections with no viable route to successful repayment.”
