Three experts weigh in on Biden’s st

By Terri Friedline, Dominique Baker and John W. Diamond

President Joe Biden has announced a program to provide student debt relief for millions of federal loan borrowers. The plan would offer up to $10,000 in rebates for people earning less than $125,000 a year — $250,000 for couples — and up to $20,000 for Pell Grant recipients. Biden also extended the pause on federal student loan debt repayment through Dec. 31, 2022, and proposed an income cap that can be used to calculate how much borrowers repay through a debt-based repayment. Income.

We asked three experts to explain the decision and its impact.

Relief makes a real difference but ignores structural issues

Terri Friedline, Associate Professor of Social Work, University of Michigan

The Biden administration’s plan is an important step that I believe will make a real difference in the lives of many people. The White House estimates that about 20 million of the nation’s roughly 43 million student debt holders will have their entire balance forgiven.

Despite this considerable impact, the plan is still limited. I hope this is just the start of much-needed political conversations about debt and education in the United States.

For one thing, Biden’s plan cuts US student debt of $1.75 trillion by less than 20%.

Additionally, the $125,000 income cap focuses on the socioeconomic class of borrowers while ignoring the roles that structural racism and sexism play in terms of who borrows and how much. For example, black women borrow about $38,000 on average to finance their education, compared to $30,000 for white men.

And because interest on student loans accumulates quickly, most black female borrowers still owe their original balance 20 years after enrolling in school. In comparison, most white borrowers fully repaid their loans during this period.

The Biden administration will need to do more if it aims to adequately address these issues and the many other remaining structural problems related to debt and education.

Plan expands much-needed aid to black borrowers

Dominique Baker, Assistant Professor of Educational Policy, Southern Methodist University

When around 10,000 student borrowers had their private student loans randomly canceled from 2010 to 2017, researchers found that it ultimately made it easier for them to move house, change jobs and earn more money. Borrowers were also 11% less likely to default on credit cards or other loans.

I expect similar results to follow from the Biden administration’s decision to cancel federal student loans. And the decision to waive up to $20,000 for those who received Pell Grants means even greater relief can be given to black borrowers.

From a racial justice perspective, I believe this additional relief for black borrowers is needed because of centuries of systemic inequities. These inequalities include the accumulation of educational debt through “predatory inclusion,” a practice in which black people are offered access to things like college or buying a home, but under financial operating conditions that have negative long-term effects.

Black student borrowers are also often the most burdened with student loan debt. For example, black bachelor’s degree holders are more likely to default on student loans than white bachelor’s degree holders, 21% versus 4%, respectively. Even more surprisingly, black bachelor’s degree holders fail at a higher rate than white students who leave college without a degree — 21% versus 18%, respectively.

The Biden administration has also proposed changes to the income-based repayment plan, which should help future undergraduate borrowers by reducing the monthly percentage of discretionary income they would pay from 10% to 5% and increasing what is considered non-discretionary income. This means that borrowers will have more money that will not be used to calculate the percentage they owe each month.

I would say there is still work to be done to create an affordable college education. But it’s a great start.

Loan cancellation could fuel inflation

John W. Diamond, Director of the Baker Institute’s Center for Public Finance, Rice University

The price of Biden’s debt cancellation plan is estimated at just over $300 billion.

While this will provide direct financial benefits to some people who currently owe money on federal student loans, I think there will be another cost: higher inflation.

US inflation is already rising just below the fastest annual pace in 40 years, prompting the Federal Reserve to aggressively raise interest rates to bring it down, even at the risk of a recession. Biden’s plan will make the central bank’s job harder.

Upward pressure on inflation will come from increased spending by those who see their student debt reduced, as well as the continued moratorium on federal loan repayments. This higher demand for consumer goods – compared to a world without debt relief or a repayment moratorium – has the effect of driving up the prices of everyday goods and services.

The Committee for a Responsible Federal Budget found that a similar but more modest version of debt cancellation would lead to a measurable increase in personal consumption spending, which would drive up prices for all consumers. That was based on a plan to spend about $230 billion on debt cancellation, at least $70 billion less than Biden’s plan.

Another side effect could be that Biden’s debt relief provides incentives for students entering or currently in college to take on additional debt in anticipation of future rounds of forgiveness. Economists call this moral hazard. Other research has found that increased student loans can lead to higher tuition fees.

Some research has found positive economic outcomes for those who receive debt relief, such as lower future debt, greater job mobility, and higher wages. But those effects are based on a full discharge of student debt, not a gradual reduction like that announced by Biden.

Ultimately, loan forgiveness, whatever its merits, will likely lead to larger federal deficits and higher inflation. Although it benefits those with student loan debt, these benefits must be weighed against the costs it imposes on others and the economy.

Terri Friedline is an associate professor of social work at the University of Michigan; Dominique Baker is assistant professor of educational policy at Southern Methodist University; and John W. Diamond is Director of the Center for Public Finance at Rice University’s Baker Institute, Edward A. and Hermena Hancock Kelly Public Finance Fellows and Assistant Professor of Economics at Rice University.

This article is republished from The conversation under Creative Commons license. Read the original article.

Maria D. Ervin