The White House has not made a final decision on the matter of student loan cancellation, but reports in the Washington Post indicate that it’s working on a plan to erase up to $10,000 in borrowers’ debt. This plan would only apply to Americans making less than $150,000 the previous year or married couples filing jointly. For further information, please read the Washington Post article. It also contains a detailed breakdown of the pros and cons of the plan.
Biden’s plan to cancel student loans
President-elect Joe Biden has said he would be open to canceling student loans if elected. He has pledged to forgive at least $10,000 in student debt per borrower. The move comes after Sen. Elizabeth Warren has made similar calls for student debt forgiveness. But is this plan really a good idea? It depends on the details. Let’s take a closer look. It could benefit students, but Republicans in Congress are against it.
Despite the ostensible benefits of a federal student loan cancellation program, critics worry that President Biden’s plan will increase the amount of debt held by Americans. Currently, 13 percent of Americans hold federal student debt. Of that number, more than half are graduates. These graduates are most likely to hold high-paying jobs, so the proposal could disproportionately benefit them. Unfortunately, it’s not clear if this plan will make a difference in the lives of students or their families.
The biden administration plan will offer a program that would erase up to $10,000 of student debt for graduates earning under $300,000. However, it is unclear whether the relief would be permanent or only available for graduates who make less than that. The plan is also unclear as to when it would be necessary to resume repayment, a few months after the end of the moratorium that expired after the pandemic. Inside Higher Ed has not received any communication from the Biden administration, and therefore we cannot confirm whether or not the plan is real.
Although many progressive Democrats have called for student debt relief across the board, they have been silent on a solution. For instance, progressive Democrats have demanded that at least $50,000 of student debt be eliminated for every borrower. However, most households would not benefit from Biden’s plan. That means the proposal would not benefit most households, and it could hurt people who cannot afford higher educations. A solution to this problem is more widespread and effective.
The timing of the Biden plan to cancel student loans is also critical. While a new plan to cancel student loans may be announced at the end of April, the federal government will likely raise interest rates on existing student loans in July. This means that new borrowers of federal student loans will be paying more starting July 1. It is unclear how long the process will take, though. In the meantime, the current payment pause will continue.
Arguments for and against
Proponents of student loan cancellation argue that the benefits of debt forgiveness far outweigh the costs of higher education. However, the idea is not without flaws. It could leave many borrowers behind. It could also penalize those who earned advanced degrees but have no means to pay back their debts. Furthermore, many people will be left in the same financial situation as before. That’s why proponents of debt forgiveness should avoid letting this idea rule their lives.
The first argument against student loan cancellation is that the massive debt burden of college borrowers has risen out of proportion with the cost of higher education. In addition, tuition prices have skyrocketed during two recessions, driving down wages and employment. Consequently, canceling all student loans would represent a huge missed opportunity for millions of people. Moreover, it would not solve the social issues that accompany the massive student debt burden.
The government should be compassionate to students who are struggling financially. The HEA requires the government to consult with a wide range of stakeholders, including the student loan servicers. However, Congress did not require the Department of Education to consult with these groups during loan cancellation. This limits the federal government’s ability to challenge the cancellation of student debt under current standing doctrine. If borrowers did seek cancellation, the government would likely be forced to adjudicate the case.
The federal government holds $1.6 trillion in student loan debt. Thus, nullifying a loan would likely result in a years-long legal battle. In addition, there is no cause of action against the government in the federal courts. As long as the debt burden continues to rise, the Executive Branch will most likely continue to be more reluctant to act. The decision to cancel student debt is ultimately up to the executive branch.
Advocates of student debt argue that relief will help make housing more affordable. Senator Warren argues that student debt cancellation will encourage people to buy homes and increase their chances of homeownership. The skyrocketing cost of housing is locking many people out of homeownership. However, the benefits of debt relief for students are purely individual. But for the nation, student debt is a burden to many people and not to the economy. The majority of people who are burdened with student loan debt are people who can afford it.
Cost to taxpayers
Some Americans are angry at the prospect of student loan cancellation because they see it as a slap in the face. But it is even more of a slap to those who never went to college, as research shows that college degrees increase lifetime earnings by nearly 50%. On top of that, student loan cancellation would cost taxpayers tens of billions of dollars, and all taxpayers would contribute to this cost.
In addition to transferring costs from borrowers to taxpayers, student loan cancellation would also increase the federal deficit. The total amount would be determined by the value of forgiven loans. While the cancellation of student debt won’t increase the national deficit immediately, the total amount could reach $230 billion. Adding the cost of cancellation to the debt owed by borrowers makes little sense, since many low-income Americans are struggling to pay off their student loans.
While the government would be happy to have some extra money, removing student loan debt from the public will cost taxpayers a fortune. The Federal Reserve estimates that forgiving student loan debt by a third of the population would cost $904 billion in the short term, with a similar increase in costs if forgiving just ten percent of the debt. In fact, if the debt forgiveness plan is approved, it will cost taxpayers nearly $1 trillion over the next decade.
Student loan debt is the largest single burden of college graduates. The cost of education and training is nearly $1 trillion. Many college graduates are crippled by their student loans. The Biden plan would cover up to $10,000 of a borrower’s debt, but it would still cost $450 billion overall. The plan is highly unlikely to have an impact on non-borrowers, because it would pass the buck to taxpayers.
Cancelling all federal student loans would cost taxpayers $1.7 trillion, adding more to the national debt. It would also fuel inflation and unfairly penalize those Americans who have carefully considered affordability in their higher education decisions. It would also lead to more income inequality because one-third of student debt is owed by the richest twenty percent, while the bottom twenty percent owe only 8%. That’s an unfair way to punish the poorest Americans.
Impact on racial wealth gap
The disparity in the wealth of blacks and whites has been widely documented for decades. For example, students attending for-profit colleges are more likely to have high levels of debt than those attending public or private non-profit colleges. Additionally, these students tend to have lower job outcomes. While the reasons for this racial wealth gap are many, they can all be traced back to historic and contemporary policies. In the US, for instance, the housing boom produced a tremendous amount of wealth in African American communities, which was destroyed during the housing bust. Similarly, decades of denying people of color mortgage financing have led to a substantial gap in wealth.
Recent studies show that the income gap between blacks and whites has grown wider due to student debt. This disparity is especially acute among young black households. As a result, their average net worth is less than half that of young white households. In addition, black households typically have negative net worth, whereas white households have positive net worth. These disparities are exacerbated by a lack of financial cushion for emergencies.
Recent research has shown that expanding debt relief programs for students in low-income households can narrow the racial wealth gap by 4 percent. While this is still a far cry from the level of wealth in America, it is crucial to realize that a policy focused on the poorest will have the greatest impact on reducing the racial wealth gap. This policy can also reduce the number of students who fail to finish college.
Another study shows that eliminating student debt could narrow the racial wealth gap. More than forty million Americans owe money for their education. Approximately 25 percent are in delinquency or default, and the average black borrower has $53,000 in debt four years after graduating from college. This is twice as much debt as their white counterparts. In addition, students with debt tend to delay other financial investments, including building intergenerational wealth.