President Joe Biden has spent months trying to explore how to fulfill a campaign promise to relieve federal student loan borrowers from the debt crisis. He tries to avoid making it mistakes for the wealthy or a trigger for inflation.
On Wednesday, Biden announced a plan to cancel up to $10,000 in federal student loan debt for borrowers making less than $125,000 a year, or less than $250,000 a year for households.
Recipients of federal Pell grants who make less than $125,000 a year will be eligible for loans of up to $20,000.
Responding to critics, Biden stressed that both of these actions would benefit “those who need it most.”
“We’re taking a fiscally responsible course” that will benefit middle- and working-class families and make college more affordable without materially affecting inflation, he said.
Biden also extended the moratorium on student loan repayments, which was set to expire on August 31, “one last time” until the end of the year, saying “It’s time to start making payments again,” starting in January 2023.
Those with loans from undergraduate schools can limit their repayments to 5%, up from 10% of their monthly discretionary income. And the loan balances of those who borrowed $12,000 or less would disappear after 10 years of payments, instead of 20 years. That would allow nearly all community college borrowers to be debt-free within a decade, the Department of Education estimates.
If all the help is claimed, the plan would save the average borrower more than $1,000 a month and cancel all outstanding debt for 20 million borrowers, the White House said.
Biden said he still hasn’t given up on the idea of offering two years of free pre-kindergarten as well as free community college. But eradicating college debt has long been an effort, despite concerns that it could add to inflationary pressures.
Stephanie Kelton, a professor of economics and public policy at Stony Brook University, told MarketWatch that the combination of modest debt relief and resumption of loan payments in the coming months could dampen current inflation. It could also stimulate the economy.
MarketWatch cited a 2018 analysis by Kelton that found that canceling all outstanding student debt at the time, which was about $1.4 trillion, would boost gross domestic product by an average of up to $108 billion annually for the next decade.
Nearly 44 million people collectively owe $1.7 trillion in federal student loan debt. Canceling some of them will cost taxpayers hundreds of billions of dollars.
Biden runs many risks. Only a minority of Americans graduated from college (37.9% in 2021), and debt forgiveness could appear overly generous to those who knowingly took on debt to earn their degrees.
There is also the risk of resentment from some people who paid off their student loans without government help. Under the income cap in Biden’s plan, most of the debt canceled would be held by the top 60 percent of earners, according to the Penn Wharton budget model.
Again, the goal is to free millions of households from burdensome debt so they can be free to buy homes and start families, decisions some borrowers have put off because of their finances.
Biden has already canceled debt for borrowers from for-profit schools. Last week, the Department of Education announced the cancellation of $3.9 billion in debt for those who attended the now-defunct ITT Technical Institute.
As of Wednesday’s announcement, that brought the total student debt written off under the Biden administration to $32 billion, which the White House noted is “more than any administration in history.”
But his larger plan is a difficult balancing act.
Former Treasury Secretary Lawrence Summers said in a series of tweets Monday and Tuesday that an undue relief would contribute to inflation or could encourage colleges to raise tuition.
“Student loan debt relief is demand-driven and inflation-driven spending,” eating up resources that could have gone to help those who failed to go to college and tending to raise tuition, Summers said. The repayment moratorium benefits “highly paid surgeons, lawyers and investment bankers.”
The issue has become a political football this year in the midterm elections. Sen. John Thune, R-South Dakota, even introduced a bill earlier this year to end loan deferrals — borrowers haven’t had to pay since the pandemic began in March 2020 — and said canceling the student loan debt is “grossly unfair” those who paid off their loans.
An NPR/Ipsos poll released in June found that 55% of Americans support canceling up to $10,000 in student loan debt.
Sen. Elizabeth Warren (D., Mass.), who said she pursued her college dreams at a school that cost $50 per semesteron Wednesday he tweeted that the plan “will be transformative for the lives of workers across this country.”
Write to Janet H. Cho at email@example.com