But while some Democrats argue that the President should immediately erase large amounts of student loan debt for 43 million Americans with the stroke of his pen, the implications of such a significant policy move are complicated.
There are upsides and downsides.
On the one hand, student debt cancellation could deliver financial relief to millions of Americans, helping them buy their first homes, start businesses or save for retirement — all investments that may take a back seat to pay off student debt. Loan forgiveness could also help narrow the racial wealth gap, some experts say.
But broad student loan forgiveness would also shift the cost — likely hundreds of billions of dollars — to taxpayers, including those who chose not to go to college or already paid for their education. Loan cancellation could also add to inflation while doing nothing to address the root of the problem: college affordability.
Student loan debt cancellation won’t lower the cost of college
A one-time cancellation of federal student loan debt would do nothing to bring down the cost of college for future borrowers or those who already paid for their degrees.
“Forgiving debt does not affect college affordability at all,” said Douglas Holtz-Eakin, president of the American Action Forum, a conservative think tank, and former director of the nonpartisan Congressional Budget Office.
In fact, it might even drive up the cost of college, he said. If prospective students have reason to believe that a future president may cancel their debt, they may be more willing to borrow more money — and colleges, in turn, may decide to charge more for tuition and fees.
“It creates this moral hazard and sets up an expectation that debt may be forgiven in the future,” Holtz-Eakin said.
Biden has acknowledged that college affordability is a problem and called for making community college free — but that move would require an act of Congress. The proposal was cut from the Biden-supported Build Back Better bill, which passed the House but stalled in the Senate.
An economic boost? Or higher costs for all?
A lot of borrowers say that having less student debt hanging over their heads could help ease the pain of rising inflation.
If Biden cancels some student loan debt, it’s true that some borrowers will owe less money on a monthly basis and in turn, have more money in their pockets. But more consumer spending could add fuel to an already overheated economy.
“It’s a situation where what’s good for individuals is not necessarily good for society,” said Beth Akers, a senior fellow at the conservative American Enterprise Institute, where she focuses on the economics of higher education.
“In reality, it probably wouldn’t move the needle drastically in either direction. But the downside for cancellation got a bit worse since we entered this inflationary period,” Akers added.
One reason the economic impact may be modest is because borrowers generally pay back their student loans over time. They wouldn’t receive a lump sum of money if some of their debt is canceled. They would instead be required to pay less money each month toward their student loan payments.
Helping poorer households as well as high-earners
There are certainly many low-income Americans who are struggling to pay off their student loan debt. But it’s not easy to target loan forgiveness to those who need it the most and exclude borrowers with higher salaries.
Many economists argue that canceling student loan debt would disproportionately benefit higher-wealth households, like those of doctors and lawyers, because those borrowers tend to have more student debt after attending graduate school.
An income threshold that cuts off borrowers who earn more than $125,000 a year could help make sure a bigger proportion of the relief goes to low-income borrowers.
About 16{ac23b82de22bd478cde2a3afa9e55fd5f696f5668b46466ac4c8be2ee1b69550} of the canceled dollars would go to the poorest households earning less than $25,000 a year.
Roughly one-quarter of the relief dollars would go to those earning between $26,000 and $44,000, and another quarter to those earning between $71,000 and $122,000.
One-third of the relief would go to households with total incomes between $45,000 and $70,000 a year.
Student debt cancellation would help close the racial wealth gap, experts say, because Black students are more likely to take on student debt, borrow larger amounts and take longer paying them off than their White peers.
Plus, most Americans don’t have student loan debt at all. Roughly 80{ac23b82de22bd478cde2a3afa9e55fd5f696f5668b46466ac4c8be2ee1b69550} of households below the $125,000 threshold don’t have student loan debt and would not see a benefit if Biden takes new action, according to Chingos.
Some loan forgiveness programs already exist, but they don’t always work
There are already federal student loan repayment programs that exist to help borrowers who are struggling to make their payments or were victims of for-profit college fraud.
Most federal student loan borrowers are eligible for loan repayment plans that tie their monthly payment amount to their income and family size, known as income-driven repayment plans. There are a variety of plans, but generally they cap payments at 10{ac23b82de22bd478cde2a3afa9e55fd5f696f5668b46466ac4c8be2ee1b69550} of a borrower’s discretionary income. After 20 or 25 years of payment, depending on the specific plan, the remaining student loan debt is forgiven.
The federal government also offers a student loan forgiveness plan for public sector workers who make 10 years of qualifying monthly payments. But the program, known as Public Service Loan Forgiveness, has also had problems that prevented people from qualifying.
There is also a government forgiveness program for borrowers who enrolled at schools that shut down while they were enrolled or fell short of delivering the education the institutions promised. The Biden administration has been chipping away at a backlog of forgiveness claims filed under this program, known as borrower defense to repayment.
Altogether, about $18.5 billion in student loan debt has been forgiven for more than 750,000 borrowers since Biden took office, per the latest figures from the Education Department.
