What Student Loan Forgiveness Means

Experts on banking, public spending, and education policy look at the impact of Biden鈥檚 plan.

By Terri Friedline &
Dominique Baker &
John W. Diamond

4 MIN READ

Aug 25, 2022

President Joe Biden announced a to millions of borrowers of federal loans. The plan would offer up to US$10,000 in forgiveness for people who earn less than $125,000鈥�$250,000 for couples鈥攁nd up to $20,000 for Pell Grant recipients. Biden also extended the pause on repaying federal student loan debt through Dec. 31, 2022, and has proposed a cap on income that can be used to calculate how much borrowers repay through income-driven repayment.

We asked three experts to explain the decision and its impact.

Relief Makes Real Difference but Ignores Structural Issues

Terri Friedline, Associate Professor of Social Work, University of Michigan

The Biden administration鈥檚 plan is an important step that I believe will make a real difference in many people鈥檚 lives. The that about 20 million of the nation鈥檚 will see their entire balance canceled.

Despite this considerable impact, the plan is still limited. I hope it鈥檚 just the beginning in much-needed policy conversations about debt and education in the United States.

For one thing, Biden鈥檚 plan of America鈥檚 $1.75 trillion student debt tab.

In addition, the income cap of $125,000 focuses on borrowers鈥� socioeconomic class while ignoring the roles and sexism play in terms of who borrows and how much. For example, about $38,000 on average to finance their education, compared with $30,000 for White men. And because interest on student loans quickly accumulates, most Black female borrowers their original balance 20 years after enrolling in school. By comparison, most White borrowers have paid off their loans completely within that time period.

The Biden administration will have to do more if it aims to adequately address these and the many other remaining structural problems with debt and education.

Plan Extends Much-Needed Relief to Black Borrowers

Dominique Baker, Assistant Professor of Education Policy, Southern Methodist University

When approximately 10,000 student loan borrowers had their private student loans randomly canceled from 2010 to 2017, researchers found that it ultimately enabled them to . The borrowers were also 11% less likely to default on credit cards or other loans.

I expect similar outcomes will flow from the Biden administration鈥檚 decision to cancel federal student loans. And the decision to cancel up to $20,000 for those who received Pell Grants means that .

From the standpoint of racial justice, I believe this additional relief for Black borrowers is necessary because of of . Such inequities include accumulating education debt through 鈥�,鈥� a practice in which Black people are offered access to things like college or buying a house but on exploitative financial terms that have long-term negative effects.

Black student loan borrowers are also often the . As , Black bachelor鈥檚 degree earners are more likely to default on their student loans than White students who earn a bachelor鈥檚 degree鈥�21% versus 4%, respectively. Even more startling, Black bachelor鈥檚 degree recipients default at a higher rate than White students who leave college with no degree鈥�21% versus 18%, respectively.

The Biden administration also has , which should help future undergraduate borrowers by reducing the monthly percentage of discretionary income borrowers would pay from 10% to 5% and increasing what counts as non-discretionary income. That means borrowers will have more money that will not be used to calculate the percentage they owe each month.

I鈥檇 argue there is still work to be done to create an affordable college education. But today was an excellent start.

Loan Forgiveness Could Fuel Inflation

John W. Diamond, Director of the Baker Institute鈥檚 Center for Public Finance, Rice University

The price tag for Biden鈥檚 debt forgiveness plan is estimated .

While it will provide direct financial benefits for some people who currently owe money on federal student loans, I believe there will be another cost: higher inflation.

U.S. inflation is already rising at just below the , prompting the Federal Reserve to to reduce it, even at the risk of recession. Biden鈥檚 plan will make the central bank鈥檚 job tougher.

The upward pressure on inflation will result from increased spending by those who see their student debts reduced, as well as from the continuing moratorium on federal loan repayments. This higher demand for consumer goods鈥攔elative to a world without debt relief or a repayment moratorium鈥攈as the effect of driving up prices for current goods and services.

The found that a similar though more modest version of debt forgiveness would lead to a measurable increase in , which would have the effect of driving up prices for all consumers. That was based on a plan to spend roughly $230 billion on debt forgiveness鈥攁t least $70 billion less than Biden鈥檚 plan.

Another side effect could be that Biden鈥檚 debt relief offers incentives to students entering or currently in college to in anticipation of future rounds of forgiveness. Economists call this . Other research found that increases in student borrowing .

Some research has pointed to for those who receive debt relief, such as less future indebtedness, greater job mobility, and higher salaries. But these effects are based on a full discharge of student debt and not an incremental reduction like the one Biden announced.

Ultimately, loan forgiveness鈥攚hatever its merits鈥攚ill likely lead to larger federal deficits and higher inflation. While it benefits those with student loan debt, those benefits should be weighed against the costs it imposes on others and the economy.

This article is republished from under a Creative Commons license. Read the . It has been lightly edited for 猫咪社区! Magazine.

Terri Friedline is an Associate Professor at the University of Michigan School of Social Work. She has published extensively on banks and the financial system. Her most recent works include mapping the locations of banks, credit unions, and payday lenders nationwide, interviewing bank employees about the organizational contexts that shape customers' experiences, and interviewing women about their debts.

Dominique Baker is an Assistant Professor of Education Policy in the Annette Caldwell Simmons School of Education and Human Development at Southern Methodist University. Her research focuses on the way that education policy affects and shapes the access and success of minoritized students in higher education.

John W. Diamond is the Edward A. and Hermena Hancock Kelly Fellow in Public Finance and director of the Center for Public Finance at the Baker Institute, an adjunct professor of economics at Rice University and CEO of Tax Policy Advisers, LLC. His research interests are federal tax and expenditure policy, state and local public finance, and the construction and simulation of computable general equilibrium models.