Neal McCluskey
On January 16, the US Department of Education announced that it will delay the collection of defaulted federal student debt via wage garnishment and retention of federal funds such as Social Security payments. The reasons offered by the Trump administration are that the Biden administration left student debt repayment a confused mess that needs to be clarified before forced collection resumes, and the Working Families Tax Cuts Act—aka One Big Beautiful Bill—will simplify debt repayment starting this July, as well as allow a second chance for defaulted borrowers to rehabilitate their loans.
This makes some sense. Federal student lending is, indeed, perplexing, which was made worse by President Biden’s unconstitutional debt cancellation proclamation and efforts to unilaterally transform repayment. There are currently seven repayment plans that are due to be reduced to two in July. In an ideal lending world, granting leeway for a lender’s mistakes, and as better repayment options come on line, could be reasonable.
But federal student loans are not an ideal lending world. They are loans made in a political world using money taken from taxpayers, whether they wanted to lend or not.
Because these are government loans, the first thing to determine is whether the law allows the education secretary to delay involuntary repayment. It appears to. Wage garnishment falls under the Higher Education Act, which says that the Secretary of Education may—not shall—garnish wages to collect on unpaid debts, so the administration probably can legally delay such collection or not use it at all. The Debt Collections Improvement Act says that agency leaders “shall try to collect a claim of the United States Government for money or property arising out of the activities of, or referred to, the agency.” But it also says leaders “may compromise a claim of the government of not more than $100,000,” suggesting the education secretary could implement measures short of retaining funds for many borrowers.
Even if legal, there is a huge problem with another delay: It will likely bolster the deleterious sentiment among borrowers for which the Trump administration blamed Biden. “Why bother putting a lot of effort into repaying?” many borrowers will likely ask. “The feds will never really demand it.”
Political reality also makes it quite possible that the delay, if not stopped now, will become permanent. The Education Department’s statement suggested that collection would resume after new repayment simplification came online in July, but it included no concrete end date for the moratorium. And during COVID-19, we saw repayment delay after delay after delay, with excuse after excuse for why borrowers could not restart what they were always supposed to be doing: repaying their loans.
The political incentives to continually defer repayment are potent. Borrowers have strong incentives to fight politically for what they want—continued non-repayment—because it has a big impact on them. For taxpayers who are not getting repaid, in contrast, student loan losses are just one among thousands of ways the feds drain their wallets. The concentrated benefits to borrowers and diffuse costs for taxpayers make policymakers’ incentives to respond to borrowers stronger than to get taxpayer dollars back.
Given the political incentives and practical experience, it seems unlikely that allowing a delay will ultimately result in taxpayers getting their money returned, even if the arguments for a delay make some intuitive sense.
Going deeper than the question of repayment, everyone should see this mess for what it is: more evidence that the federal government should not be involved in student lending. The programs:
- disburse billions of dollars to borrowers who are unlikely to complete programs with good employment and pay prospects, resulting in mass defaults
- fuel rampant price and credential inflation
- are unconstitutional
Private lenders, risking their own money, might well decide that the best business decision is to get their own house in order and simplify customer options before using forceful, last-ditch debt-collection efforts. But the federal government is not a private lender risking its own money. It is risking yours, and should not delay in getting you repaid.