Biden administration to relieve student loan debt

Adhokshaya Malhotra

U.S. President Joe Biden announced a plan to relieve loan debt for college students in a speech at the White House last week, fulfilling a commitment he made on the campaign trail a few years ago.

“Here’s what my administration is going to do: provide more breathing room for people so they have less burden by student debt and, quite frankly, to fix the system,” Biden said.

The administration’s plan targets people earning less than $125,000 per year, or $250,000 for married couples or heads of households. Additionally, if someone has outstanding undergraduate loans, they may cap them at 5% of their monthly income.

People who meet the criteria of the plan may have up to $20,000 in debt forgiven if they receive Pell grants. For those who did not receive Pell grants, they may have up to $10,000 in debt forgiven.

The Biden administration also announced that it will extend the moratorium on student loans until January 2023. This will be the fourth and last time the moratorium is extended.

The plan received mixed reactions. Students facing loan debt were excited.

“I was standing in my dorm room when I heard this and I just let out a scream,” graduate student Marlene Ramirez — who used Pell grants when studying for her bachelor’s degree and is still paying off federal loans — told The New York Times. “This will almost wipe that out. I’m shaking right now. This is life changing.”

Some people said that the plan does not go far enough and should cancel all student debt.

“We intend to keep fighting until all student debt is canceled and college is free,” Debt Collective co-founder Astra Taylor told CNBC. “If President Biden can cancel this much debt, he can cancel it all.”

Some others believed that it punishes people who did not go to or get a chance to attend college.

“President Biden’s student loan socialism is a slap in the face to every family who sacrificed to save for college, every graduate who paid their debt and every American who chose a certain career path or volunteered to serve in our Armed Forces in order to avoid taking on debt,” Senate Minority Leader Mitch McConnell said in a press release. “This policy is astonishingly unfair.”

While the plan was the subject of political discourse, some analysts have highlighted the economic impact of it on record-high inflation.

According to analysis from the Wharton School of the University of Pennsylvania, the rough cost of the plan for the government is between $469 billion and $519 billion. Excessive spending may eventually add to the exorbitant deficit.

In addition to this plan to forgive student debt, the Inflation Reduction Act, which was passed in the U.S. Senate, is projected to lower cumulative deficits by almost $300 billion over 10 years, according to estimates from the analysis.

There are three ways to understand the plan’s impact on inflation.

Firstly, it’s impact on inflation may be stymied because the money will not be disbursed to the recipients directly. Instead, the total balance on their loan will be lowered.

But the plan may also have a significant impact on inflation because the money the government needs to raise is around $500 billion, which means it will need to either borrow more or raise taxes to infuse the equivalent money in the system.

Some economists, like former U.S. Treasury Secretary Larry Summers, pointed out the impact on macroeconomics, as the plan will raise demand and potentially the tuition charged by colleges too. This will also add to the existing inflationary pressures from the Federal Reserve.

Thirdly, there may be a moderate impact on inflation in the short-term, potentially boosting inflation. Other commodities, however, are on a downward trend that will help to balance the inflationary gap.

In the long run, the plan’s impact on inflation may be lessened because the government will resume student loan payments from next year, and it will bring in about $50 billion in revenue every year.