Supreme Court struck down federal student debt forgiveness

Investment Analysis Clubs Macro Economic Trends and Risks
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Who’s Impacted by the Supreme Court’s Student-Loan Forgiveness Ruling

More than 16 million borrowers who thought their loans would be forgiven have to repay

By Rosie Ettenheim and Kara Dapena, The Wall Street Journal, June 30, 2023

The Supreme Court struck down the Biden administration’s plan to eliminate as much as $20,000 in federal student debt for millions of borrowers. The forgiveness plan would have wiped away an estimated $430 billion in loans from the government’s books…

Once payments resume, the typical student-loan payment will be between $210 and $314 a month… Overall, more than 40 million borrowers would have qualified for loan forgiveness through a required application…

More than 43 million people collectively owe $1.6 trillion in federal student-loan debt as of March 31, according to the Education Department. The types of loans include Direct Loans, Federal Family Education Loans and Perkins Loans. … The largest cohort in the Education Department’s data is borrowers ages 25 to 34, and nearly a quarter of them owe more than $40,000. In the next-largest cohort, of borrowers ages 35 to 49, more than one-third owe more than $40,000. … The bipartisan debt-ceiling deal President Biden signed into law this month mandates that student-loan payments resume by Aug. 30. …[end quote]

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The burden of student loans falls hardest on people in their prime career and family formation years. It’s shocking to see that 1/3 of all households in the lowest income range have student loan debt. Many are probably young people whose income is low because they are just starting their careers. But many are probably people who went into debt to study subjects that did not equip them for higher-paying jobs. Some are carrying substantial student loan debt well into middle age and beyond.

The Macroeconomic impact of this is huge. Millions of people won’t be able to buy homes or start families because their income will be directed toward paying off this debt for many years to come. The scale of the debt (over $1 Trillion) will impact the real estate market because people who are paying hundreds of dollars toward debt repayment won’t be able to pay toward rent or a mortgage.

Student loans can’t be easily discharged in bankruptcy. The concern of the lenders was that new graduates would simply declare bankrupcy and stiff the lenders.

There is a new process to discharge student loan debt in bankruptcy but it isn’t easy. It’s so complicated that the applicant would probably need a lawyer to go through the process. It’s on a case-by-case basis and wouldn’t work for millions of people at once.

What follows is a list of ways to eliminate your federal student loan balance aside from paying in full. (Rules are different for private student loans that do not come from the government, and they’re generally much more strict.) If you know anyone who has student loans refer them to this article.

Not all student loan debt is federal. Some is from private lending. The total is $1.77 Trillion and rising. Today’s Supreme Court ruling only applies to federal student loan debt.

Families have invested an immense amount of money into education but much of it may be wasted. Around 40% of undergraduate students leave universities and colleges every year. On average, these students are expected to earn $21,000 less than college graduates, ultimately making 35% less than their counterparts per year.

The Macro impact of the Supreme Court ruling will be greater wealth inequality. Many of the college dropouts come from poorer families and run out of money before graduation. Their investment in education will burden them for years.

Wendy

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A new survey found that 73 percent of student loan forgiveness applicants would spend the extra money from relief on non-essentials like vacations, eating out at restaurants, buying a new phone, drugs/alcohol, gambling, and gaming systems.

The Macro issue of forgiving student loan debt is it exacerbates a much larger problem, the continued increasing cost to get an education. If the student doesn’t have skin the game, they won’t be price sensitive. Why is the teacher to student ratio higher than it has ever been and yet the cost of tuition is rising faster than basically any other set of goods and services?

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As usual, if you look at this survey (of a whole whopping 1,250 people btw), it also says that “75 percent of recipients plan to spend money on groceries, 66 percent on rent or mortgage payments, 65 percent to pay the credit card debt, 62 percent to cover transportation expenses, 60 percent for medical care, and 40 percent for childcare.”

There are some nuances in this little survey.

Pete

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Because the administrator to student ratio is lower than it’s ever been. And the cost of administrators is rising as fast, or faster, than tuition. Add to that, the cost of non-education expenses (Sports, DEI, facilities, security, etc) that has been going up way way way faster than anything else.

