But while some Democrats argue that the president should immediately write off vast amounts of student loan debt for 43 million Americans with the stroke of a pen, the implications of such a significant policy decision are complicated.
There are advantages and disadvantages.
On the On the one hand, canceling student debt could bring financial relief to millions of Americans, helping them buy their first home, start a business or save for retirement – all investments that can be relegated in the background to repay student debt. Loan forgiveness could also help narrow the racial wealth gap, some experts say.
But wide canceling student loans would also shift the cost – likely hundreds of billions of dollars – onto taxpayers, including those who have chosen not to go to college or who have already paid for their education. Canceling loans could also contribute to inflation without doing anything to address the root of the problem: college affordability.
Student loan debt cancellation will not reduce the cost of college
One-time federal student loan debt cancellation would do nothing to reduce the cost of college education for prospective borrowers or those who have already paid off their degrees.
“Debt cancellation in no way affects college affordability,” said Douglas Holtz-Eakin, president of the American Action Forum, a conservative think tank and former director of the nonpartisan organization. Congressional Budget Office.
In fact, it might even drive up the cost of college, he said. So forward-looking students have reason to believe that a future president can cancel their debt, they may be more willing to borrow more money – and colleges, in turn, may decide to charge more for tuition and expenses.
“It creates moral hazard and creates an expectation that debt could be written off in the future,” Holtz-Eakin said.
Biden acknowledged that college affordability is an issue and called for making community colleges free — but that move would require legislation from Congress. The proposal was dropped from the Biden-backed Build Back Better bill, which passed the House but stalled in the Senate.
An economic boost? Or higher costs for all?
Many borrowers say having less student debt over their heads could help ease the pain of rising inflation.
If Biden forgives some student loan debt, it is true that some borrowers will owe less money on a monthly basis and in turn will have more money in their pockets. But more consumer spending could fuel an already overheated economy.
“It’s a situation where what’s good for individuals isn’t necessarily good for society,” said Beth Akers, a senior fellow at the conservative American Enterprise Institute, where she focuses on the economics of education. superior.
“In reality, it probably wouldn’t move the needle drastically in either direction. But the downside of the cancellation has gotten a bit worse since we entered this period of inflation,” Akers added. .
One reason the economic impact may be modest is that borrowers typically repay their students ready in time. They would not receive a lump sum of money if some of their debt is cancelled. Instead, they would be required to pay less money each month for their student loan repayments.
Help the poorest households as well as high incomes
There are certainly many low-income Americans struggling to pay off their student debt. But it is not easy to target loan cancellation to those most in need and to exclude borrowers with higher salaries.
Many economists argue that canceling student debt would disproportionately benefit wealthier households, such as those of doctors and lawyers, because these borrowers tend to have more student debt after attending graduate school.
An income threshold that cuts off borrowers earning more than $125,000 a year could help ensure that a greater proportion of the relief goes to low-income borrowers.
About 16% of the canceled dollars would go to the poorest households earning less than $25,000 a year.
About a quarter of the relief dollars would go to those earning between $26,000 and $44,000, and another quarter to those earning between $71,000 and $122,000.
One-third of the relief would go to households with total incomes between $45,000 and $70,000 per year.
Canceling student debt would help close the racial wealth gap, experts say, as black students are more likely to go into debt, borrow larger amounts and pay them back longer than their white peers .
Also, most Americans have no student loan debt. About 80% of households below the $125,000 threshold have no student loan debt and would see no benefit if Biden took further action, according to Chingos.
Some Loan Cancellation Programs Already Exist, But They Don’t Always Work
Federal student loan repayment programs already exist to help borrowers who are struggling to make payments or who have been victims of for-profit college fraud.
Most federal student loan borrowers are eligible for loan repayment plans that tie their monthly payment amount to their income and family size, known as income-driven repayment plans. There are a variety of plans, but they generally cap payments at 10% of the borrower’s discretionary income. After 20 or 25 years of payment, depending on the specific plan, the remaining student loan debt is forgiven.
The federal government is also offering a student loan forgiveness plan for public sector workers who complete 10 years of qualifying. monthly payments. But the scheme, known as the Civil Service Loan Remission, has also had issues that have prevented people from qualifying.
There is also a government forgiveness program for borrowers who enrolled in schools that closed during enrollment or failed to deliver the education promised by the institutions. The Biden administration has nibbled away at a backlog of pardon applications filed under this program, known as the borrower’s defense against repayment.
In total, about $18.5 billion in student loan debt has been forgiven for more than 750,000 borrowers since Biden took office, according to the latest figures from the Department of Education.