The Impact of Canceling Student Debt

For many American adults and families, President Joe Biden’s attempts to waive student loan debt for qualifying borrowers would be a welcome respite and a lifesaver. Households of color would particularly benefit from the cancellation of this debt. However, the impact would be negligible for those who never attended college or who have already paid off their loans, and the economic impact might not be as favorable as some believe.

What Is Biden’s Plan to Cancel Student Debt?

The Biden-Harris administration unveiled its long-term student debt relief proposal on August 24, 2022, but the U.S. Supreme Court overturned it in June 2023. The Biden-Harris Administration at the White House. “FACT SHEET: President Biden Announces Relief from Student Loans for the Most Needy Borrowers.”

There were three prongs to the plan: $10,000 in federal student loan forgiveness would have been available to borrowers making less than $125,000 annually. Heads of household or married couples filing jointly with income up to $250,000 would still have been qualified. Recipients of the income-based Pell Grant during their academic tenure could have been entitled for forgiveness of up to $20,000.

Even though the Supreme Court ultimately rejected the debt forgiveness plan, the government persisted in pursuing loan forgiveness and income-driven repayment (IDR) schemes as alternative debt reduction strategies. On September 1, 2023, the interest rate halt on student loans was finally lifted, and on October 1, 2023, the payments started again.

Be aware that while the American Rescue Plan makes student loan forgiveness provided from January 1, 2021, to December 31, 2025, federally tax-free, state laws may differ.
As of right now, states including Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin anticipate taxing forgiveness as income.

Positive Impacts of Canceling Student Debt

Even though many students owe more than $10,000, they would financially benefit from any type of student debt forgiveness. According to some economists, loan forgiveness would also boost the economy since borrowers might utilize the money saved for other things, like property purchases.

For instance, if you have $35,000 in student loan debt and make $300 monthly payments at a 4.66% interest rate, you will accrue over $12,000 in interest over the course of 13 years. You could pay off the remaining debt five years sooner and save roughly $6,000 by eliminating $10,000 of that student loan.

Particularly women and persons of color, lower-income borrowers may gain most from the cancellation of college loans. The “median wealth for Black households overall, not just borrowers, would instantly increase by 42% with $75,000 in student debt forgiveness and around 34% with $50,000 in forgiveness,” according to a 2020 academic report.
Although those sums exceed what President Biden has proposed, they are consistent with the racial justice efforts of his administration.

Negative Impacts of Canceling Student Debt

Opponents contend that waiving any amount of student loan debt would unfairly benefit college students, who are a relatively privileged group of individuals. Even though over 45 million Americans owe money on their student loans, they only make up around 13.5% of the country’s total population.

Aside from questions about the plan’s equity, there are expenses associated with it. According to fiscal experts, canceling the loan would come with a $519 billion price tag over a ten-year budget horizon. The overall sticker price might approach $1 trillion if you include an additional $16 billion for 2022 in forbearance and possibly an additional $450 billion for the new income-driven repayment (IDR) program.