Debt Cancellation and Economic Ramifications
The White House announced President Biden’s three-part plan for forgiving $10,000 in student loan debt on August 24, 2022. President Biden said he “believes that a post-high school education should be a ticket to a middle-class life, but for too many, the cost of borrowing for college is a lifelong burden that deprives them of that opportunity.”
According to the White House fact sheet, the purpose of this plan is “to provide more breathing room to America’s working families as they continue to recover from the strains associated with the COVID-19 pandemic.” This new executive order will cancel $10,000 worth of debt for non-Pell Grant recipients and $20,000 worth of debt for Pell Grant recipients. Individuals are eligible for loan cancellation if their annual income is less than $125,000 (or $250,000 for married couples).
Under this new plan, Biden is also making changes to the income-driven repayment system and the already existing Public Service Loan Forgiveness (PSLF) program. Borrowers will only have to pay five percent per month instead of the current ten percent in order to keep their loan. Under PSLF, borrowers with original loan balances of $12,000 or less will have their loan completely forgiven after 10 years. In addition to these changes, “The President will continue to fight to double the maximum Pell Grant and make community college free,” according to the White House website.
Student loan forgiveness aims at positive effects for the economy such as increasing consumer spending for individuals who benefit. The White House mentioned a nurse who makes $77,000 annually and spends an average of $295 per month to pay off her loans as an example of someone who would benefit from the plan. Under this policy, her monthly average payment would decrease to $61, leaving her with $234 more to spend each month. The hope behind the plan is that this money would be added back into the economy and increase consumer spending.
Some economists warn that these drastic changes to American economic policy could also have negative effects. According to the Brookings Institution, student loan forgiveness will cost taxpayers $373 billion and its benefits will not be equally distributed among Americans.
Brookings compared the cost of a one-time $10,000 debt cancellation against cumulative spending on several of the country’s welfare and benefit programs from 2000 to 2019. Brookings found if all 43 million people eligible take advantage of the debt cancellation, it “would involve a transfer that is about as large as the country has spent on welfare since 2000 and exceeds the amount spent since then on feeding hungry school children in high-poverty schools through the school breakfast and lunch program.”
The White House estimates that nearly 45 million people will be eligible for the program, and those who received Pell Grants may receive twice as much as those who do not. These differences will cost taxpayers even more money and even further exceed the cost of welfare and other programs.
According to Brookings’ statistics about the percentage of students who receive a college education within each income bracket, “beneficiaries of across-the-board student loan forgiveness would be higher income [and] better educated … than beneficiaries of just about all other programs designed to reduce hardship and promote opportunity and targeted to those who need help.”
Forbes Magazine warned that student loan forgiveness could be “unfair” to certain groups of people, including those that do not have student loans, those with private student debt, and those who did not go to college: “For many, wide-scale student loan forgiveness not only feels like wealth distribution but also feels like a slap in the face to working Americans who also have financial struggles.”
Margaret Mathis is a sophomore classics major pursuing minors in constitutional studies and business economics. Margaret loves sewing and hopes to become an attorney. When she is not narrowly escaping trademark infringement while hand-sewing the Notre Dame logo onto everything she owns, she can be found translating Ovid’s Metamorphoses in Hesburgh library. Reach out to her at firstname.lastname@example.org.