After several years of waiting, Americans finally received an answer from President Joe Biden on his administration’s solution to the student crisis.
This conversation is a controversial topic. Even calling it a student loan crisis is likely to ruffle some feathers. But given that today’s announcement will have significant economic implications, we’ll focus our efforts on that part of the conversation.
First, let’s start with some background. Today, roughly 43 million Americans hold a total of $1.7 trillion in student loan debt, with the federal government funding roughly ~92% of them. Meanwhile, the cost of attending college has skyrocketed, with approximately 70% of college attendees requiring some form of student debt to attend. Lastly, student loan debt accounts for about 10% of total consumer household debt (second to mortgage debt), and the average student loan balance is over $30,000 (median $17,000).
In response to the COVID economic downturn, the government paused interest and payments in March 2020 for all federal loans as it attempted to navigate a global pandemic.
During this period, democrats have been pushing for Biden to honor his campaign promise of canceling some student debt and reforming higher education. After much deliberation (aka stalling), the upcoming midterm elections finally pushed the administration into action.
Now, let’s understand what today’s student loan relief plan includes.
Part one of the plan focuses on providing targeted debt relief. It includes forgiving $10,000 in debt cancellation to non-Pell Grant recipients who have individual income below $125,000 (or $250,000 if married). For Pell Grant recipients, that amount jumps to $20,000. Additionally, they’ve extended the pause on federal student loan repayments for the final time to December 31, 2022.
These measures will cancel the remaining balance for roughly 20 million borrowers, with 87% of debt cancellation benefits going to borrowers earning less than $75,000.
Part two of the plan focuses on making the student loan system more manageable. It includes measures to simplify the loan repayment process and deliver significant savings to low and middle-income borrowers. For example, one of the measures cuts the amount borrowers have to pay monthly from 10% to 5% of discretionary income. Another forgives loan balances after ten years of payments (instead of twenty) for original loan balances under $12,000.
Additionally, the plan takes steps to certify that the Public Service Loan Forgiveness (PSLF) program serves those who currently qualify and ensures more effective implementation in the future.
Part three of the plan focuses on keeping college costs under control. While this section was light on details, the Department of Education is looking to strengthen accountability among institutions whose students experience poor career/financial outcomes. Some potential levers it’s working with are withdrawing accreditation from troublesome schools, publishing an annual watchlist of the programs with the worst debt levels to make students aware, and requesting institutional improvement plans from the institutions with consistently poor outcomes.
Finally, let’s get into the potential economic impacts.
Analysis by the Penn Wharton Budget Model shows that this plan costs around $300 billion, which is another form of stimulus in an economy that’s already running hot.
Many speculate this will worsen inflation, but others say not so fast.
Just because $10,000 of student loans are forgiven doesn’t mean each borrower automatically has $10,000 in cash available. They are technically richer, but not in a way that they can immediately go out and spend. Instead, we may see inflation in other areas that consumers regularly buy, like travel, services, etc. because the impact will be felt each month when they choose what to do with the money that isn’t going to their loan payment.
But also, since student loans have been paused for more than two years, how much will it actually change people’s behavior in the short term? Probably not all that much. One could even argue that the student loan pause was an accommodative policy (freeing up discretionary income for people), so restarting payments in January must then be a contractionary policy (tying up discretionary income).
Could that be a net positive for inflation even with the $300 billion in forgiven loans?
We agree that this section of our article presents more questions than answers, but it highlights the problem that all these “potential impacts” are educated guesses at best, and there are many angles to each data point.
Nobody knows what people will do with their newfound “paper wealth,” and we won’t for several quarters until it’s reflected in the data. So at the macro level, it’s tough to assign a clear or direct impact, but at the micro level, we’d assume this is a significant stimulus for a good portion of people receiving it.
Maybe that’s a better way to go about this, talking to people in real life about how it impacts them rather than plugging assumptions into spreadsheets and then arguing about them online.
Though that might be wishful thinking on our part…
Lastly, this article would not be complete without mentioning some of the criticism from both sides of the argument. This is by no means an exhaustive list, but a few of the loudest objections.
- The policy does nothing to address the structural issues that make higher education so expensive.
- Graduates of higher education tend to have higher median/average incomes than those who don’t attend. And most debt is owed by higher-income, higher-wealth, and better-educated households, making this a regressive policy.
- Forgiving student loans encourages people to borrow more than they would if there wasn’t a possibility of forgiveness (moral hazard).
- $10,000 does not go far enough; some proponents are pushing for $50,000 in forgiveness and other structural reforms.
- Others suggest the president doesn’t even have the authority to forgive student loans without Congress’ permission or action.
Overall, we’ll have to wait and see this new policy’s impact. In the meantime, speculation about what will happen continues…so enjoy the show, we guess? 🤷♂️