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President Biden’s plan to forgive hundreds of billions of dollars in student debt is sparking heated debate.
Biden last week announced plans to forgive up to $20,000 in federal student loan debt for Pell Grant recipients and up to $10,000 for others who qualify.
The news will provide relief for borrowers at a time when the cost of higher education has surged.
But critics are questioning the fairness of the plan and warn about the potential impact on inflation should the students with the forgiven loans increase their spending.
Here are three key arguments – for and against the wisdom of Biden’s decision.
Raising living standards or adding fuel to inflation?
Undoubtedly, student debt is a big burden for a lot of people.
Under Biden’s plan, 43 million people stand to have their loan payments reduced, while 20 million would have their debt forgiven altogether.
People whose payments are cut or eliminated should have more money to spend elsewhere – maybe to buy a car, put a down payment on a house or even put money aside for their own kids’ college savings plan. So the debt forgiveness has the potential to raise the living standard for tens of millions of people.
Critics, however, say that additional spending power would just pour more gasoline on the inflationary fire in an economy where businesses are already struggling to keep up with consumer demand.
Inflation remains near its highest rate in 40 years and the Federal Reserve is moving to aggressively raise interest rates in hopes of bringing prices back under control.
Not all economists believe the debt forgiveness will do much to fuel inflation.
Debt forgiveness is not like the $1200 relief checks the government sent out last year, which some experts say added to inflationary pressure. Borrowers won’t suddenly have $20,000 deposited in their bank accounts. Instead, they’ll be relieved of making loan payments over many years.
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Because the relief is dribbled out slowly, Ali Bustamante, who’s with left-leaning Roosevelt Institute says Biden’s move won’t move the needle on inflation very much.
“It’s just really a drop in the bucket when it come to just the massive level of consumer spending in our very service- and consumer-driven economy,” he says.
The White House also notes that borrowers who still have outstanding student debt will have to start making payments again next year. Those payments have been on hold throughout the pandemic.
Restarting them will take money out of borrower’s pockets, offsetting some of the additional spending power that comes from loan forgiveness.
Helping lower income Americans or a sop to the rich?
Another big point of contention has to do with fairness.
Forgiving loans would would effectively transfer hundreds of billions of dollars in debt from individuals and families to the federal government, and ultimately, the taxpayers.
Some believe that transfer effectively penalizes people who scrimped and saved to pay for college, as well as the majority of Americans who don’t go to college.
They might not mind subsidizing a newly minted social worker, making $25,000 a year. But they might bristle at underwriting debt relief for a business school graduate who’s about to go to Wall Street and earn six figures.
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The White House estimates 90% of the debt relief would go to people making under $75,000 a year. Lower-income borrowers who qualified for Pell Grants in college are eligible for twice as much debt forgiveness as other borrowers.
But individuals making as much as $125,000 and couples making up to $250,000 are eligible for some debt forgiveness. Subsidizing college for those upper-income borrowers might rub people the wrong way.
“I still think a lot of this benefit is going to go to doctors, lawyers, MBAs, other graduates that have very high earnings potential and may even have very high earnings this year already,” says Marc Goldwein senior policy director at the Committee for a Responsible Federal Budget.
Helping those in need or making college tuition worse?
Goldwein also complains that the loan forgiveness doesn’t address the larger problem of soaring college tuition costs.
In fact, he suggests, it might make that problem worse — like a Band-Aid that masks a more serious infection underneath.
For years, the cost of college education has risen much faster than inflation, which is one reason student debt has exploded.
By forgiving some of that debt, the government will provide relief to current and former students.
But Goldwein says the government might encourage future students to take on even more debt, while doing little to instill cost discipline at schools.
“People are going to assume there’s a likelihood that debt is canceled again and again,” Goldwein says. “And if you assume there’s a likelihood it’s canceled, you’re going to be more likely to take out more debt up front. That’s going to give colleges more pricing power to raise tuition without pressure and to offer more low-value degrees.”
The old rule in economics is when the government subsidizes something, you tend to get more of it. And that includes high tuition and college debt.