Today, Americans have more student debt than at any time in U.S. history. According to the Peter G. Peterson Foundation, “in 2019, 21% of households owed student debt at an average amount of about $42,000; by comparison, only 8% of households held student debt 30 years before, and the average amount was just $11,500 (after adjusting for inflation).”
The Biden administration’s Student Debt Relief Plan will provide $10,000-$20,000 in debt forgiveness to eligible recipients, aiming to “make the student loan system more manageable for current and future borrowers” per a White House press release.
Will it increase inflation?
Projections are mixed among experts. Some are predicting negligible inflation, while others warn inflation will hurt the students the plan is aimed at helping.
Mark Zandi, the chief economist at Moodys Analytics, said in a tweet that “the impact on growth and inflation in 2023 will be marginal ... the net is largely a wash.”
Lawrence Summers, former director of the National Economic Council, said “student loan debt relief is spending that raises demand and increases inflation,” indicating that inflation will be observed by a rise in tuition.
Joseph Stiglitz, the chief economist at the Roosevelt Institute, wrote in The Atlantic that “whatever your view of student-debt cancellation, the inflation argument is a red herring and should not influence policy.”
Is it targeting those in need?
According to the White House, the Department of Education estimates that “among borrowers who are no longer in school, nearly 90% of relief dollars will go to those earning less than $75,000 a year.”
The plan provides $20,000 in debt cancellation to any Pell Grant recipients with loans, as opposed to $10,000 for non-Pell Grant recipients. Pell Grants are need-based grants to low-income college students.
A study from the National Center for Education Statistics estimates that “the average student loan for Black borrowers is nearly 50% larger (around $13,000 higher) than that for white borrowers,” so loan forgiveness reduces that disparity to some extent.
But Penn Wharton Budget Model, from the University of Pennsylvania, projects a less targeted distribution. According to the study, over 60% of debt relief accrues to borrowers in the top 60% of the income distribution. Around 25% is projected to go towards households with income over $80,000.
According to the Brookings Institute, “student loan relief could be designed to aid those in greater need, advance economic opportunity and reduce social inequities, but only if it is targeted to borrowers based on family income and post-college earnings.”
They noted that “the median income of households with student loans is $76,400, and 7% are below the poverty line.”
How will it affect students going forward?
The Biden administration justifies the Student Debt Relief Plan by citing that the cost of four-year college has nearly tripled since 1980, but federal support has not kept pace, per a recent press briefing. Separately, however, the Biden administration increased the Pell Grant maximum to $6,895 for the 2022–23 award year.
Advocates for the plan believe that student loan relief will free recipients up to contribute to the economy. The Federal Reserve found that a “$1,000 increase in student loan debt causes a 1 to 2 percentage point drop in homeownership rate for student loan borrowers.” The Federal Reserve Bank of Philadelphia found that increasing student debt reduced the number of small businesses founded.
Others have indicated there will be consequences to the widespread forgiveness of loans.
Jason Furman, the former director of the National Economic Council under President Barack Obama, said that there could be highly problematic impacts such as “encouraging higher tuition in the future, encouraging more borrowing, creating expectations of future debt forgiveness, and more.”
Beth Akers from the American Enterprise Institute believes that the plan was politically motivated, and “by canceling student debt through a one-time event rather than through thoughtful reform of the existing safety net, Biden will be driving students to borrow more and institutions to raise prices even faster than before.”