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Consequences for Student Financial Aid If Congress Doesn't Raise the Debt Ceiling

Mark Kantrowitz

July 14, 2011

The game of chicken being played out in Washington, DC, may have serious consequences for student financial aid as well as the rest of the economy.

Congress and the White House are fighting over raising the debt ceiling, which caps the amount the federal government can borrow to pay its bills. The current debt ceiling is set at $14.294 trillion. The federal government is expected to reach this debt ceiling by August 2, 2011.

Both parties are playing a dangerous game of brinksmanship, trying to leverage the must-pass nature of the debt ceiling legislation for their priorities. The disagreement between the two parties is centered on revenue increases. One side wants only spending cuts without any tax increases. The other side insists on combining spending cuts with revenue increases, such as repealing a variety of tax loopholes and allowing temporary tax cuts for the wealthy to expire. Both sides appear to be reacting emotionally and with a lot of political posturing.

If Congress does not raise the debt ceiling, the federal government will no longer be able to borrow money to pay its bills. The federal budget runs at a deficit, with expenses exceeding income by about $135 billion a month. If the government is unable to borrow to pay its bills, it would need to cut spending by that amount immediately. That represents almost a 40% cut in spending.

The federal government is unlikely to default on its debt, even if it hits the debt ceiling. A default is a failure to make payments of principal and interest. But the interest on the national debt is only about $16 billion a month on average, so the government could easily continue to pay the interest out of the $220 billion or so in monthly revenue. Principal payments reduce the national debt, so the US Treasury could issue new debt to pay the principal.

It may even be unconstitutional for the US government to fail to make payments on its debts. The fourteenth amendment to the US Constitution states:

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. …

But it is unclear whether the White House could rely on constitutional grounds to ignore the debt ceiling, since the amendment also specifies that “The Congress shall have power to enforce, by appropriate legislation, the provisions of this article.” Similarly, Article I, Section 8 of the US Constitution grants the power of the purse to Congress, with explicit reference to debts:

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States; To borrow Money on the credit of the United States; …


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