Biden announced plans last week to forgive up to $20,000 in federal student loan debt for Pell Grant recipients and up to $10,000 for others who qualify.
The news will bring comfort to borrowers at a time when the cost of higher education is soaring.
But critics question the fairness of the program and warn of the potential impact on inflation if students who receive loan forgiveness increase their spending.
Here are three key arguments for and against the wisdom of Biden’s decision
Raise living standards or increase inflation?
There is no doubt that student debt is a heavy burden for many people.
Under Biden’s plan, 43 million people would have their loans reduced, while 20 million would have their debt completely forgiven.
People whose payments are cut or canceled should have more money to spend elsewhere – perhaps on a car, a down payment on a house, or even to save for their children’s college savings plans. As a result, debt forgiveness has the potential to raise the standard of living for tens of millions of people.
However, critics say the extra spending power will only add fuel to the inflationary fire in an economy where businesses are already struggling to keep up with consumer demand.
Inflation remains near its highest level in 40 years, and the Federal Reserve is aggressively raising interest rates in hopes of bringing prices back under control.
Not all economists agree that debt relief will significantly push up inflation.
Debt forgiveness is unlike the $1,200 relief checks the government issued last year, which some experts say added to inflationary pressures. Borrowers won’t suddenly have $20,000 in their bank accounts. Instead, they will not have to make payments on a multi-year loan.
President Biden announces student loan forgiveness in the Roosevelt Room of the White House in Washington, D.C., on Aug. 24.
Olivier Douliery / Agence France-Presse via Getty Images
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Agence France-Presse via Getty Images
President Biden announces student loan relief in the Roosevelt Room of the White House in Washington, D.C., on Aug. 24.
With relief flowing slowly, Ari Bustamante of the left-leaning Roosevelt Institute said Biden’s move won’t have much of an impact on inflation.
“In our service- and consumer-driven economy, the enormous level of consumer spending is really just a drop in the bucket,” he said.
The White House also noted that borrowers who still have outstanding student debt will have to start making payments again next year. Those payments have been put on hold throughout the pandemic.
Restarting them would take money out of borrowers’ pockets, offsetting some of the extra spending power created by loan forgiveness.
Helping Low-Income Americans or Appeasing the Rich?
Another important point of contention has to do with fairness.
Loan forgiveness would effectively transfer hundreds of billions of dollars of debt from individuals and families to the federal government and, ultimately, to taxpayers.
Some argue that transfers effectively punish those who scrimp and save to attend college, as well as the majority of Americans who don’t go to college.
They may not mind subsidizing an up-and-coming social worker who makes $25,000 a year. But they may be angry about underwriting debt relief for business school graduates about to enter Wall Street and earn six-figure incomes.
George Washington University students wear their graduation gowns outside the White House in Washington, D.C., on May 18. Economists fear President Biden’s plan to forgive student loans could encourage more people to take on debt with a view to having it forgiven as well.
Stefani Reynolds / AFP via Getty Images
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Agence France-Presse via Getty Images
George Washington University students wear graduation gowns outside the White House on May 18 in Washington, D.C. Economists fear President Biden’s plan to forgive student loans could encourage more people to take on debt with a view to having it forgiven as well.
The White House estimates that 90 percent of the debt relief will be available to people earning less than $75,000 a year. Low-income borrowers who qualify for Pell Grants while in college are eligible for twice as much debt relief as other borrowers.
However, individuals with incomes up to $125,000 and couples with incomes up to $250,000 are eligible for partial debt relief. Providing college subsidies for those high-income borrowers could be misleading.
“I continue to believe that the bulk of these benefits will go to doctors, lawyers, MBAs and other graduates with very high earning potential, and perhaps even very high earnings already this year,” said Marc Goldwein, senior policy director for the commission. Responsible federal budgeting.
Helping the needy or making college tuition worse?
Goldwein also complains that loan forgiveness doesn’t address the larger problem of soaring college tuition.
In fact, he suggests, it may be making the problem worse – like a Band-Aid covering up a more serious infection.
For years, the cost of a college education has been rising much faster than inflation, which has contributed to the surge in student debt.
By forgiving some of that debt, the government would provide relief for current and former students.
But Godwin said the government could encourage future students to take on more debt while doing nothing to instill cost discipline in schools.
“People will assume that debt is likely to be canceled over and over again,” Goldwein said. “If you assume it’s likely to be canceled, you’ll be more likely to take on more debt up front. This will give universities more pricing power to raise tuition and offer more low-value degrees without pressure.”
The old rule of economics is that when the government subsidizes something, you tend to get more of it. That includes high tuition and college debt.
