What Biden’s reported student debt cancellation plan could mean for borrowers

If Wednesday’s announcements match reports, a proposal that originated during Occupy Wall Street in 2011 and was derided at the time as being too extreme for mainstream politicians to consider will be a reality for millions of borrowers — though not on the scale that those pushing for mass debt relief had hoped. Once announced, both advocates and critics of the policy will be watching its impact. 

Persis Yu, senior policy director and managing counsel at the Student Borrower Protection Center, a borrower advocacy group, said she’s excited to see reports of possible debt cancellation, but said “the details of this are very important.” 

“We hope it will be as big as possible and it’s automatic for as many borrowers as possible,” Yu said. “Even $10,000 is going to be life changing for millions of borrowers.”

“Is it going to end the student loan crisis?” she added. “No, unfortunately there will still be a lot of people with student loan debt. We’re going to need to see major reforms to the system so that we can deliver relief for anybody who has remaining debt.” 

Who the reported proposal will help

Since Biden took office the debate over who mass student debt might help has loomed over the White House’s decision. 

Critics have said student loan cancelation would provide a benefit to the college-educated, who are more likely to be well off, at the expense of taxpayers. Biden himself questioned the wisdom of providing a potential benefit to graduates of Ivy League colleges. “The idea that you go to Penn and you’re paying a total of 70,000 bucks a year and the public should pay for that? I don’t agree,” he said last year.  

Proponents of mass debt relief have argued that the bulk of student loan borrowers don’t fit that profile; roughly 40% never finished college, many are low-income and the burden of repaying student loans falls disproportionately on Black borrowers and Black women borrowers in particular. 

If the White House announces a plan to forgive $10,000 in debt for borrowers earning less than $125,000, nearly 60% of the debt canceled would be held by the bottom 60% of earners or those making $82,400 or less, according to an analysis from the Penn Wharton Budget Model. Roughly 2.5% of the relief would accrue to Americans in the top 10% of the income distribution and none of it would go to Americans in the top 5%. 

Concern that some well off borrowers might benefit from debt cancellation likely underlies interest from policymakers in a means test. Canceling $10,000 per borrower without an income cap would mean that about 1.07% of the relief would accrue to the top 5% of the income distribution, Penn Wharton found. 

Abby Shafroth, the director of the Student Loan Borrower Assistance Project at the National Consumer Law Center, said “it seems like a wild political move,” to make the most vulnerable borrowers jump through red tape to keep such a small group of well-off borrowers from benefiting from the initiative.

Elderly borrowers or low-income borrowers juggling in-person jobs are less likely to have the time and resources — such as reliable internet access — to navigate an application process. If the long history of student loan borrowers struggling to overcome bureaucratic hurdles is any indication, advocates likely have a basis for their concerns. 

“The group of borrowers that I advocate on behalf of are low-income borrowers so a lot of people are surprised that I care about an income cap,” Shafroth said. “Even though my clients would be eligible and other borrowers like them would be fully eligible under an income cap a lot of them wouldn’t end up getting the relief.” 

Broader economic impact of student debt relief

Critics and advocates of the policy will also be watching to see the broader economic impact of any debt relief. As an announcement seemed increasingly imminent over the past few days, prominent economists, including Larry Summers, an Obama-era Treasury Secretary, urged the Biden administration not to pursue mass debt relief out of concern it could contribute to inflation and push colleges to raise tuition. 

The Penn Wharton model estimates that cancelling $10,000 in debt for borrowers earning up to $125,000 could cost the government up to $330 billion over the next 10 years. 

Stephanie Kelton, a professor of economics and public policy at Stony Brook University, said combining relatively modest debt cancellation together with restarting payments in the next few months could actually dampen current inflation. In 2018, Kelton found that canceling the total outstanding student debt at the time — about $1.4 trillion — would boost gross domestic product by up to $108 billion a year on average for the 10 years following the relief. 

Kelton, who also co-hosts MarketWatch’s Best New Ideas in Money podcast, said she hasn’t re-run the numbers, but “everything I understand about economics tells me that this would have very little impact on inflation,” she said. That’s because her initial analysis assumed that millions of people were going from making student loan payments monthly to suddenly not having to do that ever again — freeing up cash they could spend in the economy. 

If it’s the case that the White House announcement comes Wednesday and matches reports, borrowers will already have had access to that cashflow for roughly two and a half years and $10,000 in relief probably isn’t enough to change their spending habits, Kelton said. 

“You could imagine a wealth effect, but the propensity to spend out of that would be very small,” she said.  

Cancellation and payment pause could impact other student debt relief efforts

In addition, there are some borrowers for whom the $10,000 in cancellation will do very little. For example, those who have high balances, but are repaying their debt as a percentage of their income under the government’s income driven repayment plans may not see their monthly payments change. 

Still, some of these borrowers could benefit from other proposals already announced by the Department of Education. Both getting millions of borrowers off the books by canceling the debt and delaying the resumption of payments could help the Department and its contractors more effectively carry out these policies. 

Last year, the agency announced it would streamline the processes for eligible borrowers to access debt relief through certain programs like Public Service Loan Forgiveness, which allows government and certain nonprofit employees to have their federal student loans wiped out after 10 years of payments, and income driven repayment, which provides debt relief to federal student loan borrowers after 20 or 25 years of payments tied to their income. 

In addition, the agency plans to provide an opportunity for borrowers in default to return their loans to good standing. These borrowers face some of the harshest consequences of the student loan system, including wage garnishment as well as the seizure of their tax refunds and Social Security checks to repay the old student debt. 

Student loan advocates will be watching closely to see whether borrowers in default who don’t have their debt fully wiped out through any debt cancellation announcement are able to access the benefits of the program, called Fresh Start, seamlessly. Advocates had hoped officials would automatically place eligible borrowers into a payment plan that allows them to repay their debt as a percentage of their income. Instead, borrowers will have to take steps to make the new payment arrangements themselves. 

Borrowers in default have one year from when the payment pause ends to make these arrangements. Otherwise, they’ll be at risk of facing collection activity.  

Implementing all of these initiatives, “while adjusting everyone’s accounts in order to reduce to their balances, that’s a lot of work to do and it’s critically important work to do to really right many of the wrongs that borrowers have experienced through the decades of this broken student loan system,” Yu said. “One of the things that is critical is that borrowers are not thrown back into repayment while we’re working through all of these initiatives.”