Aug 26, 2022
President Joe Biden has some good news if you are under the burden of student loan debt.
On Wednesday, Biden announced a considerable student loan forgiveness plan. For borrowers who make less than $125,000 per year, or families earning less than $250,000, his administration will cancel up to $10,000 of federal student loan debt per person.
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For low-income students who borrowed money under the Pell Grant program, the Biden administration would forgive up to $20,000 of federal student loan debt per person.
“In keeping with my campaign promise, my Administration is announcing a plan to give working and middle-class families breathing room as they prepare to resume federal student loan payments in January 2023,” President Biden wrote in a tweet on Wednesday.
Of course, you can’t just “magically” wipe out debt.
How much would it cost?
According to the University of Pennsylvania’s Wharton Budget Model, one-time maximum debt forgiveness of $10,000 per borrower — for those earning $125,000 per year or less — would cost $329.1 billion over a 10-year budget window.
The study finds that between 69% and 73% of the debt forgiven in this model scenario would go to households in the top 60% of the income distribution in the U.S.
The National Taxpayers Union Foundation also crunched some numbers. Based on a total of under 158 million taxpayers in the U.S. in 2019, the foundation says the plan would cost $2,085.59 per taxpayer.
“There’s a transfer of wealth from the society at large to people who borrowed to go to college right now,” says Andrew Lautz, director of federal policy at the National Taxpayers Union. “That has consequences for consumers. It has consequences for taxpayers.”
Keep in mind that these estimates are based on the model of $10,000 in forgiveness and do not include Biden’s $20,000 forgiveness for Pell Grant borrowers. If you consider the latter, the burden for taxpayers would further increase.
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“It will raise the costs or budget impact of the policy overall,” Lautz says.
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Fairness concerns
The plan also raises questions about fairness: You have to attend college to get a student loan in the first place, and not everyone is fortunate enough to go to college.
Rep. Tim Ryan, the Democratic nominee for U.S. Senate in Ohio, is one of the critics.
“Waiving debt for those already on a trajectory to financial security sends the wrong message to the millions of Ohioans without a degree working just as hard to make ends meet,” Ryan says in a statement.
“Instead of forgiving student loans for six-figure earners, we should be working to level the playing field for all Americans.”
What now?
Debt is a big problem for Americans — and the Fed’s hawkish stance does not help.
To tame spiking inflation, the U.S. central bank is raising interest rates aggressively. For borrowers, that means payments are going up.
While Biden’s student loan forgiveness can help alleviate the burden for some, it does come at a cost to taxpayers and won’t solve the debt problem for everyone.
The solution? Work as hard as you can, save as much as you can, and be as frugal as you can. That’s what helped folks survive the 1980s — a decade characterized by two recessions and double-digit interest rates.
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Jing is an investment reporter for MoneyWise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.
