Debt Ceiling Deal Will Force Student Loan Repayment Pause to End

The debt ceiling deal struck by President Biden and House Speaker Kevin McCarthy (R-Calif.) is meant to avert the crisis of the U.S. defaulting on its financial obligations and the ugly macroeconomic aftermath that likely would have followed. The deal has both sides making compromises — constraining national spending over the next two years in exchange for debt limit increases during the same period.

Republicans also took home a few other policy wins — adding some work requirements into existing welfare programs and the commitment to restart student loan repayment. The latter is a big win. The student loan repayment pause is costing taxpayers every minute that it remains in place and it stands to undermine the entire system of higher education finance by sending the message to borrowers and future students that these debts to taxpayers needn’t be repaid.

Repayment of federal student loans — a $1.6 trillion portfolio — has been on hold since the beginning of the COVID-19 pandemic, when President Trump used executive authority to pause collection of federal student loans in the face of unprecedented economic uncertainty. The pause initially made some sense, as the nation was racing to implement programs, like the Paycheck Protection Program, that would provide relief to Americans facing the fallout of an economy needing to come to a screeching halt. But President Biden subsequently extended the pause unnecessarily, despite strong economic conditions, costing taxpayers billions of dollars and undermining the system of higher education finance by impressing upon student borrowers the notion that they needn’t pay back their education debts to the nation.

Biden previously promised that student loan repayment would begin following a Supreme Court decision on the legality of his attempt to cancel as much as $20,000 per borrower, which is expected later this month. But he has made this promise in the past only to later extend the pause further. Given this track record, experts have questioned whether the Supreme Court decision would, in fact, bring the student loan repayment pause to an end or whether Biden would attempt a further extension — the appeal of avoiding delivering a financial blow to a key voting bloc just as the 2024 presidential election campaign season gets into full swing. Democrats, however, wishing to minimize the appearance of their compromises in this bill will argue, of course, that the restart of student loan repayment was imminent and comes at no cost to the party.

The restart of student loan repayment comes at a time of unprecedented uncertainty in the system of federal student loans. Millions of borrowers are awaiting news of the Supreme Court ruling on Biden’s debt cancellation effort, which for many will make a massive difference in the sum they’ll owe once payments again become due. At the same time, the administration is working to quickly implement an expansion of the safety nets available to borrowers that were announced along with the news of the cancellation plan — but received less attention from the media, despite massive implications for borrowers and the federal budget. 

Meanwhile, the Department of Education is working behind the scenes to get the student loan repayment infrastructure ready to fire — all while having to implement the myriad of incremental policy changes that the administration has pushed through over the course of the past two years.

According to estimates from the Treasury, the U.S. is just a matter of days from running out of the cash needed to keep the nation current on all expenses due. The Senate's passage cements the debt deal; the borrowing constraint on the Treasury Department will be lifted, new bonds will be issued to raise cash, and we’ll be able to keep all bills paid as they come due. It’s difficult to overstate the magnitude of the economic disruption that would be caused by a U.S. default. Raising the debt limit will be a massive win for the economy and also for the federal student lending program.

Beth Akers is a senior fellow at the American Enterprise Institute, where she focuses on the economics of higher education.