The Impact of Canceling Student Debt

Is President Biden's proposed $10,000 forgiveness too little or too much?

How you feel about President Joe Biden’s plan to cancel up to $10,000 of student debt probably depends on your situation. If you are a current student or recent graduate (or the parent of one), you may be grateful for any relief from your debt load. If you never went to college or have paid off any loans you took out at the time, you might be more concerned about the economic impact of forgiving trillions of dollars of debt. In this article, we’ll take a look at some of the possible positive and negative impacts of canceling student debt.

Key Takeaways

  • The Biden administration has announced a three-part student debt relief plan, which will forgive up to $10,000 in federal student loans for those making less than $125,000 (or $250,000 for married couples) annually.
  • Borrowers that received Pell Grants are eligible for up to $20,000 in forgiveness.
  • Some in Congress believe that $10,000 is too little, others too much.
  • Canceling debt would be of particular benefit to households of color, according to recent research.

What Is Biden’s Plan to Cancel Student Debt?

There are limits to what President Biden can do on his own to address student loan debt. Some policies can be set by the United States Department of Education, while others would require approval from Congress. Given that Democrats have (slim) majorities in both houses of Congress, it's likely that some type of change will be coming no matter what.

Before the election, Biden shared some of his ideas for higher education reform on his campaign website. “Joe’s Agenda for Students” described multiple initiatives related to the cost of college, including increasing Pell Grants, halving payments on undergraduate federal student loans, and expanding loan forgiveness programs.

On his first day in office, Biden signed an executive action to continue the moratorium on most federal student loan payments, as enacted under the Trump administration, until at least Sept 20, 2021. The interest rate on those loans will also remain at 0%. In April 2022, Biden again extended the student loan pause to Aug. 31, 2022.

On Aug. 24, 2022, mere days before the proposed resumption of payments, the Biden-Harris administration announced their long-term student debt relief plan. The plan features three prongs:

  1. Borrowers that earn less than $125,000 per year are eligible for $10,000 of federal student loan forgiveness. Married couples filing jointly or heads of household may make up to $250,000 and still be eligible. Those that received the income-based Pell grant while students are eligible for up to $20,000 in forgiveness.
  2. All eligible student loan payments remain paused until Dec. 31, 2022. This will be the final pause on student loan payments.
  3. Income-driven repayment plans will now be capped at 5% of discretionary income rather than the current 10%.

Student loan forgiveness only applies to certain federal loans held by the Department of Education. Private loans are ineligible by the forgiveness. To see if your loans are eligible, visit StudentAid.gov.

Some borrowers will have to fill out an application in order to receive their debt relief. The application process will be available by early October 2022. While student loan forgiveness will not be taxed as income at the federal level, some states may see it differently. Currently, the forgiveness is expected to be taxed as income in Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin.

The American Rescue Plan passed by Congress and signed by President Biden in March 2021 includes a provision that student loan forgiveness issued between Jan. 1, 2021, and Dec. 31, 2025, will be tax-free.

Positive Impacts of Canceling Student Debt

Though plenty of borrowers owe more than $10,000, any sort of student loan forgiveness would benefit them financially. Some economists believe that loan forgiveness would also serve as a stimulus to the greater economy, as borrowers could then use that money for other purposes, such as buying a home.

Canceling student debt could be of particular benefit to lower-income borrowers, especially women and people of color. An academic paper in 2020 maintained that the "median wealth for Black households overall, not just borrowers, would instantly increase by 42% with $75,000 in student debt forgiveness and around 34% with $50,000 in forgiveness." Those are higher amounts than Biden has suggested but would be in keeping with his administration's initiatives to address racial equity.

For example, at an interest rate of 4.66%, canceling $10,000 of debt would result in savings of $12,529 over the course of ten years. Canceling $20,000 would save $25,059 over the same period.

Negative Impacts of Canceling Student Debt

Critics argue against canceling any amount of student loan debt, in part because it would unduly benefit a relatively privileged class of people—college students. While over 45 million Americans have at least some student loan debt, they represent only approximately 13.5% of the U.S. population.

In addition to concern regarding the fairness of the plan, it is also not without its costs. Fiscal experts estimate that the loan cancelation will cost $519 billion over the course of the ten-year budget window. Add another $16 billion in forbearance for 2022 and potentially another $450 billion for the new income-driven repayment program, and the total sticker price could be near $1 trillion.

That potential trillion dollars in forgiveness has to come from somewhere. Current estimates state that forgiveness will cost roughly $2,000–$2,500 per taxpayer, whether they went to college or not.

While forgiving student loans may have an impact on current borrowers, an analysis by the Committee for a Responsible Federal Budget says that they expect student loan debt to return to its current level of $1.7 trillion by 2028. Since the plan does nothing to dampen higher education costs, they have no impact on current and future students facing historically high education costs. Some institutions may also increase tuition rates with the assumption of future forgiveness, though that's merely speculation at this point.

Student loan debt cancelation may have another negative impact—higher inflation rates. The Committee for a Responsible Federal Budget estimates that the influx of $10,000–$20,000 for millions of borrowers could push inflation rates even higher, with personal consumption expenditure (PCE) inflation increasing by 15–27 basis points over the next year.

Do I Have to Have a Certain Type of Loan to Qualify for Forgiveness?

Yes. The student debt relief plan only applies to federal loans held by the Department of Education. Those loans include undergraduate and graduate direct loans, Federal Family Education Loans and Perkins Loans held by the Department of Education, and certain defaulted loans held by the Department of Education.

Is Student Loan Forgiveness Automatic?

It depends. If the Education Department already has a borrower's income data, then they be eligible to receive their debt relief automatically. Other borrowers will have to submit an application in order to qualify for forgiveness. The application is expected to be available by October 2022.

Do I Have to Have Qualified for a Pell Grant Consistently to Receive the $20,000 Forgiveness?

No. As long as you received a Pell Grant once during your education, you qualify for $20,000 in forgiveness.

The Bottom Line

Though there is a general consensus that higher education reform, particularly in regard to costs, is desirable, experts are divided as to whether canceling some or all student loan debt is the best way to go about it. While those receiving forgiveness will see a financial benefit, there may be longer-reaching ramifications that will be more costly for all taxpayers in the long run.

Article Sources
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  2. JoeBiden.com. "Joe's Agenda for Students."

  3. The White House. “Statement by President Biden Extending the Pause on Student Loan Repayment Through August 31st, 2022.”

  4. The White House. "Statement by President Joe Biden Extending the Pause on Student Loan Repayment an Additional 90 Days."

  5. The White House. "Pausing Federal Student Loan Payments."

  6. The White House. "Fact Sheet: President Biden Announces Student Loan Relief for Borrowers Who Need It Most."

  7. Tax Foundation. "States That Might Tax Student Loan Debt Cancellation."

  8. Congress.gov. "American Rescue Plan of 2021 (HR 1319)."

  9. Open Science Framework. “Student Debt Forgiveness Options: Implications for Policy and Racial Equity," Page 11.

  10. United States Census Bureau. "US and World Population Clock."

  11. Penn Wharton Budget Model. "The Biden Student Loan Forgiveness Plan: Budgetary Costs and Distributional Impact."

  12. National Taxpayers Union Foundation. "Latest: Biden Student Debt Cancelation Could Cost Taxpayers Around $400 Billion."

  13. The Committee for a Responsible Federal Budget. "New Student Debt Changes Will Cost Half a Trillion Dollars."

  14. Committee for a Responsible Federal Budget. "Student Debt Changes Would Boost Inflation."

  15. Federal Student Aid. "COVID-19 Loan Payment Pause and 0% Interest."

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