By Katie Lobosco, CNN
President Joe Biden is considering canceling some federal student loan debt, suggesting a once pie-in-the-sky idea is closer than ever to becoming a reality.
But while some Democrats argue that the president should immediately write off vast amounts of student loan debt for 43 million Americans with the stroke of a pen, the implications of such a significant policy decision are complicated.
There are advantages and disadvantages.
On the On the one hand, canceling student debt could bring financial relief to millions of Americans, helping them buy their first home, start a business or save for retirement – all investments that could be relegated in the background to repay student debt. Loan forgiveness could also help narrow the racial wealth gap, some experts say.
But wide canceling student loans would also shift the cost – likely hundreds of billions of dollars – onto taxpayers, including those who have chosen not to go to college or who have already paid for their education. Canceling loans could also contribute to inflation without doing anything to address the root of the problem: college affordability.
“It’s a pretty complex question,” Education Secretary Miguel Cardona told MSNBC’s Symone Sanders earlier this month, when asked why student debt cancellation isn’t had not yet taken place.
Borrowers currently hold $1.6 trillion in unpaid federal student loan debt, more than Americans owe in credit card or car loan debt. According to the College Board, about 54% of borrowers with outstanding student loan debt owed less than $20,000 as of March 2021. About 45% of outstanding debt was held by the 10% of borrowers who owed $80 $000 or more.
Compared to other types of debt, it is extremely difficult to repay student loans in the event of bankruptcy. Before the pandemic, thousands of borrowers had their Social Security checks garnished because their student loans were in default.
Federal student loan payments and accrued interest have been frozen since March 2020 due to a pandemic-related pause that Biden has repeatedly extended. Payments should resume after Aug. 31, and the White House has indicated the president will decide whether or not to forgive student debt by then — just months before the midterm elections.
Student loan debt cancellation will not reduce the cost of college
One-time federal student loan debt cancellation would do nothing to reduce the cost of college education for prospective borrowers or those who have already paid off their degrees.
“Debt cancellation in no way affects college affordability,” said Douglas Holtz-Eakin, president of the American Action Forum, a conservative think tank and former director of the nonpartisan organization. Congressional Budget Office.
In fact, it might even drive up the cost of college, he said. So forward-looking students have reason to believe that a future president can cancel their debt, they may be more willing to borrow more money – and colleges, in turn, may decide to charge more for tuition and expenses.
“It creates moral hazard and creates an expectation that debt could be written off in the future,” Holtz-Eakin said.
Biden acknowledged that college affordability is an issue and called for making community colleges free — but that move would require legislation from Congress. The proposal was dropped from the Biden-backed Build Back Better bill, which passed the House but stalled in the Senate.
An economic boost? Or higher costs for all?
Many borrowers say having less student debt over their heads could help ease the pain of rising inflation.
If Biden forgives some student loan debt, it is true that some borrowers will owe less money on a monthly basis and in turn will have more money in their pockets. But more consumer spending could fuel an already overheated economy.
“It’s a situation where what’s good for individuals isn’t necessarily good for society,” said Beth Akers, a senior fellow at the conservative American Enterprise Institute, where she focuses on the economics of education. superior.
“In reality, it probably wouldn’t move the needle drastically in either direction. But the downside of the cancellation has gotten a bit worse since we entered this inflationary period,” Akers added.
One reason the economic impact may be modest is that borrowers typically repay their students ready in time. They would not receive a lump sum of money if some of their debt is cancelled. Instead, they would be required to pay less money each month for their student loan repayments.
A report of impartiality The Committee for a Responsible Federal Budget has estimated that canceling all of the $1.6 trillion federal student loan debt would raise the rate of inflation by 0.1 to 0.5 percentage points over 12 months. But Biden suggested he would write off less than $50,000 per borrower.
The group also found that canceling student debt is not a cost-effective way to stimulate the economy.
The cost of canceling student loan debt would add to the deficit, shifting the cost from borrowers to all taxpayers. The White House has suggested Biden is considering writing off $10,000 per borrower, but excluding those earning more than $125,000 a year. Under these parameters, canceling student debt would cost at least $230 billion, according to the Committee for a Responsible Federal Budget.
Help the poorest households as well as high incomes
There are certainly many low-income Americans struggling to pay off their student debt. But it is not easy to target loan cancellation to those most in need and to exclude borrowers with higher salaries.
Many economists argue that canceling student debt would disproportionately benefit wealthier households, such as those of doctors and lawyers, because these borrowers tend to have more student debt after attending graduate school.
An income threshold that cuts off borrowers earning more than $125,000 a year could help ensure that a greater proportion of the relief goes to low-income borrowers.
Matthew Chingos, vice president of education data and policy at the Urban Institute, said that share of debt canceled by income group if Biden canceled $10,000 in student loan debt for borrowers earning less than $125,000 a year.
About 16% of the canceled dollars would go to the poorest households earning less than $25,000 a year.
About a quarter of the relief dollars would go to those earning between $26,000 and $44,000, and another quarter to those earning between $71,000 and $122,000.
One-third of the relief would go to households with total incomes between $45,000 and $70,000 per year.
Canceling student debt would help close the racial wealth gap, experts say, as black students are more likely to go into debt, borrow larger amounts and pay them back longer than their white peers .
“Cancelling student debt is one of the most powerful ways to address issues of racial and economic equity. The student loan system reflects many of the inequalities that plague American society and widen the racial wealth gap wrote dozens of Democratic lawmakers in a March letter to Biden urging him to reverse “a significant amount of student debt.
But the impact on the racial wealth gap could be mitigated by the fact that there are also fewer black students than white students. The Chingos Model found that 62% of canceled student loan dollars would go to white borrowers while 25% would go to black borrowers if Biden canceled up to $10,000 for those earning less than $125,000 a year.
Also, most Americans have no student loan debt. About 80% of households below the $125,000 threshold have no student loan debt and would see no benefit if Biden took further action, according to Chingos.
Some Loan Cancellation Programs Already Exist, But They Don’t Always Work
Federal student loan repayment programs already exist to help borrowers who are struggling to make payments or who have been victims of for-profit college fraud.
Most federal student loan borrowers are eligible for loan repayment plans that tie their monthly payment amount to their income and family size, known as income-driven repayment plans. There are a variety of plans, but they generally cap payments at 10% of the borrower’s discretionary income. After 20 or 25 years of payment, depending on the specific plan, the remaining student loan debt is forgiven.
But the programs are messy and don’t still work as they should. A recent government accountability report found that few people qualified for a rebate under an income-driven repayment plan. The Ministry of Education had approved the forgiveness of a total of 157 loans as of June 1, 2021. Meanwhile, around 7,700 loans in repayment may have already qualified for the forgiveness.
The federal government is also offering a student loan forgiveness plan for public sector workers who complete 10 years of qualifying. monthly payments. But the scheme, known as the Civil Service Loan Remission, has also had issues that have prevented people from qualifying.
The Biden administration has made changes to the income-based reimbursement program and the Civil Service Loan Cancellation Program that brings millions of borrowers closer to debt cancellation.
There is also a government forgiveness program for borrowers who enrolled in schools that closed during enrollment or failed to deliver the education promised by the institutions. The Biden administration has nibbled away at a backlog of pardon applications filed under this program, known as the borrower’s defense against repayment.
In total, about $18.5 billion in student loan debt has been forgiven for more than 750,000 borrowers since Biden took office, according to the latest figures from the Department of Education.
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