What to Expect from the New Student Loan Forgiveness Program

The Joe Biden administration has recently announced a plan to forgive some of the debts owed by college graduates on the student loans they took out. Borrowers earning less than $125,000 (or $250,000 for married couples and heads of households) will be eligible for up to $10,000 in debt forgiveness. Pell Grant recipients will be eligible for up to $20,000 in cancellation.

So, how much of a difference will Biden’s student loan forgiveness program make? Student debt cancellation is broadly popular among voters (55 percent approval among the general public), and progressive analysts hope that forgiving student loans will benefit the middle class and boost the economy. On the other hand, some economists have voiced their concern about the program being too expensive to taxpayers, while conservatives have accused the Biden administration of using the student loan forgiveness program to disproportionately benefit affluent Americans. To better understand the student loan debate, read on to learn about the pros and cons of the new student debt forgiveness program.

Pro #1: The Program Does Not Cover the Student Debts of the Super-Rich

Individuals earning more than $125,000 and married couples earning more than $250,000 are ineligible for Biden’s student loan forgiveness. This plan will effectively exclude the top six percent of U.S. households from any debt forgiveness benefits, thereby staving off fears of student loan forgiveness being used to benefit the super-rich. An analysis conducted by the Wharton School of the University of Pennsylvania found that 75 percent of the student debt cancellation benefits will go to households making less than $88,000, causing some columnists to declare Biden’s student loan program as a win for the middle class.

Con #1: The Program Disproportionately Benefits the Upper-Middle Class

Although the most affluent households in the United States will not receive a cent of student debt forgiveness from Biden’s plan, the plan would still disproportionately benefit Americans who are already financially well-off. The Wharton School analysis also found that households in the top 60 percent of the income distribution will receive 62 percent of debt cancellation benefits, while households in the bottom 20 percent will receive just 14 percent of benefits.

Pro #2: Borrowers May See Their Personal Wealth Increase

A February 2021 analysis by the Brookings Institution endorsed the idea of student loan forgiveness due to its potentially positive effects on household wealth. The Institution’s analysis found that 68% of student debt is held by households with a net worth below the national median of $104,000. The analysis also noted that households with student debt are likelier to have a zero or negative net worth than households without student debt.

The Brookings Institution concluded that student loan forgiveness would increase the net worth of many households in the United States currently encumbered by student debt, with low-income and Black households reaping the majority of the benefits. The Institution also claimed that student debt cancellation would noticeably reduce the wealth gap between Black and White Americans.

Con #2: Total Outstanding Student Loan Debt Will Quickly Rebound

The Committee for a Responsible Federal Budget (CRFB) has provided a more critical outlook on student loan forgiveness. One analysis by the CRFB found that Biden’s student loan program will cause total outstanding student loan debt to initially fall from $1.6 trillion to $1.1 trillion. However, this number will rebound to pre-cancellation levels within five years (seven years if accounting for inflation).

Some columnists, politicians, and analysts have argued that, by forgiving student loan debt, the Biden administration will create incentives for future college students to borrow even more recklessly, thereby sinking the nation into an even deeper student debt problem in the long run.

Pro #3: Overall Inflation Will Only Rise Modestly

Some economists like former Treasury Secretary Larry Summers have voiced fears that student loan forgiveness will increase inflation by artificially driving up consumer demand; this is especially concerning given that consumer inflation in the United States remains high at 8.5 percent. However, the inflationary pressure caused by student debt cancellation will be minuscule—just 0.15 percent—compared to overall inflation.

Con #3: College Tuition Inflation Will Accelerate

While overall inflation will not increase that much due to student loan forgiveness, the same cannot be said about college tuition inflation specifically. One study published by the Federal Reserve of New York found that every additional dollar per student spent by the federal government on student loans causes college tuition costs to rise by 60 cents. Canceling student debt could incentivize future college students to borrow even more recklessly, thereby causing the demand for college education to go up. College tuition inflation would therefore accelerate, which is especially concerning given that college tuition costs have risen to an all-time high during the COVID-19 pandemic.

Pro #4: The Economy May Experience Modest Short-Term Growth

Canceling hundreds of billions of dollars of student debt may increase short-term consumer spending by freeing up additional income for borrowers otherwise used to pay off debt. The housing market may highly benefit from this spike in consumer expenditures. Real GDP may modestly increase in the short run due to this upward trend in consumer spending.

Con #4: Taxpayer Costs Far Outweigh Economic Benefits

Some economists have voiced concerns over the high costs imposed on taxpayers compared to the relatively small economic benefits. The Committee for a Responsible Federal Budget (CRFB) reports that, with a $10,000 cancellation cap, student loan forgiveness would only boost economic growth by 2 to 27 cents for every dollar of debt canceled.

When combined with the income-driven repayment plan and one-year payment pause for student loan debt proposed by the Biden administration, student loan forgiveness would cost U.S. taxpayers over $600 billion between 2022 and 2031; this is especially concerning given that the debt-to-GDP ratio is currently over 120%.

What Happens Next?

There are many diverging opinions on the issue of student loan forgiveness. Some view it as an opportunity for rebuilding the middle class, while others have condemned it as fiscally reckless. Still, the policy is broadly popular among the general public.

An NPR/Ipsos poll found that 55 percent of Americans, including 84 percent of student loan borrowers, support canceling student debt. Some analysts expect the new student loan program to boost President Biden’s low approval ratings.

There is, however, a fairly strong opposition toward student loan forgiveness among conservatives. Some analysts have accused Biden of bribing young voters ahead of the upcoming midterm elections. Republican lawmakers have decried the student loan program as unconstitutional and illegal, and some have threatened to sue the Biden administration for it.

But at the end of the day, only time will tell us the outcome of the student loan forgiveness program.