On paper, US President Joe Biden’s student debt relief plan looks pretty good.
The government will forgive $10,000 in student debt for those earning under $125,000. That’s nearly a third of the average amount owed by student debt holders.
According to White House estimates, the policy wipes out balances for 20 million Americans — nearly half of all borrowers. That’s great considering a third of them have student debt but no college degree, according to the Department of Education.
But those overall numbers mask a key flaw in the plan: It won’t do much to help borrowers who need it most, those with large amounts of debt and low incomes.
Although they make up only a small share of student loan holders, their situation is a result of everything wrong with higher education. To counter that, many loan-relief advocates have been pushing the government to take racial disparities into account and provide more generous relief, said Fenaba Addo, an associate professor of public policy at the University of North Carolina at Chapel Hill.
But could the economy handle further debt relief without increasing consumer demand and fueling the inflationary fire, as some opponents of debt relief argue? Isn’t Biden’s plan like giving millions of Americans a $10,000 check?
There are millions of Americans who need much more than Biden’s $10,000 pardon
Most of the 43 million holders of student debt represent a small slice of the $1.6 trillion pie, with a small share of borrowers who owe more than $100,000 — 7% — accounting for nearly 40% of total student debt, according to College details. The result: Biden’s policy gives a large number of people with small balances a big reprieve, while barely helping a smaller group of students with large balances.
More than 8 million borrowers in income-driven repayment (IDR) plans, which are determined by the borrower’s discretionary income rather than the amount of student debt they hold, will see little financial impact from the cancellation.
If a borrower has a middle-class income of $60,000 and $40,000 in student debt, taking $10,000 off the balance won’t change their situation. They’re still not on track to pay off their debt because their income is so low, making payments under an IDR plan means the loan principal will continue to grow.
While another plan from Biden would reinstate 7.5 million defaulting student loan borrowers, nearly a third of all student loan holders have experienced default over the past two decades. Within this group many borrowers have defaulted multiple times. That’s a large portion of the total $1.6 trillion owed that the government wouldn’t see even if it wasn’t forgiven.
Student loan borrowers are not ready to spend
Claims that student loan cancellation will only help rich people or increase inflation ignore what caused the student loan crisis in the first place.
“People default and default on their debts because they didn’t have the money to pay for it,” Ando said. “If you don’t have income or wealth, landing $10,000 doesn’t mean you have income to spend.”
No one has been paying interest on their debt since the federal government stopped payments at the start of the pandemic, and the current inflationary environment is not due to student loan borrowers buying more stuff than the rest of the population.
Meanwhile, student loan debt has a crushing effect on a person’s financial future—creating a ripple effect throughout the economy. Economists at the Federal Reserve Bank of New York found that student loan holders are less likely to move into higher paying jobs, more likely to default on other types of debt and more likely to have lower credit scores.
When Covid-19 hit the US, these borrowers were in the sectors hardest hit by the disease. They are well aware of their precarious financial position. According to the Consumer Expectations Survey, Americans with student debt are much more likely to worry about defaulting on debt than other Americans.
Many economists believe that cancellation encourages long-term financial decisions (ie, moving) over short-term decisions (ie, buying a new TV). Debt cancellation improves a borrower’s debt-to-income ratio so they can borrow more for long-term expenses like a car, home or small business—in turn boosting the broader economy.
“Anything that would help people fill some jobs, I think would be good for the economy,” said Mike Konczal, director of macroeconomic analysis at the Roosevelt Institute.