Last week, President Biden made good on one of his campaign promises and cancelled up to 10,000 USD of student debt for borrowers earning less than 125,000 USD per year. Additionally, he cancelled another 10,000 for borrowers from low-income backgrounds who received Pell Grants in college. Other changes affect loan repayments, reducing monthly costs and eliminating interest accumulation for millions of lower-earning borrowers who maintain payments. Politically, student debt cancellation is a divisive topic in the United States (it would be elsewhere, if other countries had student debt to begin with), and much of that debate falls on party lines. The more interesting aspect of the discussion is among economists, who are debating how the student debt cancellation will play out economically. Here is where the debate stands on certain issues.
Government Revenue
Any action that forgives debt will reduce revenue, and Biden’s policies about reduced repayment will also lessen the government’s revenue stream, thereby increasing budget deficits. That increase is not in question, but the size of the increase is. The Committee for a Responsible Federal Budget calculates the budget impact at somewhere between 440 billion and 600 USD billion over a decade, whereas the University of Pennsylvania’s Penn Wharton Budget Model estimates just over 600 billion over ten years.
Inflation
Harvard’s Jason Furman and Lawrence H. Summers, both former top economic officials in Democratic presidential administrations, have warned that forgiving student debt will add to inflation. By reducing or eliminating future loan payments, consumers will have more money to spend. While borrowers won’t be getting checks from the government, they will be relieved of the financial burden of monthly payments to student loan organisations. In contrast, researchers at Goldman Sachs agree that the plan won’t worsen inflation, saying the reduced buying power from restarting interest payments will more than offset the boost from loan forgiveness.
Who Actually Benefits
Much of the political debate also centres around this issue: who is actually benefiting from loan forgiveness? Penn Wharton has found that nearly three-quarters of the benefits of the plan will go to low-income and middle-class earners, with almost none to those at the very top. Critics argue that the real beneficiaries will be the ones who will be rich someday, like young doctors or lawyers who are just getting started in their fields. They will meet the income qualifications since they are not well into their careers, but they would have been readily able to pay off their debts. Penn Wharton attempted to calculate the plan’s effects only on borrowers ages 25 to 35. But it found essentially no change in the results: Among people of that age group, the bulk of the benefits still went to households earning between 29,000 and 88,000 USD a year.
Time will tell whether student loan forgiveness will prove to be a popular – and repeatable – policy, but the only thing we know for sure is that millions of borrowers are thrilled to see some relief.