August 26, 2022
President Biden’s plan for relieving student loan debt came in right on the mark. It gives substantial relief to people who really need it without being a big giveaway to those who ran up big debts on expensive and valuable degrees.
Ten thousand dollars of loan forgiveness will greatly help a struggling recent college graduate trying to get by on low-paying retail or restaurant jobs. It will not matter much to a Harvard Business School graduate with $250,000 in debt and every prospect of earning a six-figure salary at their first job.
To clarify, the plan gives $10,000 of student loan forgiveness to people earning less than $125,000 a year. That probably excludes our Harvard Business School graduate.
It also gives $20,000 of loan forgiveness to people who received Pell grants to attend college. This is a way of targeting people from lower-income backgrounds. These are people who generally cannot count on much financial support from their families to attend college, and cannot expect much assistance from them to pay back their loans once they are out of school.
The most important part of the plan is getting the least attention. Biden is restructuring the income-driven repayment (IDR) plan to ensure that paying back student loans should not be a major burden.
First, he is raising the income floor from 150 percent of the poverty level to 225 percent of the poverty level. This means that a single person earning less than $30,600 in 2022 would not pay anything on their loan.
The plan also reduces the percentage of their income above this amount that would go to repayment from 10 percent to 5 percent. This means that a worker earning $40,000 a year ($9,400 above the cutoff) would pay just $470 a year towards their loans.
Finally, under the restructured IDR, the length of time a person has to pay off the loan drops from 20 years to 10 years. Any debt not paid after 10 years will be written off. This will make it far less likely to see people in their 40s, 50s, and 60s struggling to pay off student loan debt.
This is also a measure that changes the rules going forward. Debt forgiveness helps people who accumulated debt in the past, while the new rules for the IDR will help make college more affordable for students long into the future.
The Inflation Scare Story
Many opponents of Biden’s plan have claimed that it will worsen inflation. This is true in the same way that buying a new car will worsen inflation. It will create more demand in the economy. The question is how much.
The people who have looked at this seriously have concluded that the impact on inflation will be minimal. For example, Kent Smetters, who runs the Penn Wharton model, predicted it would raise inflation by less than 0.1 percentage point. The economic forecasters at Goldman Sachs came to the same conclusion.
While the $300 billion in debt being forgiven is big money to normal people, it is just 0.1 percent of an economy that will have a GDP of more than $300 trillion over the next decade. It is also worth remembering the timing of loan payments. As it stands, a moratorium on loan payments has been in place since the start of the pandemic.
The moratorium will end at the start of next year. This means that, even with debt forgiveness, those with debt will actually be making larger loan payments next year than they are now.
Is it Fair?
Many people have pointed out that those who have graduated college are, on average, better off than those who did not. While this is true, that does not mean that there are not millions of people with debt who are seriously struggling.
The labor market recovered very slowly from the Great Recession. Millions of students who completed their education in these years had difficulty getting jobs. Even when they found jobs the work often did not pay as much as expected for a person with a college degree. And of course, many of the people with student loan debt did not graduate college.
In other contexts, most people seem fine when the government makes payments, often to wealthy people, in the wake of a disaster. For example, people will get government aid, even to rebuild expensive homes after a flood or hurricane. The Trump administration gave out tens of billions of dollars in assistance to farmers to offset the impact of his trade policies. Few seemed bothered by this.
What About College Costs?
People have rightly complained that Biden’s plan does not address the underlying problem of out-of-control college costs. This is true but ignores the fact that Republicans in Congress have blocked efforts to lower college costs, most notably by making community college free.
More action needs to be taken to control college costs, but we will have to wait until we either get more Democrats in Congress or Republicans who actually care about making the system work.
In short, the Biden administration’s debt forgiveness plan is not perfect, but it is a big step that will help tens of millions of people. That’s pretty good for government work.