What Does Student Loan Cancellation Mean for Low-Income Individuals?
In 2021, the student loan crisis reached an all time high, with $1.748 trillion in outstanding debt. This debt is particularly crippling due to interest payments on loans, causing borrowers to still owe back the principal amount on their loan despite making payments over several years. Interest payments are the root of the vicious cycle that has trapped over 43 million individuals in constantly growing debt.
Source: Education Data and U.S. Federal Reserve
Nearly halfway through its first term, the Biden administration fulfilled one of their most popular campaign promises by announcing a sweeping student loan forgiveness program to address this ever growing crisis. The program targets both middle and low income individuals. Middle income borrowers are eligible for up to $10,000 in relief. Low-income students who receive pell grants, which are grants to fund education for those typically making under $60,000 annually, are eligible for up to $20,000 in relief. The Department of Education is also implementing structural changes where low-income borrowers will not have to make monthly payments greater than 5% of discretionary income, and public servants will receive credit towards loan forgiveness.
Researchers at both Wharton and Booth U-Chicago found that the top 10% benefit as much as the bottom 30%. Further, Black and Hispanic individuals would benefit less than their outstanding balance suggests. The paper examines the effects of a fixed amount loan forgiveness, and uses a 10% discretionary income threshold as opposed to 5% in the Biden proposed plan. Their model uses forgiveness caps of $10,000 and $50,000 which also differs from the Biden plan, but the underlying pattern stands: fixed loan forgiveness is much more present for high-income borrowers relative to low-income borrowers.
The above model varies from the Biden plan, and thus projections for the impacts of the new implementation are slightly different. The Wharton Budget Model examines the potential impact of the plan, and finds that under “strict ‘static’ assumptions”, the plan would cost $605 billion with roughly 75% of the benefit accrued to households making under $88,000.
The difference in the first implementation and the PWBM model mainly stems from the change in maximum payment. Previously, borrowers would have to pay back as much as 10% of discretionary income; Biden’s plan caps them at only paying 5% of discretionary income, meaning borrowers retain a larger portion of their incomes for other expenses. Thus, Biden’s reformed approach has the potential to alleviate the burden on low-income families much greater than the previous debt relief structure that was in place.
With the student loan crisis growing and growing each year, Biden’s policy is a much-needed start to a necessary sweeping debt reform in the United States.