President Joe Biden has spent months trying to navigate how to fulfill a campaign promise to relieve federal student loan borrowers from crushing debt. He’s trying to avoid making it a boondoggle for the affluent 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 under $125,000 a year, or households making less than $250,000 a year.
Pell Grant recipients who make less than $125,000 a year would be eligible for loan cancellation up to $20,000.
Biden also extended the moratorium on student loan repayments, scheduled to expire on Aug. 31, though the end of the year.
The plan could free up to 15 million borrowers from student debt entirely, The Wall Street Journal reported.
Economists said a limited cancellation plan is unlikely to add to inflationary pressures in the near term, but could increase them in the long term.
Stephanie Kelton, an economics and public policy professor at Stony Brook University, told MarketWatch that the combination of modest debt cancellation and the resumption of loan payments in the next few months could dampen current inflation. It could also boost the economy.
MarketWatch cited a 2018 analysis by Kelton that found 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 a year for the decade following.
The anticipation for Biden’s announcement has been building since April but the issues involved are longstanding. Nearly 44 million people collectively owe $1.7 trillion in federal student loans. Canceling some of it would cost taxpayers hundreds of billions of dollars.
Biden runs several risks. Only a minority of Americans graduate from college (37.9% in 2021), and debt cancellation could appear overly generous to those who knowingly took on debt to obtain their degrees.
There is also the risk of resentment from some people who repaid their student loans without government help. Based on the income limit in Biden’s plan, most of the debt canceled would be held by the top 60% of earners, the Penn Wharton Budget Model said.
Then again, the goal is to relieve millions of households of burdensome debt so they are free to buy houses and start families, decisions that some borrowers have deferred because of their finances.
Canceling student loan debt “would open a can of snakes: Anger and possibly lawsuits from Republicans and other opponents; and anger from progressives who won’t be satisfied,” said Capital Alpha Partners’ analyst Ian Katz.
Biden already has canceled debt for borrowers from for-profit schools. Last week, the Education Department announced the cancellation of $3.9 billion in debt for those who attended ITT Technical Institute, which is now defunct.
Until Wednesday’s announcement, that brrought the total of student debt forgiven under the Biden administration to $32 billion, which the White House noted is “more than any Administration in history.”
But his broader plan is a tricky balancing act.
Former Treasury Secretary Lawrence Summers said in a series of tweets Monday and Tuesday an unreasonable amount of relief would contribute to inflation or could encourage colleges to raise tuition.
“Student loan debt relief is spending that raises demand and increases inflation,” consuming resources that could have gone to help those who didn’t get to go to college and tending to increase tuitions, Summers said. The repayment moratorium benefits “highly paid surgeons, lawyers and investment bankers.”
The issue has become a political football this midterm election year. Sen. Mitt Romney (R, Utah) and other Republicans tried unsuccessfully in May to limit the president’s authority to cancel debt. He said it “would not only be unfair to those who already repaid their loans or decided to pursue alternative education paths, but it would be wildly inflationary at a time of already historic inflation.”
Sen. John Thune, a South Dakota Republican, even introduced a bill earlier this year to stop the loan payment deferrals—borrowers haven’t had to pay since the pandemic started in March 2020—and said canceling student debt is “grossly unfair” to those who paid off their loans.
An NPR/Ipsos poll released in June found 55% of Americans support forgiving up to $10,000 in student loan debt.
Sen. Elizabeth Warren (D., Mass.), who has said she pursued her college dreams at a school that cost $50 a semester, on Tuesday tweeted that canceling debt would narrow the racial wealth gap among borrowers, provide relief to the 40% of borrowers who never got to finish their degree, and give working families the chance to buy their first home or save for retirement. “It’s the right thing.”
Write to Janet H. Cho at email@example.com