Day after criticizing efforts by the Biden administration to ease student loan debt, former Treasury Secretary Larry Summers offered an alternative.
“I think the best way to relieve student debt would be to allow it to be discharged in bankruptcy,” he wrote Tuesday on Twitter. “I would support this reform.
This means that people with student debt can pay it off by successfully filing for personal bankruptcy. Currently legal under Chapters 7 and 13 of the US Bankruptcy Code, insolvents can restructure their debts, albeit at some personal cost, such as taking a hit on credit scores.
Summers added that bankruptcy “would also penalize other private creditors, as opposed to government debt relief, which would partly subsidize them.”
President Joe Biden is expected to announce on Wednesday its student loan debt relief plan, which could forgive $10,000 of student debt per borrower for those making less than $125,000 a year. Changes to the implementation of the Bankruptcy Code are unlikely to be included in the plan.
Summers, a former Treasury secretary under Bill Clinton and chief economic adviser to Barack Obama, has been a fierce critic of the Biden administration. Just yesterday on Twitter, he warned that student debt relief can contribute to inflation.
Summers has no official role in the Biden administration. But it is said that there is helped the rescue climate change and the president’s health care agenda, swaying a key senator to support the Inflation Reduction Act.
Summers, now an economics professor at Harvard University, isn’t the only person advocating for student loan discharge through the bankruptcy process. There is also his former Harvard colleague, Senator Elizabeth Warren.
It’s ‘Nearly Impossible’ to Get Rid of Student Debt Through Bankruptcy
Before becoming one of Massachusetts’ two Democratic senators, Warren spent most of his career as a law professor studying why American families end up in debt and broke. Her plan to fix the US bankruptcy system, in particular, was the main reason she entered politics.
In the mid-2000s, Warren had a “Bankruptcy Blog” where she regularly wrote about these issues for Talking Points Memo, or TPM, a political news and opinion website. In 2008, before running for the Senate, she advised Obama on the bailout and came up with the idea for the Consumer Financial Protection Bureau.
In the 2020 presidential campaign, Warren argued that the bankruptcy system makes it “almost impossible” for many Americans to get out of debt. She accused Congress and the courts of making it increasingly difficult to forgive student debt as part of the process.
“Congress initially passed a law stating that publicly guaranteed student loans could only be forgiven upon a showing of ‘excessive hardship’ by the borrower,” she wrote in a post on her campaign website. “Ultimately, courts have interpreted this language to impose a very high standard for discharge—a standard not generally applied to other forms of consumer debt.” Then, as part of the 2005 bankruptcy bill, Congress specifically protected private student loans with the same undue hardship standard.
During the presidential campaign, she offered to cancel up to $50,000 in debt for 95 percent of people who have it, versus Biden’s possible $10,000.
Her plan included making student debt dischargeable like other consumer debt, allowing people to seek relief through bankruptcy, which is exactly what Summers says he would support.
Summers and Warren have had disagreements over monetary policy in the past. Recently after I wrote a comment on Wall Street Journal criticizing the Fed raising interest rates and a call Summers as the “cheerleader” of the approach, Summers clapped back.
“@SenWarren’s attacks on @federalreserve’s monetary policy and my economic analysis are, in my view, misguided and, if heeded, could have devastating consequences for tens of millions of workers,” he wrote on Twitter in response to her article.
The economist even appeared in her 2014 memoir A fighting chancein which she mentioned a dinner the two had.
“Larry leaned back in his chair and offered me some advice,” Warren wrote. “I had a choice. I could be an insider or I could be an outsider. Outsiders can say what they want. But the people inside don’t listen to them. However, insiders get a lot of access and a chance to push their ideas. People – strong people – listen to what they have to say. But insiders also understand one unbreakable rule: They do not criticize other insiders.”
“I was warned,” Warren said.
For now, Warren and Summers are out looking at Biden’s plan to repeal student debt.
This story was originally featured in Fortune.com