Biden is considering canceling some student debt. Here’s why it might not be such a good idea – CNN | Vette Leader

But while some Democrats have argued that the president should immediately pay off large amounts of student loan debt for 43 million Americans with the stroke of a pen, the ramifications of such a significant policy move are complicated.

There are pros and cons.

On the On the one hand, student debt relief could provide financial relief to millions of Americans, helping them buy their first homes, start businesses, or save for retirement — all investments that could take a backseat to paying down student debt. Credit forgiveness could also help narrow the racial wealth gap, some experts say.

But wide Forgiving student loans would also shift the cost – likely hundreds of billions of dollars – to taxpayers, including those who have chosen not to go to college or have already paid for their education. Loan foreclosures could also contribute to inflation without addressing the root of the problem: college affordability.

“This is quite a complex issue,” Education Minister Miguel Cardona told MSNBC’s Symone Sanders earlier this month when she pressed him on why there hasn’t been comprehensive student debt relief yet.
Borrowers currently have $1.6 trillion in outstanding federal student loan debt, more than Americans owe on credit card or auto loan debt. About 54% of borrowers with outstanding student loan debt owed less than $20,000 as of March 2021, according to the College Board. About 45% of the outstanding debt was held by the 10% of borrowers who owed $80,000 or more.
Paying off student loans in bankruptcy is extremely difficult compared to other types of debt. Before the pandemic, thousands of borrowers’ Social Security checks were being garnished because their student loans were in arrears.
Payments and accrual of interest on federal student loans have been frozen since March 2020 because of a pandemic-related hiatus that Biden has extended several times. Payments will resume after August 31, and the White House has indicated that by then the president will decide whether to forgive some student debt — just months before the midterm elections.

Debt on student loans Cancellation will not reduce college costs

A one-time cancellation of federal student-loan debt would do nothing to lower college costs for prospective borrowers or those who have already paid for their degrees.

“Debt relief doesn’t impact college affordability at all,” said Douglas Holtz-Eakin, president of American Action Forum, a conservative think tank and former director of the nonpartisan organization Congressional Budget Office.

In fact, it could even drive up college costs, he said. If interested Students have reason to believe that a future president might cancel their debt, they might be more willing to borrow more money — and colleges, in turn, might decide to charge more for tuition and fees.

“It creates that moral hazard and creates an expectation that debt can be forgiven in the future,” Holtz-Eakin said.

Biden has acknowledged that college affordability is an issue and has called for the community college to be made free — but that move would require an act of Congress. The proposal was dropped from the Biden-backed Build Back Better bill, which passed the House of Representatives but stalled in the Senate.

An economic boom? Or higher costs for everyone?

Many borrowers say 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 each month and have more cash in their pockets. But more consumer spending could add fuel to an already overheated economy.

“It’s a situation where what’s good for the individual isn’t 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 to the cancellation has worsened a bit since we entered this inflationary phase,” Akers added.

One reason the economic impact can be small is because borrowers generally repay their students credits over time. You would not receive a lump sum sum of money if some from their debts will be forgiven. Instead, they would have to pay less money each month for their student loan payments.

A report from the non-partisan The Federal Budget Committee estimated that canceling all $1.6 trillion in state student loan debt would add 0.1 to 0.5 percentage point to the inflation rate over 12 months. But Biden has suggested he would cancel less than $50,000 per borrower.
The group has also found that student debt relief is not a cost-effective way to provide economic stimulus.
The cost of canceling student loan debt would increase the deficit — transferring the cost from borrowers to all taxpayers. The White House has suggested Biden is considering terminating $10,000 per borrower but excluding those earning more than $125,000 a year. Under these parameters, debt relief for student loans would cost at least $230 billion, according to the Federal Budget Governance Committee.

Help for poorer households as well as for higher earners

There are certainly many low-income Americans who are struggling to pay off their student loan debt. But targeting loan forgiveness to those who need it most and excluding borrowers with higher salaries isn’t easy.

Many economists argue that forgiveness of student loan debt would disproportionately benefit wealthier households, such as those of doctors and lawyers, since these borrowers tend to have more student debt after attending graduate school.

An income cap that cuts off borrowers earning more than $125,000 a year could do so help ensure that a larger share of the relief goes to low-income borrowers.

Matthew Chingos, vice president of education data and policy at the Urban Institute, appreciated this Share of debt forgiven by income group if Biden canceled $10,000 in student loan debt for borrowers earning less than $125,000 a year.

About 16% of the canceled dollars would go to the poorest households, earning less than $25,000 a year.

About a quarter of the aid money would go to those earning between $26,000 and $44,000 and another quarter to those earning between $71,000 and $122,000.

A third of the relief would go to households with combined incomes between $45,000 and $70,000 a year.

Eliminating student debt would help close the racial wealth gap, experts say, because black students are more likely to incur student debt, borrow larger amounts, and take longer to repay than their white counterparts.

“Cancelling student debt is one of the most effective ways to address racial and economic justice issues. The student loan system reflects many of the inequalities that plague American society and widens the racial wealth gap,” dozens of Democratic lawmakers wrote in a March letter to Biden, urging him to “take a significant amount of student debt.”
But the impact on the racial wealth gap might be tempered by the fact that there are also fewer black college students than white college students. The Chingos model found that if Biden canceled up to $10,000 for those earning less than $125,000 a year, 62% of canceled student loan dollars would go to white borrowers, while 25% would go to black borrowers.

Also, most Americans have no student loan debt at all. Approximately 80% of households below the $125,000 threshold has no student loan debt and would see no benefit if Biden took new action, according to Chingos.

Some loan forgiveness programs already exist, but they don’t always work

Government student loan repayment programs already exist, designed to help borrowers who are struggling to make payments or have been victims of for-profit college fraud.

Here's who is eligible for student loan debt relief following Biden's recent actions

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-controlled repayment plans. There are a variety of plans, but generally they cap payments to 10% of a borrower’s discretionary income. After 20 or 25 years of payment, depending on the plan, the remaining student loan debt is forgiven.

But the programs are messy and don’t do it always work as they should. A recent government accountability report found that few people qualified for forgiveness under an income-based repayment plan. The Department of Education had approved the forgiveness of a total of 157 loans as of June 1, 2021. In the meantime, around 7,700 loans in repayment are likely to have been waived.

The federal government also offers a student loan forgiveness plan for public sector workers who qualify for 10 years monthly payments. But the program, known as Public Service Loan Forgiveness, also had issues preventing people from qualifying.

The Biden administration changed both the income-based payback program and the Public Service Loan Forgiveness program, which brings millions of borrowers closer to debt relief.
There is also a government forgiveness program for borrowers who enrolled in schools that were closed during their enrollment or failed to deliver the education promised by the institutions. The Biden administration has cleared a backlog of forgiveness claims filed under this program, known as the Borrower Defense for Repayment.

Overall, through June 1, the Department of Education has approved $25 billion in student loan debt relief for 1.3 million borrowers under Biden.

This story has been updated with additional information.

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