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Extra Credit: The looming $21.3 billion in debt that could cost Americans their homes

Hello and welcome back to MarketWatch’s Extra Credit column, a weekly look at the news through the lens of debt.

This week we’re diving into the debt ceiling and student debt cancellation. But first up, rent debt. 

The debt that could cost people their homes

Nearly 6.4 million households owe an estimated $21.3 billion in rent debt, putting them at risk of losing their homes when the national eviction moratorium expires on Saturday

Though owing back rent is a phenomenon that pre-dates the pandemic, COVID-19’s combined health and economic crises likely exacerbated it. Susan Shin, the legal director at the New Economy Project, which hosts a hotline that provides free advice and referrals to low-income New York City residents, said her organization has heard from people struggling to afford rent after they lost their jobs due to the pandemic or had their limited income impacted by COVID-19 in some way. 

“We’ve had an uptick in calls from people who are concerned about their growing rent debt and whether they will be able to pay it off,” she said. 

The National Equity Atlas, a combined initiative of PolicyLink and University of Southern California’s Equity Research Institute, began tracking rent debt in May, said Sarah Treuhaft, vice president of research at PolicyLink, which does research and advocacy focused on equity. The idea was that by understanding how much rent debt Americans owe and who exactly owes it, the rent debt dashboard could help inform policy.

“Rent debt is one of the key equity issues of the pandemic,” she said. “It’s predominantly low-income renters, people of color, who were negatively impacted by the pandemic’s economic fallout — that’s who is behind on rent.”

Unless these renters are protected by a local eviction moratorium — some states and cities have bans on evictions that last beyond the national freeze, which expires Saturday — they’re at risk of losing their homes. “It will depend on the landlord whether or not they proceed with eviction or help tenants stay in their units by creating payment plans, forgiving some of the rent,” Treuhaft said. 

The various coronavirus relief packages have made about $46 billion in funds available for renters to use to cover back rent and make landlords whole. That could mitigate renters’ eviction risk. The problem: The money, which is being distributed through states and localities, is trickling out slowly and may not reach renters or landlords in time. The Consumer Financial Protection Bureau launched a tool this week that renters and landlords can use to find local programs. 

“It would be a policy failure if there is mass eviction because of the expiration of the moratorium, given that the resources are there and states and localities are trying to get them to renters and landlords in need,” Treuhaft said. 

Student debt forgiveness of all types

Over the past few months colleges have been wiping out balances owed to them by students. This so-called “institutional debt” isn’t student loan debt. The money is often bills students or former students owe to their schools over unpaid tuition, parking and library fees, and collectively, it’s an estimated $15 billion. Advocates and higher education leaders have been concerned about this debt for years, because it can hold students back from completing their degrees or transferring to another college. 

It turns out there was a simple solution to mitigating that debt: More money. 

As part of the American Rescue Plan, the coronavirus relief measure passed by Congress in March, the Department of Education gave colleges the flexibility to use the funds they received from the package to cancel institutional debt. Almost immediately, Historically Black Colleges and Universities began wiping away student balances. Schools in other sectors that educate low-income and other underserved students followed suit.

This institutional debt is separate from the $1.7 trillion borrowers owe in federal and private student loans, but any time a borrower’s debt is wiped away it proves debt discharge is possible. That’s why proponents of broad student debt cancellation are citing these schools’ decisions as they advocate for the policy.  

“The presidents of Historically Black Colleges and Universities have been using those ARP funds for cancelling student debt, which I think further makes the case that they understand the burden that this has disproportionately on Black families,” Representative Ayanna Pressley, a Massachusetts Democrat, told reporters this week. “We should be following their lead, we should be being the pace setters.” 

Despite support from some mainstream Democrats, broad-based debt cancellation still faces a political battle. After Pressley and Senators Chuck Schumer and Elizabeth Warren called on President Biden again this week to cancel up to $50,000 in student debt per borrower, Speaker of the House Nancy Pelosi told reporters that Biden doesn’t have the power to cancel student debt. Instead, she said, “that has to be an act of Congress.” 

