President Joe Biden met with congressional leaders May 9 in hopes of coming to an agreement to raise the country’s debt limit, or the cap on how much the federal government can borrow to pay for its functions and programs. Treasury Secretary Janet Yellen announced that the country reached its debt limit in January, prompting “extraordinary measures” to maintain government functions as lawmakers negotiate a deal. On May 1, Yellen warned that the U.S. could hit its debt limit by June 1, which could trigger a national financial crisis. With the June 1 deadline looming, The Michigan Daily examined how a potential default on the national debt would impact University of Michigan students.
In an interview with The Daily, Justin Wolfers, U-M professor of economics and public policy, explained how the national debt works and why it has become a politically polarizing issue.
“In important respects, government debt is like regular debt, when you spend more than you take in,” Wolfers said. “The government doesn’t have any savings, so therefore if you decide to spend more than you take in, you must borrow. That’s what the government debt is.”
The federal government generally incurs financial debt by issuing bonds, a type of loan from the government to public and private buyers. According to Wolfers, historically, when the government ran out of bonds, Congress would increase the limit without stipulations. However, Wolfers said political polarization in the last 20 years has made raising the debt limit less politically feasible, risking economic distress.
“At various points in the last 20 years, one side or the other, but predominantly Republicans, said, ‘Oh if we don’t do this, we can hold the other side up for ransom,’” Wolfers said. “Historically, no one did this because not raising the debt limit would be bad for the economy, bad for the constituents.”
If Congress is unable to reach a deal by the X-date, or the date when government money runs out, Wolfers said the economy may enter a condition similar to the 2008 financial crisis.
“If we show that there’s no reason for global markets to be confident that they’ll be repaid when they lend money to the (United States), that will cause an enormous change in interest rates,” Wolfers said. “That would cause a financial shock of a form that we don’t fully know the answer (to). We do know if everyone’s running around worried that everyone else is secretly broke, that’s going to create the problems we saw in 2008 and 2009.”
Wolfers also emphasized the potential impact of a debt default for students who are on federal financial aid or working for professors with federal grants.
“I imagine there are some number of students on federal financial aid, and if they’re waiting for the next check from the government, it’s not coming,” Wolfers said. “I know many students work for faculty who are on federal grants, and those grants are not coming.”
In an email to The Daily, University spokesperson Kim Broekhuizen said the University is monitoring the situation, though at this point is unable to determine how students relying on financial aid would be affected.
“The impact that this would have on federal aid is not known at this time,” Broekhuizen wrote. “The situation is being monitored closely by the Office of Financial Aid, but there isn’t enough information available to speculate on how financial aid for U-M students would be affected, if at all. The underlying statutes and determinations of federal student aid do not change if the U.S. government were to default on its debts.”
Broekhuizen said the University would provide assistance to students affected by a default through OFA programs, but recognized that most difficulties students may face would be a product of broader effects on the economy.
“(The Office of Financial Aid) has existing practices to address the needs of students and families experiencing unique hardships and those will still be in place regardless of what happens with the debt ceiling conversations,” Broekhuizen wrote. “The impact of the U.S. government defaulting on its debts isn’t specific to Higher Education so the effect on U-M students will be tied to the effect on the overall economy. Not enough is known at this time to anticipate the resulting needs of U-M students and families.”
According to Broekhuizen, U-M students received $301.2 million in federal financial aid during the 2021-2022 school year, with 40.7% of presumed eligible students receiving some form of federal aid.
Citing evidence from the 2008 financial crisis, Wolfers said rising seniors may also face difficulties finding employment after graduation if the U.S. defaulted on its debt.
“If we have a financial crisis, the next generation of seniors are going to graduate into a recession,” Wolfers said. “The students who graduated in 2009 had a really hard time getting a job. In fact, there’s research to show that many years later, their wages are lower than folks who graduated during better economic times. So it changes your post-college life literally for decades.”
Rising LSA sophomore Aaron Castro, who relies on federal financial aid and programs, said he feels worried about the potential harms of the debt default on the cost of his education.
“Anyone receiving federal funding, like (Supplemental Nutrition Assistance Program benefits) for example, they will probably not receive their funds very quickly or at all,” Castro said. “So that’s sort of concerning. And everything will probably get a little more expensive due to the possibility of another recession coming from this, so students would take a big hit if we couldn’t get this passed.”
House Republican and Democrat leaders met with Biden Tuesday and told reporters they expect a deal to raise the debt ceiling in the coming days. Speaking in a press conference at the White House on Wednesday, Biden said government leaders were focused on avoiding a debt default.
“Every leader in the room understands the consequences if we failed to pay our bills,” Biden said. “And it would be catastrophic for the American economy and the American people.”
While Congressional leaders may come to an agreement to raise the debt ceiling, Wolfers said it could be difficult to vote on the agreed-upon legislation, citing House Speaker Kevin McCarthy’s slow election to the speakership, taking a historic 15 rounds of voting.
“The concern is that in the current Congress, (House Speaker Kevin) McCarthy couldn’t even organize his own party to elect himself Speaker of the House,” Wolfers said. “How confident are you that he can organize his own party to pass a debt limit raise?”
Daily Staff Reporter Joshua Nicholson can be reached at firstname.lastname@example.org. Summer News Editor Astrid Code contributed reporting to this article.