There’s a lot that’s wrong with Biden’s student debt forgiveness plan — morally, economically, and legally. The plan is fundamentally unfair; many experts think it will be inflationary, and it’s almost surely illegal under Supreme Court case law. But that’s not the whole story: As a senator in 2005, Joe Biden pushed changes in bankruptcy law on behalf of the credit card industry that helped precipitate the student debt crisis.
Pre-Biden Bankruptcy Laws
There is indeed a student debt crisis. About 45 million Americans owe something like $1.6 trillion in student loans. Most of the debt is owed to the government. But a sizeable chunk (about 8 percent) is owed to private lenders.
In general, borrowers burdened by too much debt and unable to pay their loans can usually discharge them in a personal bankruptcy case. Some debts, particularly those owed to the government, are not dischargeable. But consumer loans and credit card debts generally are dischargeable. Before 2005, young people who were overwhelmed by student loans from private lenders were able to get relief by filing for bankruptcy. Even student loans from the government had been dischargeable before 1976, though that was later changed.
The upside of bankruptcy for the debtor is that the slate is wiped clean. But there’s a major downside to bankruptcy: Your credit rating is shattered. You’re a proven bad risk, and if lenders deal with you at all in the future, they’re likely to demand high-interest rates or substantial collateral or both. But that’s just as it should be: You shouldn’t be able to walk away from your debts and stiff your creditors with no consequences at all. Fear of being branded a bad risk is a healthy incentive either not to borrow too much or to pay up if you can.
Biden Protecting the Banks
Those were the normal rules and incentives before Biden led a group of 18 Democrat senators in supporting changes in the bankruptcy law in 2005. One of those changes barred most student debtors from being able to discharge their private loans. (Congress left a tiny loophole for some student borrowers, but it wasn’t available to the vast majority.) Biden was an enthusiastic supporter of the legislation, voting for it four times before its final passage in 2005.
This kind of protection for lenders is exceptional; in general, private consumer debt can be discharged. The legislation Biden wanted was a sweetheart deal for the banks that stripped student loans of bankruptcy protections. And it led to a train wreck: Students borrowed too much, couldn’t find the kind of employment that would let them pay off their loans, and began to buckle under the strain. Student debt tripled in the decade after 2005; more than 1 million people were defaulting on their student loans every year.
Worst off were the student borrowers who had been suckered into attending colleges whose programs couldn’t lead to good jobs, and who dropped out of college saddled with debt to take low-paid work at Starbucks.
Biden’s Debts to the Financiers
Why did Biden staunchly back this change — even as Democrats like Teddy Kennedy denounced it for “sacrific[ing] Americans to the rampant greed of the credit card industry”? Because Biden was a long-time water carrier for the credit card and banking industries. And both he and his family profited from that arrangement.
Biden has long had mutually rewarding ties to the financial services sector, (as do many members of his Cabinet and others in his inner circle). In the 2003-2008 Senate electoral cycle, Biden received more than $500,000 from credit card companies, financial services, and banks. For decades, he was especially close to the credit card company MBNA (now part of Bank of America) — so much so, that he felt obliged to say in 1999, “I’m not the Senator from MBNA.” Like so much else that Biden says, this was false.
For over 20 years, MBNA was Biden’s largest contributor. MBNA hired Hunter Biden straight out of law school, made him an executive, and retained his services for five years after his departure — for an undisclosed sum — as a “consultant.” So during the years when Biden was backing and voting for a bill that enriched corporate lenders and screwed over student borrowers, Hunter was still on MBNA’s payroll.
The reckoning has come 17 years later. As president, Biden had to do something to fix the problem that Biden as senator had helped to create. Hence, the giveaway of $500 billion. And Biden’s loan forgiveness does absolutely nothing to make things better — in particular, nothing to bring the exorbitant cost of higher ed down, or improve its quality, or steer young people into careers that will let them build better lives, enjoy higher incomes, and contribute more to society without a huge overhang of debt.
A Better Plan
If Biden had considered the public interest, he could have proposed a plan to Congress that would have enabled student borrowers — whether in debt to the government or private lenders — to discharge their debts in bankruptcy, at least if they had paid, say, seven years’ worth of loans. This would have returned the student loan program to something more like its earlier incarnation.
Yes, it would have cost the government, i.e. taxpayers, hundreds of billions, but probably less than the plan he adopted. By requiring that the student has paid off the loan for several years before being able to shed the rest, it would have prevented the worst abuses. It would have created an incentive to continue payments on the loan because bankruptcy damages the borrower’s credit rating.
So some of those whom Biden’s program benefited — likely the ones best able to shoulder their payments — would likely not have chosen bankruptcy. On the other hand, the borrowers in greatest distress would have taken advantage of the opportunity. And if Congress enacted these changes, their legality would have been unassailable. But no, this could have hurt the banks. So rather than trying to repair his past mistakes, Biden chose the quick and dirty but less effective fix.