Warren and Schumer have based their calls for Biden to cancel debt in part on a legal memo written by attorneys at Harvard Law School’s Project on Predatory Student Lending, which says the Higher Education Act provides the Secretary of Education with the authority to cancel student debt. One of the attorneys who authored the memo is now working in the Biden administration. 

Some supporters of student debt cancellation have worried that discharging it through executive order instead of through Congress could draw legal challenges from student loan servicers, lenders and other entities involved in the loan process. 

Earlier this year, the White House said Biden was directing the Department of Justice and the Department of Education to prepare a legal memo assessing whether Biden had the authority to cancel student debt. So far, those memos haven’t appeared. 

The debt ceiling — what is it and why it’s up for discussion every few years

Policymakers are gearing up for a battle over the government’s debt. In 2019, Congress suspended the debt ceiling, which is the limit on the amount the government can borrow, but that suspension is set to expire on Saturday. 

Treasury Secretary Janet Yellen warned lawmakers that if they don’t act to raise the debt ceiling by Monday, the Treasury Department will begin taking “extraordinary measures” to prevent the U.S. from defaulting on its obligations. But Senate Minority Leader Mitch McConnell has said Republicans won’t vote to do it. 

But what is the debt ceiling and why do lawmakers fight about it every few years? Let’s dig into these questions. 

The debt ceiling was established by Congress in 1917 as a way to make it easier for President Woodrow Wilson to finance America’s participation in World War I. Before 1917, Congress would need to provide authorization every time the government wanted to borrow money. But legislation passed by Congress that year allowed the government to roll over its debt without seeking permission from lawmakers. 

But Congress was wary of providing Wilson with a “blank check,” as Steven Pressman, an emeritus professor of economics at Monmouth University, wrote in a recent discussion of the debt ceiling. So they put a limit on the borrowing. “That’s where we got our current debt ceiling,” Pressman said. 

Though there may be reasons to worry about the growth in the nation’s borrowing, particularly as it relates to the costs of Social Security and Medicare, refusing to raise the “completely arbitrary” government borrowing limit doesn’t do anything to get at those issues, said Harry Holzer, a professor at Georgetown University’s McCourt School of Public Policy. 

Raising or suspending the debt ceiling doesn’t increase the amount of money the government actually spends. Instead, it allows for the government to keep borrowing to meet obligations that have already been enacted by law. If the government runs out of money to meet those commitments, the U.S. would default on its obligation to pay its bills. 

“If you want to do something about the debt, you’ve got to do the hard stuff,” he said, like raising taxes, cutting spending and thinking of ways to reform the retirement system. In addition, there are also times — like, say, a low-interest rate environment and a raging health and economic crisis — when it makes sense for the government to borrow. 

“If we hadn’t been willing to pile up debt the last year the economy may have gone into a depression,” said Holzer, chief economist for the U.S. Department of Labor during the Clinton administration. “A good example of a time and a place where you don’t worry about the debt.” 

Both Holzer and Pressman agree that the debt ceiling battle isn’t about whether high levels of government borrowing are good for the country’s economy. Instead, it’s about politics. Lawmakers will use the threat of not raising the debt ceiling as leverage for their priorities, for example, cutting spending. 

Still, this “game of chicken,” as both economists referred to it, can have consequences. Though it’s unlikely that lawmakers would allow the battle over the debt ceiling to progress to the point where the U.S. defaults on its obligations, even the threat can pose a risk to the economy. In 2011, Standard & Poor’s downgraded America’s credit rating, amid a partisan battle over the debt ceiling. 

“The thing that makes me somewhat optimistic is that if the politicians get to be really stupid and we do come really close to a crisis, I can almost guarantee a really sharp decline on Wall Street,” Pressman said. “Once there’s a sharp decline on Wall Street then the politicians panic.” 

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