The President’s sweeping student loan plan follows extensive, seamless negotiations at the White House between stakeholders and lawmakers before payments begin at the end of this month. The decision is already frustrating many, with those on the left arguing that the President should have provided even more loan forgiveness and those on the right arguing that Biden is punishing Americans who avoided going into debt. But it fulfills one of Biden’s campaign promises, enacting major reforms to America’s student loan system and providing relief to millions of current and future borrowers. Borrowers who have Department of Education loans and make less than $125,000 a year are eligible for up to $20,000 in student loans if they received Pell Grants, which are given to students from low- and moderate-income families. Individuals who earn less than $125,000 per year but did not receive Pell Grants are eligible for $10,000 in loan forgiveness. Biden said that the administration’s “targeted actions are for families who need it most: working and middle class people are especially hard hit during the pandemic, making less than $125,000 a year,” stressing that “about 90% of eligible beneficiaries make under $75,000.” “I understand that not everything I announce is going to make everyone happy,” Biden said. “Some people think it’s too much — I find it interesting how some of my Republican friends who voted for these tax cuts think we shouldn’t be helping these people. Some people think it’s too little, but I think my plan is responsible and fair. It focuses on benefiting middle-class and working families, helps both current and future borrowers, and will fix a badly broken system.” The Department for Education will announce details of how borrowers can claim this relief through an application in the coming weeks. Millions of borrowers will be able to automatically receive relief based on existing income data. In addition, the department is proposing a federal rule aimed at making the student loan system more manageable for current and future borrowers. The proposed rule would change income-based repayment for student loans, cutting in half the amount borrowers would have to pay each month on their undergraduate loans, “while borrowers with undergraduate and graduate loans would pay a weighted average interest rate”. The proposal would also increase the amount of income that is considered non-discretionary income and therefore protected from repayment. And it would forgive loan balances after 10 years of payments instead of 20 years under many income-based repayment plans for borrowers with original loan balances of $12,000 or less, the department said. The proposed rule includes other changes, such as simplifying borrowers’ choices between loan repayment plans.
Unintended consequences
Biden argued Wednesday that “the entire economy is in better shape” as a result of his new plan. “By resuming student loan payments at the same time we’re providing targeted relief, we’re taking a fiscally responsible course. As a result, $50 billion a year will start returning to the Treasury because of the debt resumption,” he said. , later adding, “There’s a lot of deficit reduction to pay for the programs … many times over.” While student debt relief will provide financial relief to millions of Americans, it will shift the cost onto Uncle Sam. A one-time cancellation of $10,000 for every borrower earning up to $125,000 a year could cost the government nearly $300 billion, according to an estimate from the Penn Wharton Budget Model. Additional forgiveness for Pell grant recipients was not included in the estimate. Additionally, loan cancellation will not address the root of the problem: college affordability. There is currently $1.6 trillion in outstanding federal student loan debt. The amount of outstanding debt would return to that level in just four years after the $10,000 per borrower cancellation, according to the Committee for a Responsible Federal Budget. White House officials on Wednesday could not provide a baseline price estimate for the plan, saying there are too many unknowns to estimate how much the plan might ultimately cost. Susan Rice, a White House domestic policy adviser, said it will depend on how many eligible borrowers sign up through the Education Department for loan relief. “If 43 million borrowers get it, that’s going to be different than if 50 percent of those 43 million get it,” Rice said. Student loan cancellation could also increase inflation — though many experts say the effect would be modest because borrowers generally pay off their student loans over time. They would not receive a lump sum if part of their debt is cancelled. Instead, they would have to pay less money each month for their student loan payments. “The inflationary impact is definitely positive, but I don’t think it would be much. We’re talking about a very small impact,” said Kent Smetters, faculty director of the Penn Wharton Budget Model.
Inflation Warnings
Larry Summers, a former Treasury secretary who served as director of the National Economic Council under President Barack Obama, argued before the plan was announced that the relief would add to inflation. “I hope the administration does not contribute to inflation macro-economically by offering unduly generous student loan relief or microeconomically by encouraging college tuition increases,” Summers tweeted Tuesday, later adding, “Student loan debt relief is spending that increases demand and increases inflation. . It consumes resources that could be better used helping those who, for whatever reason, did not have the opportunity to attend college. It will also tend to be inflationary by raising tuition fees.” Jason Furman, chairman of former President Barack Obama’s Council of Economic Advisers, added: “Putting about half a trillion dollars of gasoline on an already burning inflationary fire is reckless. loan relief) and breaking another (all proposals are paid) is even worse.’ Marc Goldwein, the senior vice president and senior policy director for the Committee for a Responsible Federal Budget — a nonpartisan group that monitors federal spending — argued against the plan in an interview with CNN’s Poppy Harlow on “Newsroom” on Tuesday morning. He believes that canceling the $10,000 debt for each borrower would likely increase inflation, undermine the law’s stated goal of reducing Democrats’ inflation, and not significantly reduce the racial wealth gap. “The Inflation Reduction Act saves maybe $300 billion in the first 10 years. If we cancel $10,000 of debt and just extend the pause for a few months, we’ll be about that much in terms of new costs,” he said. . “All of the deficit reduction will be wiped out. At the same time, we’ll probably do more to raise inflation from debt cancellation than any reduction in inflation from the Inflation Reduction Act.” It’s also not easy to target loan forgiveness to those who need it most and exclude borrowers with higher wages. An income limit that cuts off borrowers who earn more than $125,000 a year could help ensure that more of the relief goes to low-income borrowers. But some doctors and lawyers, who will eventually have high incomes, may also reap the benefits. The Penn Wharton budget model also breaks down the share of debt written off by income group, assuming $10,000 is written off for borrowers earning less than $125,000 a year and for households earning less than $250,000. It found that one-third of the canceled dollars would go to households earning less than $50,795 a year. Just over half of the debt relief would go to those earning between $50,795 and $141,096. About 14% of the canceled dollars would go to households earning more than $141,096 a year.
Political pressure
Biden has faced political pressure from the left to generally cancel student loan debt since taking office. Key Democratic lawmakers, including Senate Majority Leader Chuck Schumer and Massachusetts Sen. Elizabeth Warren, had called on Biden to cancel $50,000 per borrower. The President spoke with Schumer, Warren and Democratic Sen. Raphael Warnock of Georgia on Tuesday ahead of the expected announcement. Schumer and Warren said in a joint statement that the decision is “a huge step forward in addressing the student debt crisis.” “The positive effects of this move will be felt by families across the country, particularly in minority communities, and it is the most effective action the President can take alone to help working families and the economy,” they added. Earlier this week, amid reports of Biden’s plan, NAACP President Derrick Johnson called the reported provisions inadequate and “not how you treat black voters.” A senior government official on Wednesday suggested the relief would help “narrow the racial wealth gap”. And Biden, in his remarks, acknowledged that the burden of student debt “is especially heavy on black and Hispanic borrowers, who on average have less family wealth to pay it off.” Biden has repeatedly pushed back against the repeal, saying he would support writing off $10,000 for borrowers below a certain income threshold. During the campaign, Biden called for the immediate cancellation of at least $10,000 in student debt per person in response to the pandemic, as well as…
