Balancing the positives and negatives of Student Loan Forgiveness legislation in the United States

https://www.nationalreview.com/corner/does-joe-biden-trust-kamala-harris/

With midterm elections just over two months away, the Biden-Harris administration has announced the introduction of student loan forgiveness. The legislation involves a three-part plan that will cancel up to $20,000 of debt for low-to-middle income borrowers. At first, the idea of cancelling student debt raised issues of legality. However, the 2003 “Heroes Act” grants the executive power to eliminate debt during a national emergency. 

According to The White House (2022), the implementation of such policy has a main premise, and three main objectives. The Biden administration believes that attending post-secondary education should not deprive students of future opportunity due to the significant long-term financial constraints of borrowing. In addition, there was concern over the vast number of students being unable to finish their college degrees because the cost of attendance has become too high. To that effect, the program delivery of student loan forgiveness consists of three components (White, House, 2022). First, the Department of Education will provide targeted debt relief, which focuses on alleviating the financial repercussions of the COVID-19 pandemic. Secondly, the presidential administration aims to make the current student loan system more manageable for current and future borrowers, by cutting monthly payments in half for undergraduate students. Also, those who work in non-profit organizations will receive credit towards loan forgiveness. The final part of the student loan forgiveness plan is to hold colleges accountable for when price of borrowing money increases. It also remains critical that community colleges continue to remain free and that the cost of borrowing money is reasonable (White House, 2022). 

With each of the elements of the three-part plan, there are positive implications that arise. In discussing the benefits of this legislation, the emphasis is on borrowers. According to The Federal Student Aid (2022), the first part of the plan targets debt relief. More precisely, there will be forgiveness of up to 20,000 dollars. For example, Pell Grant recipients you are eligible for 20,000 dollars of forgiveness. Nearly eight million borrowers will be eligible for forgiveness automatically, unless they opt out, since the U.S Department of Education has already received the relevant income data. For those borrowers whose income data is not available to the U.S Department of Education, the administration will set up an application platform in the month of October. In addition to the targeted debt relief, the Public Service Loan Forgiveness is a program that forgives the remaining balance on your student loans after 120 payments. To be eligible for this relief, the criteria mandates that you must be working full time for any level of government, working for a non-profit organization, or in service of the U.S military. 

The last part of the student loan forgiveness plan focuses on increasing the accessibility of the loan system to borrowers. A new income driven repayment plan will be introduced that will reduce the monthly payments for low- and middle-income borrowers. Furthermore, borrowers will be required to pay no more than 5% of their disposable income monthly on loans, the rate previously sat at 10%. The Biden-Harris administration will also ensure that an individual at 225% below the federal poverty level will not have to make any payments. Finally, there will be complete forgiveness after 10 years of payments and unpaid monthly interest will be alleviated. Thus, the Biden-Harris administration has devised a three-part plan to the legislation that offers serious improvements to student loans to ensure college attendance is not hindered by costs and to mitigate the financial stress exacerbated by the COVID-19 pandemic (Federal Student Aid, 2022). 

Although student loan forgiveness has several benefits that are forecasted to increase four-year college attendance rates, and mitigate the long-term financial stress of borrowing, economists are concerned on numerous fronts. The U.S Department of Education posits, that the program will cost an average of 30 billion dollars annually for the next ten years. The total cost of the program’s life will be 379 million dollars. Morgan Stanley’s United States Economic Team (2022) estimates that 330-390 million dollars of debt will be forgiven as part of this program. However, the fiscal multiplier is estimated to be extremely small. A fiscal multiplier is a measure of how many dollars get put back into the economy for every dollar that is forgiven. In the context of this legislation, the fiscal multiplier is set to be 0.1. For reference, this number differs substantially from other recent social programs, such as the COVID-19 stimulus, where the fiscal multiplier was between 0.5-0.9. According to the survey conducted by Morgan Stanley, those who have their debt forgiven will not change their immediate spending patterns. Although there is no immediate spending impact on the economy, there is a larger fiscal multiplier that will be introduce with the end of forbearance. In other words, as of January 2023, the pause on student loan payments will end. Prior to COVID-19, undergraduate students were paying 260 dollars a month. Once forbearance ends and the student loan forgiveness programs ramps up, monthly payments will drastically reduce. To that effect, the fiscal multiplier will increase because there will be a change to disposable income, and thus consumers adjust spending. Since Forbearance has had a deflationary impact, this might offset the inflationary impact of the student loan forgiveness program. 

In sum, although the student relief legislation will receive several upgrades that are expected to increase college attendance rates and alleviate the financial stress of long-term borrowing, there are still a variety of concerns. Although the legislation has some macroeconomic concerns, it will undoubtedly mitigate financial stress that millions of Americans endure.