Nearly 44 million people collectively owe $1.7 trillion in federal student loans. Forgiving some or all of it would cost taxpayers hundreds of billions of dollars.
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President Joe Biden has spent months trying to navigate how to fulfill a campaign promise to relieve federal student loan borrowers from crushing debt. He’s trying to avoid making it a boondoggle for the affluent or a trigger for inflation.
On Wednesday, Biden is expected to unveil his student debt plan. The expectation is he will cancel up to $10,000 in debt for each borrower but impose an income cap of $125,000.
Biden also might extend loan forgiveness to pockets of borrowers, such as Pell Grant recipients, and he might extend for the fifth time the suspension on debt payments. Right now the payment moratorium expires Aug. 31.
Stephanie Kelton, an economics and public policy professor at Stony Brook University, told MarketWatch that the combination of modest debt cancellation and the resumption of loan payments in the next few months could dampen current inflation.
MarketWatch cited a 2018 analysis by Kelton that found canceling all outstanding student debt at the time, which was about $1.4 trillion, would boost gross domestic product by an average of up to $108 billion a year for the decade following.
The anticipation for Biden’s announcement has been building since April but the issues involved are longstanding. Nearly 44 million people collectively owe $1.7 trillion in federal student loans. Forgiving some or all of it would cost taxpayers hundreds of billions of dollars.
Biden runs several risks. Only a minority of Americans graduate from college (37.9% in 2021), and debt cancellation could appear overly generous to those who knowingly took on debt to obtain their degrees.
There is also the risk of resentment from some people who repaid their student loans without government help. If the plan is $10,000 forgiven for those earning less than $125,000, most of the debt canceled would be held by the top 60% of earners, the Penn Wharton Budget Model said.
Then again, the goal is to relieve millions of households of burdensome debt so they are free to buy houses and start families, decisions that some borrowers have deferred 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 from progressives who won’t be satisfied,” said Capital Alpha Partners’ analyst Ian Katz.
“One way to (slightly) mollify opponents would be to pair a forgiveness announcement with benefits or programs for those who didn’t attend college,” Katz said. “We suspect that the administration has been thinking about things it can do that would appear less ‘elitist’ than helping only college students and graduates.”
Biden has canceled debt for borrowers from for-profit schools. Last week, the Education Department announced the cancellation of $3.9 billion in debt for those who attended ITT Technical Institute, which is now defunct.
That brings the total of student debt forgiven under the Biden administration to $32 billion, which the White House noted as “more than any Administration in history.”
But his broader plan is a tricky balancing act.
Former Treasury Secretary Lawrence Summers said in a series of tweets Monday and Tuesday that the Biden administration should not offer unreasonable relief that would contribute to inflation or could encourage colleges to raise tuition.
“Student loan debt relief is spending that raises demand and increases inflation,” consuming resources that could have gone to help those who didn’t get to go to college and tending to increase tuitions, Summers said. The repayment moratorium benefits “highly paid surgeons, lawyers and investment bankers.”
The issue has become a political football this midterm election year. Sen. John Thune, a South Dakota Republican, even introduced a bill earlier this year to stop the loan payment deferrals — borrowers haven’t had to pay since the pandemic started in March 2020—and said canceling student debt is “grossly unfair” to those who paid off their loans.
Sen. Elizabeth Warren (D., Mass.), who has said she pursued her college dreams at a school that cost $50 a semester, on Tuesday tweeted that canceling debt would narrow the racial wealth gap among borrowers, provide relief to the 40% of borrowers who never got to finish their degree, 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 protected]
Source: https://www.barrons.com/articles/what-forgiving-student-loan-debt-could-mean-for-the-economy-51661294048?siteid=yhoof2&yptr=yahoo