November 02, 2022
After months of waiting, U.S. student borrowers are getting a not-so-surprising treat from the U.S. President Joe Biden, who announced a plan to offer federal student loan forgiveness to middle class Americans. Those with an income less than $125,000 (or $250,000 if filing jointly) will qualify for the forgiveness.
For those with subsidized or unsubsidized student loans, Biden is expected to reduce their balance by about $10,000. For Pell Grant recipients, the erased balance will come to about $20,000.
As part of the order, the Biden administration also added lower repayment rate options, decreased the minimum that borrowers can pay back on Income-Based Repayment (IBR) plans, and eliminated “negative amortization.”
Opponents of the plan say that forgiving some $1.6 trillion in federal student loans will only add to inflation, create a scary precedent which might result in higher costs for education, and continue an irresponsible pattern of government spending which has marred the pandemic era.
How would student loan forgiveness impact inflation?
Over $5 trillion in pandemic stimulus was run off to shore up businesses (through bailouts and programs such as the Payment Protection Program), individuals and families (through stimulus checks and unemployment benefits), for-profit healthcare companies, state and local governments, and other entities. It has brought inflation to a 40-year high.
However, proponents of the student loan forgiveness indicate that forgiving the loans will have a meaningful impact on many Americans’ finances. According to The Washington Post, about 53% of federal student loan borrowers owe less than $20,000. For that reason, it’s likely that a significant portion of Americans – one in five hold student loans – will be getting a significant airdrop.
The relief might reduce the total balance they have to pay, which might increase spending and investment from this debt-saddled generation. People deep in student debt might see their debt-to-income ratios change considerably as a result of the forgiveness, unlocking better borrowing opportunities which might spur big purchases like a home or vehicle.
Either way, the student loan forgiveness stands to face challenges from courts – they might challenge the legality of Biden’s executive order and the expansive nature of executive power. We’ll write about the financial impacts of the executive order as the story develops.