By Terri Friedline, Dominique Baker, and John W. Diamond -
The Conversation
President Joe Biden announced on Wednesday the forgiveness of student debt for millions of people: he will forgive up to $10,000 for those who earn less than $125,000 a year and up to $20,000 for recipients of Pell Grants.
It also extended the moratorium on federal loan payments to December 31, 2022 and proposed an income limit that can be used to calculate how much people pay for this repayment.
We asked three experts to explain the decision and its impact.
Relief is relevant but ignores problems
[By Terri Friedline, Professor of Social Work at the University of Michigan]
The plan is an important step that will make a real difference in the lives of many people.
The White House estimates that some 20 million of the nearly 43 million student debt holders in the country will see their entire balance canceled.
However, the plan is still limited.
I hope this is the start of much-needed political conversations about debt and education in America.
For one thing, it cuts less than 20% of the country's $1.75 trillion in student debt.
And the $125,000 income limit focuses on borrowers' socioeconomic class, ignoring the role structural racism and sexism play in
who borrows and how much.
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For example, black women request about $38,000 on average to finance their education, compared to the $30,000 that white men request.
And because student loan interest accumulates quickly,
most black women still owe their original balance 20 years after they
enrolled in school.
By then most white debtors have already paid off their loan.
The government will have to do more if it is to tackle these and many other structural problems of debt and education.
A necessary relief to black students
[By Dominique Baker, Professor of Educational Policy at Southern Methodist University]
When some 10,000 recipients had their private student loans randomly canceled between 2010 and 2017, it
allowed them to move, change jobs and earn more money
.
They were also less than 11% likely to default on credit cards or other debt.
I hope Biden's decision will have similar results.
Forgiveness of up to $20,000 to Pell Grant recipients means there may be even more relief for black students.
Hill Street Studios/Getty Images
From a racial justice standpoint, I think it's necessary because of centuries of systemic inequalities, such as the accumulation of educational debt through predatory practices, in which Black people are offered access to college or to buy a home, but in operating financial conditions with long-term negative effects.
Black students who lend money are also
often more burdened by debt
.
For example, if they get a bachelor's degree they are more likely to default on their student loans (21%) than white students (4%).
And what is even more surprising, blacks who get a degree have a default rate
higher than white students who drop out of college without a degree: 21% vs. 18%, respectively.
[The Federal Reserve toughens its message against inflation and anticipates more rate hikes that will cause “pain” for families]
The Government has also proposed changes to the income-based reimbursement scheme, this should help reduce the monthly percentage of discretionary income from 10% to 5% that students would pay and increase what counts as non-discretionary income.
They will have more money that will not be used to calculate the percentage they owe each month.
There is still work to be done to create an affordable college education, but this is a great start.
Cancellation could fuel inflation
[By John W. Diamond, director of the Center for Public Finance at the Baker Institute at Rice University]
The cost of Biden's plan is estimated at just over $300 billion.
Although it will provide direct benefits to some, I think there will be another cost: increased inflation.
In the United States, inflation is already increasing at an annual rate slightly less than the fastest in the last 40 years, which has led the Federal Reserve to aggressively raise interest rates to reduce it, despite the risk of recession.
Biden's plan will make the central bank's job harder.
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The pressure on inflation will be the result of increased spending by those whose student debts are reduced, as well as the continuation of the moratorium on the payment of federal loans.
This increased demand for consumer goods – relative to a world without debt reduction or repayment moratorium – increases the prices of current goods and services.
[The IRS Forgives Penalties to Taxpayers Who Filed Their Tax Returns Late During the Pandemic]
The Committee for a Responsible Federal Budget found that a similar version of debt forgiveness, though more modest, would lead to a measurable increase in personal consumption spending, driving up prices for all consumers.
That was based on a plan to spend roughly $230 billion, about $70 billion less than Biden's plan.
Another side effect could be that it offers incentives to students entering or currently in college to take on additional debt in anticipation of future rounds of forgiveness.
Economists call it moral hazard.
Other research has found that increased borrowing can increase enrollment.
Some publications point to positive economic results for those who receive debt relief
, such as less future indebtedness, greater job mobility, and better wages.
But these effects are based on a total relief of student debt and not on a reduction like the one announced by Biden.
Ultimately, writing off the loans – regardless of their merits – will likely lead to higher federal deficits and higher inflation.
While it benefits those with student debt, those benefits must be weighed against the costs it imposes on others and the economy.
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