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Perhaps the impact of this decision will be people taking debt more seriously. Considering the way the last POTUS stiffed people right and left for the money he owed them, a reminder that debt matters is timely. The magical debt fairy waiving her wand and having debt magically disappear is not the way to remedy unequal access to higher education based on finances. “Free” community college in exchange for a couple of years of internship in areas deemed necessary would be a great way to start leveling the field, and a way to delay the start of studies until more mature, rather than spending the first high cost semester going crazy and failing classes due to partying.

IP,
who started saving to fund the kids’ educations before they were even born

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I have posted before, a graph showing the trend in higher education in Michigan. I would not be surprised if several other states have done the same. During the 70s, 80% of state university revenue came from the Michigan state government, with the students picking up the other 20%. Now, Lansing only provides 30% of university revenue, and the colleges put the bite on the students for the other 70%. Bottom line, the student’s share of financing the university has increased 250%, while the (L&Ses) in Lansing have diverted most of the money that used to go to education, to “other priorities”.

Steve

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Sounds like malarkey. Median (why does every site want to quote the very misleading average?) monthly student loan payment in 2020, prior to Covid, was $180 to $222 (depending on your source).

SCOTUS blocked student-loan cancellation. Here’s what it means for your loans. - MarketWatch.

If you are a college graduate and $222 (or less) is enough to keep you from buying a home, then you have bigger problems than student debt.

What did the rest of us, the millions that had/have students loans do before forgiveness was ever even a consideration?!? Go homeless?

Note, $200 is about 27k in home value at current rates. Someone that was going to buy a $400k home could instead buy a $370k with about $200 less a month.

Edit: I will add that the loan cancellation was for just $10k. A trivial amount that should have no impact on the ability of a person to buy a house.

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I expect that a non-trivial proportion of the folks who would have been eligible for the loan forgiveness have college debt but don’t have a college degree. My recollection is that around a third of borrowers fall into that category. I expect that they’re probably over-represented in the pool that would have qualified for the debt relief.

Estimates of the total cost of the relief program were about $30-40 billion per year. Probably big enough to have a non-zero impact on the broader economy, but certainly not big enough for it to have a “huge” Macroeconomic impact. At least for that specific program - this also certainly puts the kibosh on any future additional debt relief programs without congressional authorization, which is certainly not forthcoming.

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@MataroPete , if I’m being honest, what someone might spend the extra money on is somewhat irrelevant to me. About 80% of those with student debt owe less than $20k, if I recall those figures correctly. It isn’t going to meaningfully determine the long term divide between the rich and poor, as the original topic suggested. Furthermore, with shortfalls projected for Medicare and Social Security, along with cuts to programs for the youngest, it seems morally wrong to pay the voluntary debts of the able bodied and educated.

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Maybe the SCOTUS will do what the Fed hasn’t been able to do with its interest rate hikes - precipitate a recession. The next recession could be named the Robert’s Court Recession.

Resuming student loan payments will cost U.S. consumers $18 billion a month, the investment firm Jefferies has estimated. The hit to household budgets is ill-timed for the overall economy, Jefferies says, because the United States is widely believed to be on the brink of a recession.

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“Morally wrong” falls into the realm of politics, which is forbidden on METAR.

The Supreme Court rules on constitutionality. The Constitution says that only Congress can decide how to spend government funds. It was clearly unconstitutional for the president to unilaterally commit to spending government funds without a vote of Congress.

I happen to agree with you, but that’s besides the point.

Wendy

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That would be true if only it was true in this case. It isn’t.

In 2001 the US Congress granted the Education Department the ability to “waive or modify” any regulations or rules it deemed fit; this was a reaction to 9/11 and the economic distress it portended for the US economy in the aftermath. The student loans at issue were made under government auspice and funding, directly or otherwise. This did not affect private borrowing at all.

Ironically, it was Betsy DeVos as head of the Education Deparrment , and during the prior administration which invoked the law (“The HEROES Act”) to suspend payments of both principal and accrued interest for anyone with student loans at the time. I agree that “waiving” some of the principal ($10,000 or $20,000, depending) was an aggressive reading of the law, but then “waiving repayment for an indeterminate amount of time, including accrued interest” isn’t exactly a zero-sum rendition either.

Congress authorized the law. Two administrations - of opposite political parties - chose to interpret the law giving them the ability to “waive” certain responsibilities consonant with that law. Only of late, in political fashion, did one of those parties decide to change its position, goaded by an over-reach by their opponents.

