President Joe Biden has spent months trying to figure out how to deliver on a campaign promise to relieve federal student loan borrowers of crushing debt. He is trying to prevent this from being a trap for the rich or a trigger for inflation.
On Wednesday, Biden announced a plan to write off up to $10,000 in federal student loan debt for borrowers who earn less than $125,000 a year, or families earning less than $250,000 a year.
Pell Grant recipients earning less than $125,000 a year would be eligible for loan cancellation of up to $20,000.
Biden also extended the moratorium on student loan payments, scheduled to expire on August 31, through the end of the year.
The plan could completely release up to 15 million borrowers from student debt, The Wall Street Journal reported.
Economists said a limited cancellation plan is unlikely to increase inflationary pressures in the short term, but could increase them in the long term.
Stephanie Kelton, professor of economics and public policy at Stony Brook University, told MarketWatch that the combination of modest debt cancellation and resuming loan payments in the coming months could reduce current inflation. It could also boost the economy.
MarketWatch cited a 2018 analysis by Kelton that found that canceling all outstanding student debt at the time, which was about $1.4 trillion, would increase gross domestic product by an average of up to $108 billion per year. year in the following decade.
Anticipation for Biden’s announcement has been growing since April, but the issues involved are long-standing. Nearly 44 million people collectively owe $1.7 trillion in federal student loans. Canceling part of it would cost taxpayers hundreds of billions of dollars.
Biden takes several risks. Only a minority of Americans graduate from college (37.9% in 2021), and debt cancellation can seem overly generous to those who knowingly took on debt to earn their degrees.
There is also the risk of resentment from some people who have paid off their student loans without government assistance. Based on Biden’s plan’s income cap, most of the canceled debt would be held by the richest 60%, Penn Wharton’s Budget Model said.
On the other hand, the aim is to relieve millions of families of heavy debt so that they are free to buy homes and start families, decisions that some borrowers have put off because of their finances.
Canceling student loan debt “would open a can of snakes: anger and possibly lawsuits from Republicans and other opponents; and anger at progressives who won’t be satisfied,” said Ian Katz, analyst at Capital Alpha Partners.
Biden has already canceled debts owed to for-profit school borrowers. Last week, the Department of Education announced the cancellation of $3.9 billion in debt to those who attended the now-defunct ITT Technical Institute.
As of Wednesday’s announcement, that brought total student debt forgiven under the Biden administration to $32 billion, which the White House noted was “more than any administration in history.”
But his broader plan is a complicated balancing act.
Former Treasury Secretary Lawrence Summers said in a series of tweets Monday and Tuesday that an irrational amount of relief would contribute to inflation or could encourage colleges to raise tuition.
“Student loan debt relief is an expense that increases demand and increases inflation,” consuming resources that could have gone to help those who couldn’t go to college and tending to increase tuition, Summers said. The refund moratorium benefits “highly paid surgeons, lawyers and investment bankers”.
The issue has become political football this midterm election year. Senator Mitt Romney (R, Utah) and other Republicans tried unsuccessfully in May to limit the president’s authority to cancel debts. He said it would “not only be unfair to those who have already paid off their loans or decided to pursue alternative education paths, but it would be wildly inflationary at a time of already historic inflation.”
Senator John Thune, a Republican from South Dakota, even introduced a bill earlier this year to stop loan deferrals — borrowers have not had to pay since the pandemic began in March 2020 — and said the Canceling student debt is “grossly unfair” to those who have repaid their loans.
An NPR/Ipsos poll released in June found that 55% of Americans support forgiveness of up to $10,000 in student loan debt.
Senator Elizabeth Warren (D., Massachusetts), who said she pursued her college dreams at a school that cost her $50 per semesteron Tuesday tweeted that debt cancellation would narrow the racial wealth gap among borrowers, provide relief to the 40% of borrowers who never managed to finish their education, and give working families the chance to buy their first home or save for retirement. “It’s the right thing.”
Write to Janet H. Cho at email@example.com