Introduction:
On Monday, the nonpartisan Congressional Budget Office estimated that Joe Biden’s executive plan- put in place in August- to forgive thousands of dollars of student loan debt for millions of Americans will cost more than $400bn over three decades. While the White house has been reluctant in providing its own fiscal assessment of the plan, a clear estimate has now been put forward. This estimation was a confirmation for critics like Marc Goldwein, a scholar at the Committee for a Responsible Federal Budget (CRFB), who initially calculated the cost of this plan to be somewhere between $400bn and $600bn. With the cost of the plan now being somewhat out in the open, it is crucial to dissect what the exact plan entails, who it will affect, and the economic consequences. When looking at who the plan will affect- the burden of the taxpayer is, of course, crucial to highlight, however, the very regressive nature of the plan is one of the biggest takeaways. While it is supposed to be helping families struggling the most, multiple studies confirm that middle and upper-class families will be the ones benefiting the most. Moreover, the economic consequences of a student loan forgiveness plan are the creation of a moral hazard and serious effect on current inflation.
What the Plan Entails:
On August 24, President Biden announced that through executive action, he would put forward a plan of a $10,000 blanket loan forgiveness for borrowers of federal student loans who make less than $125,000 per year (as 95% of Americans do). For married borrowers, their combined spousal income would have to be less than $250,000 per year. The amount of forgiveness increases to $20,000 for borrowers who have also received a Pell Grant as an undergraduate student. The cutoff date for loan dispersal is June 30, 2022, meaning any loans issued after that date are not eligible for forgiveness. Therefore, any new federal loans disbursed for the fall 2023 semester and beyond will not be eligible for forgiveness under this plan. Moreover, all federally owned student loans are eligible for forgiveness under President Biden’s plan, including direct loans, Stafford loans, Perkins loans, as well as Grad and Parent Plus Loans. This would of course mean that private student loans are ineligible for any forgiveness under the plan.
Who Does This Impact? :
a. Regressive nature of plan
Defending the plan, Biden was quoted saying that “an entire generation is now saddled with unsustainable debt in exchange for an attempt at least at a college degree. The burden is so heavy that even if you graduate you may not have access to the middle-class life that the college degree once provided”. Many supporters echo this sentiment and ultimately claim that the plan targets lower- and working-class communities, however, this is not the full picture. Student loan forgiveness proposals in general, along with this plan, have been criticized for often being regressive and counterproductive as they often end up assisting families with higher income as the very people who attend college are a lot more likely to earn high incomes compared to people who don’t go to college[1].
One of the most crucial takeaways from this specific plan is the very regressive nature of it, as it ultimately ends up aiding wealthier households and using taxpayer money to provide this loan forgiveness. In fact, researchers at the Penn Wharton Budget Model, an academic costing outfit, evaluated the impact of a blanket forgiveness of $10,000. Their results were that even with a qualifying income cap of $125,000, 69% of benefits accrued to those in the top 60% of the income distribution. Another important report to highlight is one conducted at the University of Chicago, which ultimately found that the distributional effects of student loan forgiveness are quite regressive as the top 10 percent of earners receive more from cancellation than the entire bottom 30 percent of earners. If the goal of this plan is to provide benefits to the lowest earners (which the White House claims), then it is safe to question the validity of the loan forgiveness plan. It is, however, crucial to mention that while the blanket loan is somewhat regressive, the higher cancellation for Pell Grant recipients (usually given out to students with low-income families), will make the plan a little less regressive.
b. Transferring responsibility to the taxpayer
Along with the plan having regressive consequences, it will ultimately come with a humongous cost that taxpayers will need to pay. The loan forgiveness now qualifies Americans who did not attend college, or attended college and paid off their loans, as liable for paying for other people’s student loans. With the nonpartisan Congressional Budget Office now providing an estimation of $400bnd, the sheer size of the cost can now truly be seen and the strain it will put on taxpayers. In fact, the National Taxpayers Union Foundation recently did a study and found that an estimated $2,500 would be have to be paid by the taxpayer. The burden being placed on taxpayers only reiterates some of the ineffectiveness of the plan as the plan does not seek to fix the issue at origin (like lowering education costs)- instead, the blame and responsibility is simply transferred to taxpayers who may very well have no student loans.
The Economic Consequences:
a. Creating a moral hazard
Along with the effects on taxpayers as well as the very regressive nature of the loan forgiveness plan, the economic consequences of the plan are consequential to analyze. One of the major problems of student loan forgiveness is the fact that it does nothing to address the actual problem- meaning that it does not aim to lower costs of schools. Instead, it creates a moral hazard and will probably incentivize universities to raise tuition even more, subsequently producing a higher cost for students. Furthermore, this will create the issue of expectations from future students as well. Students about to attend another year of college or beginning college will expect future student loan forgiveness programs- thus- they will take out loans more frequently and recklessly, with less care being paid attention to perspective majors and career paths. Moreover, people unsure of whether college is the right path will now attend in hopes of a future loan forgiveness program, also increasing chances of default rates and reckless behavior. Thus, not only may students now take on more loans than necessary, but they may feel more comfortable with defaulting on their loans. These realistic examples ultimately present a moral hazard, highlighting one of the greatest negative economic consequences of this plan.
b. Effects on Inflation
One of the biggest worries from critics of the plan is the possible effects that student loan forgiveness would have on inflation. In an already inflationary environment, where the Fed is not done hiking and prices remain somewhat steady, this is only bound to hurt more. While we cannot for sure claim that this plan will increase inflation, there is a sound logic we can follow that leads to a probable chance. By increasing consumer consumption from cutting peoples monthly payments, more money will be spent in the economy which will consequently increase inflation. While an increase in consumer spending usually means an increase in economic output, it would not in this case as the economy is already heavy with demand and restricted with supply. However, in this ongoing stage, it will be hard to precisely tell how much this will affect inflation as there are “many moving pieces to the inflation picture right now”[2] with various factors contributing. Thus, while it is directionally clear that the plan raises inflation, it is not clear (at this point), just how much.
Conclusion + Moving forward:
With light being shed on the probable costs of Bidens student loan forgiveness plan, as the nonpartisan Congressional Budget Office estimated $400bnd, it is crucial to examine the plan that is to be put forward through Executive Action. Ultimately, the plan fails at addressing the true issue at hand and does not truly reform anything. Instead, it offers a forgiveness program that is quite regressive in its nature and passes the responsibility off to taxpayers. Moreover, there are true negative economic consequences that can derive from this plan as it produces a moral hazard. Universities will be incentivized to increase costs of school and students will be incentivized to take on more loans with possible default rates increasing. Ultimately, while the effects on inflation cannot for sure be stated, the plan will ultimately drive-up consumer spending which will affect inflation. Moving forward, it is also important to note that legal issues could be brought up and this plan could get challenged frequently. There has already been one lawsuit filed in U.S. District Court for the Southern District of Indian on Tuesday, September 27th– attempting to act before Biden’s policy takes place. The lawsuit was filed on behalf of Frank Garrison, an attorney who works for The Pacific Legal Foundation, and claims that the executive branch lacks the authority to create a new forgivenesspolicy and is usurping Congress’s power to make law.
[1] https://www.crfb.org/blogs/everything-you-need-know-about-student-debt-cancellation
[2] Sarah House, Senior economist at Wells Fargo: https://www.cnbc.com/2022/08/29/how-student-loan-forgiveness-will-affect-inflation-from-economists.html
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