The USSC decision was based more on “standing” than on “action”. They declined to hear a nearly identical challenge from individuals last year, but this time decided that State Governments could claim injury, and so decided 6-3 to grant “standing” and decide against the forgiveness program.

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The Supreme Court has nothing at all to do with the restarting of payments after the COVID emergency has ended. That was announced a few weeks before the recent SC rulings on the other issue (forgiveness as proposed by the Biden admin).

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Once again I skirt into the political realm because economics are politics regardless that some want it to be math.

The plan makes loan payments more affordable in the following ways:

  • The most borrowers must pay toward their undergraduate loans is 5% of their discretionary income, down from 10%.
  • No borrower making less than 225% of the federal poverty level will have to make a monthly payment.
  • Loan balances will be forgiven after 10 years of payments — instead of 20 years — if the original loan balance was $12,000 or less.
  • Borrowers won’t be charged with unpaid monthly interest, so balances won’t grow if they make their payments — even if that monthly payment is $0 because their income is low.
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That has been claimed repeatedly. It is not that true. It is a wedge issue to not get taxed to pay for school funding.

Meanwhile the boomers going to state schools generally paid 1 part with the state picking up 4 parts of the cost. Today it is the opposite and now the boomers resent the idea of paying for others. I get selfishness was popular with Reagan but he was an awful president. Bragging about selfishness is not leadership. The results economically for the last forty years because of supply side econ have been horrible.

We need to keep in check ideas planted to lie. I am not saying the lies are partisan. The lies are just planted there.

Supply side econ is not economics. Milton Friedman was never correct or right. Samuelson constantly proved him completely wrong. People listen and are fooled.

We need a much better US economy. I do not accept spreading lies unwittingly.

College costs have gone up. So has everything else. College costs were lower decades ago in relative terms. So was medicine. Doctors are now getting paid more than ever in history in relative terms. The difference is demand in the economy.

Why does the US need college educated people? Do you really not know any of you? So if we need this we should support it. Back to boomers do not want to pay much in taxes. It is disgusting. Our parents most of them did not dodge responsibility.

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A pol interviewed on the news tonight expanded on what I have talked about; the shifting of the costs from state government, to the students. It isn’t just in Michigan. He claimed that, on average, state funding used to cover 2/3rds of the cost, and students 1/3. Now, that has reversed, with the state funding 1/3rd and the student’s burden doubling, to 2/3rds if the cost. Additionally, Pell Grants used to cover 80% of the cost, but now only cover 30% of the cost.

Yes, selfishness was hailed as a virtue in the 80s. People were told that, if they threw their neighbor under the bus, they might get a tax cut.

But I would say it is not all boomers that are against funding education. I submit that it is the rich boomers, who send their spawn to private school, and Ivy League, private, colleges, that refuse to pay any tax to fund education for the Proles. They are probably the ones eager to push the “schools are doing woke indoctrination” narrative, to further undermine support for public education.

Steve

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Doesn’t all this just reset the economic impact to the way things were in, say, 2019? What am I missing?

DB2

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Steve,

There are older guys around here with now older grandchildren who are against paying local taxes because education should not cost that much.

Boomers face a tough retirement because we were lied to so much about the economy. Taxes going up is something most boomers wont support. Not a super majority but a simple majority.

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How does the typical old phart know what education “should” cost? I have commented before on how education in Michigan has been partly defunded to pay for tax cuts and subsidies for the “JCs”. College cost burden has been shifted to the students. Many public schools have dropped shop classes and driver’s ed. Many school districts started charging fees to play sports. A few days ago, I posted about how Farmington Public has dropped the sports fees, because, apparently, it is critically important that spawn play sports, but the STEM classes, where kids actually learn something, all charge a fee of at least $10-$15, for classes that are mostly, if not all, book learning. Farmington, unlike Livonia Public, still offers driver’s ed, with an $80 fee.

So where to the old phartz get their information on what education “should” cost? From Fox Noise blowhards?

Steve

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Yep purposely planted misconceptions. Dumb ideas. Dumb beliefs. Counter productive garbage. Self serving is the motivation. It is not just the JCs.

Remember minimally 50% of boomers are living by each month’s SS check. Then 40% see their money completely running out. Simple math do not raise taxes.