Supreme Court Strikes Down Student Loan Forgiveness: What Next?

Today, the Supreme Court overturned President Biden’s plan to forgive more than $400 billion in student debt, reaffirming the important principle that major fiscal policy changes should be made by the legislative branch. The Supreme Court’s decision will undoubtedly disappoint many borrowers who had hoped this policy would provide immediate debt relief. It should also renew lawmakers’ commitment to finding comprehensive solutions to the rising cost of college and the resulting debt. The court’s ruling underscores the need for bipartisan legislation that provides targeted relief to students struggling to repay their loans and protects taxpayers and borrowers from the consequences of excessive student debt by addressing the underlying forces driving the problem.

In today’s dollars, federal student loan debt expanded from $750 billion in 2007 to $1.6 trillion in 2023. During this time, the number of loan recipients increased from 28 million to 44 million people.

This expansion in outstanding federal student debt creates risks for both borrowers and taxpayers alike. It also poses significant concerns for racial equity and social mobility—low-income and Black students are more likely than their peers both to borrow for higher education and to default on their loans. Indeed, prior to the pandemic and the associated repayment pause, nearly two out of five federally managed loans were either delinquent or in default.

Yet, while the debate over student debt forgiveness captures public attention, the growth in student debt is the product of deeper problems rooted in the declining affordability of higher education. Several factors, among others, contribute to these rising costs and the resulting increases in student debt:

• Declining public investment in state systems of higher education. As a share of personal income, states’ support for higher education dropped from 1.0% in the mid-1970s to 0.5% in 2019. Public systems of higher education have responded to declining state support by increasing their reliance on tuition dollars.
• Erosion in the value of Pell Grants. Pell grants have not kept up with increases in tuition or rising costs of attendance. Between the 1999-2000 and 2019-20 academic years, cost of attendance at public four-year institutions grew by 76% while the maximum Pell Grant grew by just 29%.
• Availability of federal loans. Although the magnitude of the impact is debated, the availability of federal loans puts upward pressure on tuition prices, while giving institutions of higher education little incentive to control costs.

Debt cancellation would have done nothing to address these drivers. It is, moreover, an inefficient and regressive approach to the challenge of student debt that does not distinguish between borrowers who are struggling to repay loans and those with higher-paying jobs that will allow them to more easily repay their obligations.

Meanwhile, too many students leave higher education without completing a degree or certificate, while others graduate with a credential that provides limited or no value. For these students, even comparatively small amounts of student debt can present a tremendous burden.

Addressing these interrelated issues requires a comprehensive solution that combines front-end affordability investments for students with measures that promote institutional accountability, encouraging schools to restrain tuition increases and building their capacity to improve student outcomes.

To tackle these complex challenges, the Bipartisan Policy Center has recommended a set of solutions, including:

• Promoting accountability through institutional risk-sharing. Congress should implement a risk premium tied to student outcomes (and adjusted for low-income enrollment and student-centered spending) that would hold institutions accountable for poor loan outcomes. Lawmakers should pair this system of institutional risk-sharing with capacity-building support for minority-serving institutions and community colleges that enroll a high proportion of low-income students.
• Better evaluation and accountability. Policymakers should establish stronger metrics that encourage institutional accountability for student outcomes and for the use of federal funds. Specifically, Congress and the Department of Education should improve student data availability and transparency, standardize how colleges and universities calculate the cost of attendance, and require institutions to report on a wider array of student outcome metrics and provide clearer data on their student services spending.
• Facilitating automatic enrollment in an improved and streamlined income-driven repayment (IDR) system for federal loans. Students who borrowed less than $5,000 are the most likely to default. The Department of Education recently proposed changes to the IDR system that would make IDR easier to navigate and provide much-needed relief to some borrowers. Unfortunately, the changes would also make the system more regressive by supplying generous support to higher-income borrowers at a hefty cost to taxpayers. BPC has provided recommendations for an income-driven repayment system that closely targets repayment support for the students who most need it and who are most vulnerable to default.
• Increase funding for Pell Congress should expand the maximum Pell Grant award and better target those dollars to support college completion, enhance student outcomes, and improve affordability for low- and middle-income students. Additional Pell Grant funding should be available for students at institutions that have demonstrated success serving large numbers of low-income students.
• Flexible grants to states. Policymakers should provide states with flexible block grants to incentivize continued state investment in their higher education systems and help lower the cost of college for low- and moderate-income students.

In comparison to debt cancellation, these recommendations provide a more comprehensive approach that addresses the drivers of escalating college costs and directly targets financial support and debt relief toward the students who will most benefit from it.

Debt cancellation would have provided relief to many borrowers and would have temporarily reduced outstanding levels of federal student debt. However, it would have done nothing to address the future debt burden for students, institutions of higher education, and taxpayers.

Now is the time for policymakers to focus on a bipartisan approach to solve the challenge of student debt by promoting accountability and affordability in America’s system of higher education.