What Biden’s Student Debt Relief Plan Could Mean for Borrowers

The question on the minds of millions of student loan borrowers will likely be settled on Wednesday, when the Biden administration is expected to announce broad student debt relief.

Although borrowers will have to wait for official notification to learn the final contours of any debt relief plan, reports indicate the White House will announce plans to cancel $10,000 in student debt for borrowers earning up to $125,000 . The report also suggests the Biden administration will extend the freeze on student loan payments, collections and interest. The freeze was scheduled to expire on August 31.

If Wednesday’s announcements match reports, a proposal that originated during Occupy Wall Street in 2011 and was derided at the time as too extreme for mainstream politicians to consider will be a reality for millions of borrowers — though not on the scale they’re pushing for. for massive hoped for debt relief. Once announced, both supporters and critics of the policy will be watching its impact.

Persis Yu, senior policy director and CEO at the Student Borrower Protection Center, a borrower advocacy group, said she was excited to see reports of possible debt forgiveness, but said “the details are very important.”

“We hope it will be as large as possible and automatic for as many borrowers as possible,” Yu said. “Even $10,000 will be life-changing for millions of borrowers.”

“Will the Student Loan Crisis End?” she added. “No, unfortunately there will still be a lot of people with student loan debt. We will need to see significant reforms to the system so that we can offer relief to anyone with outstanding debt.”

Who will the mentioned proposal help?

Since Biden took office, the debate over who could help with massive student debt has come up for the White House’s decision.

Critics said student loan cancellation would benefit college-educated people, who are more likely to be well-off, at the expense of taxpayers. Biden himself has questioned the wisdom of providing a potential benefit to graduates of Ivy League colleges. “The idea that you go to Penn and pay a total of $70,000 a year and the public should pay for it? I don’t agree,” he said last year.

Proponents of massive debt relief have argued that the bulk of student loan borrowers do not fit this profile. about 40% They never finished college, many are low-income, and the burden of repaying student loans falls disproportionately on black borrowers, and especially black female borrowers.

If the White House announced a plan to forgive $10,000 in debt for borrowers earning less than $125,000, nearly 60% of the debt canceled would be held by the bottom 60% of earners, or $82,400 or less, according to an analysis by Penn . Wharton Budget Model. About 2.5% of the relief would go to Americans in the top 10% of the income distribution, and none of it would go to Americans in the top 5%.

Concern that some well-to-do borrowers might benefit from debt forgiveness likely underlies policymakers’ interest in a means test. Repealing $10,000 per borrower with no income cap would mean about 1.07 percent of the relief would go to the top 5 percent of the income distribution, Penn Wharton found.

Abby Shafroth, the director of the Student Loan Borrower Assistance Project at the National Consumer Law Center, said it “seems like a wild political move” to make the most vulnerable borrowers go through red tape to keep such a small group of affluent. to benefit from the initiative.

Older borrowers or low-income borrowers juggling jobs are less likely to have the time and resources — such as reliable Internet access — to navigate an application process. If the long history of student loan borrowers struggling to overcome bureaucratic hurdles is any indication, advocates likely have a basis for their concerns.

“The group of borrowers that I advocate on her behalf are low-income borrowers, so a lot of people are surprised that I care about an income cap,” Shafroth said. “Although my clients would be eligible and other borrowers like them would be fully eligible with an income cap, many of them would not end up getting the relief.”

Broader financial impact of student debt relief

Critics and advocates of the policy will also be watching to see the broader economic impact of any debt relief. As an announcement looked increasingly imminent in recent days, prominent economists, including Larry SummersAn Obama-era Treasury secretary, he urged the Biden administration not to pursue massive debt relief out of concern that it could contribute to inflation and push colleges to raise tuition.

The Penn Wharton model estimates that writing off $10,000 in debt for borrowers earning up to $125,000 could cost the government as much as $330 billion over the next 10 years.

Stephanie Kelton, a professor of economics and public policy at Stony Brook University, said the combination of relatively modest debt relief along with a resumption of payments in the coming months could reduce current inflation. In 2018, Kelton found that canceling the total outstanding student debt at the time — about $1.4 trillion — would boost gross domestic product by up to $108 billion a year on average over the 10 years after the relief.

Kelton, who also co-hosts MarketWatch’s Best New Ideas in Money podcast, said she hasn’t run the numbers before, but “everything I understand about economics tells me that this would have very little impact on inflation,” she said. That’s because her original analysis assumed that millions of people who started making monthly student loan payments suddenly didn’t have to again — freeing up cash they could spend in the economy.

If the White House announcement comes Wednesday and matches reports, borrowers will already have access to that cash flow for about two and a half years, and the $10,000 relief likely isn’t enough to change their spending habits, said the Kelton.

“You could imagine a wealth effect, but the propensity to spend from that would be very small,” he said.

Cancellation and payment freeze could affect other student debt relief efforts

Additionally, there are some borrowers for whom $10,000 in cancellation will do very little. For example, those with high balances but repaying their debt as a percentage of their income under the government’s income-based repayment plans may not see their monthly payments change.

However, some of these borrowers could benefit from other proposals already announced by the Department of Education. Both removing millions of borrowers from the debt forgiveness books and delaying the resumption of payments could help the Department and its contractors more effectively implement these policies.

Last year, the agency announced it would streamline the process for eligible borrowers to access debt relief through certain programs such as Public Service Loan Forgiveness, which allows government and certain nonprofit employees to have their federal student loans discharged after 10 years of payments and income-driven repayment, which provides debt relief to federal student loan borrowers after 20 or 25 years of income-linked payments.

In addition, the agency plans to provide an opportunity for defaulting borrowers to repay their loans in good standing. These borrowers face some of the harshest consequences of the student loan system, including garnishment of wages as well as garnishment of tax refunds and Social Security checks to repay old student debt.

Student loan advocates will be watching closely to see if borrowers who haven’t fully wiped out their debt through any debt relief announcement can access the benefits of the program, called Fresh Start, seamlessly. Supporters had hoped officials would automatically place eligible borrowers into a payment plan that allows them to repay their debt as a percentage of their income. Instead, borrowers should take steps to make the new payment arrangements themselves.

Borrowers in default have one year from the end of the moratorium to make these arrangements. Otherwise, they will be at risk of facing collection activity.

Implementing all of these initiatives, “adjusting everyone’s accounts to lower their balances, is a lot of work that needs to be done, and it’s extremely important work to really fix a lot of the wrongs that borrowers have experienced over the decades of this broken student loan system,” Yu said. “One of the things that’s critical is that borrowers don’t go back into repayment while we’re working on all these initiatives.”

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