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  • Natalia Reyes

A Look Into the Predicted Economic Implications of Biden’s Student Debt Relief Plan

President Biden recently announced his controversial plan to cancel up to $20,000 in federal student loan debt for Pell Grant recipients, and up to $10,000 in debt for non-Pell Grant recipients. This relief is limited to borrowers with an individual income of less than $125,000 or $250,000 for married couples. While much is still left unknown about the plan and its long-term effects, the White House released a fact sheet with information regarding the plan’s purpose and scope, and a statement regarding the program’s projected fiscal and cash-flow impacts.


Student debt is a national crisis with $1.6 trillion in cumulative federal student loan debt and over 45 million borrowers (for now). Since 1980, the cost of attending a 4-year public or private institution has nearly tripled after accounting for inflation, making it much harder for students to accumulate wealth and savings after college. This in turn makes it more difficult for graduated students to make investments necessary to creating a life for themselves, investments like a house or a car. Not only is student debt a crisis but also a social issue. With students of color facing larger debt burdens due to patterns of discrimination and inequalities in academic opportunities, these negative consequences of taking on student debt mentioned above are even more devastating for Black and Hispanic borrowers. With the typical White family having eight times the wealth of the typical Black family and five times the wealth of the typical Hispanic family, a greater number of Black and Hispanic students must borrow money to get a degree, further increasing the racial wealth gap.


So wouldn’t a plan to cancel student debt for middle and low-income borrowers be a cause for celebration? Well, that depends on who you ask.


Of course, there are people who already paid off their student debt questioning the fairness of the issue. Additionally, there are people who believe that student debt is normal and that it is not a crisis that needs government attention. Most of the arguments against federal student debt, however, are from people concerned about its long-term macroeconomic effects, especially on inflation. The overheated economy brought on by COVID-19 has further complicated the debate over whether Biden is making the right decision by canceling student debt.


One major concern with a student debt relief program is that it will further increase inflation during a period of already unusually high inflation rates. This fear mostly stems from the inflationary impacts of COVID-19 stimulus payments and the federal student debt pause that has been in effect since the start of the pandemic.


COVID stimulus checks came out in three rounds, each with slightly different parameters for who would receive these payments. In such uncertain times, the federal government was more concerned with getting the money out in a timely manner than targeting the payments toward those who actually needed them. This allowed for people who were well above the poverty line and remained employed during the pandemic to receive payments, contributing to excess demand and a severe increase in inflation in recent years. However, the Penn Wharton Budget Model predicts that 75% of student loan forgiveness will go to households making under $88,000 per year. Biden’s relief program also offers more relief to Pell Grant recipients, potentially skewing relief toward low-income borrowers. Whether or not the relief is targeted enough can only be answered once it goes into effect.


The pause put on student loan payments was thought to impact the inflation increase during COVID-19, as it put money into the pockets of students during a time of excess demand and limited supply. However, independent analysts have estimated that each full-year moratorium on student debt adds only about 0.2 percentage points to inflation, with White House projections being even lower. The debt students owe after earning a degree is money that would be paid in years or even decades, and is money most borrowers do not have. Some borrowers may spend more following student debt forgiveness, which can be explained by the wealth effect. However, the plan’s overall inflationary impacts are estimated to be small. Additionally, the inflationary impacts of debt forgiveness are thought to be offset by federal loan payments restarting, which will be happening at the same time Biden’s executive order goes into effect.


More will become known about the economic implications of Biden’s student debt forgiveness in the coming months. What we do know is that student debt is a large and growing problem and that something needs to be done to make college a more worthwhile investment, and an investment available to all.


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