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President Biden’s plan to write off hundreds of billions of dollars in student debt is sparking heated debate.
Biden last week announced plans forgive up to $20,000 in federal student loan debt for Pell Grant recipients and up to $10,000 for others who qualify.
The news will provide relief to borrowers at a time when the cost of higher education has surged.
But critics question the fairness of the plan and warn of the potential impact on inflation if students on the canceled loans increase their spending.
Here are three key arguments — for and against the wisdom of Biden’s decision.
Raising living standards or fueling inflation?
Without a doubt, student debt is a heavy burden for many people.
Under Biden’s plan, 43 million people could see their loan repayments reduced, while 20 million would have their debt forgiven entirely.
People whose payments are reduced or eliminated should have more money to spend elsewhere — perhaps to buy a car, put down a down payment on a house, or even set aside money for the college savings plan. of their own children. Thus, debt cancellation has the potential to raise the standard of living for tens of millions of people.
Critics, however, say additional purchasing power would only pour more gasoline on the inflationary fire in an economy where businesses are already struggling to keep up with consumer demand.
Inflation remains near its highest rate in 40 years and the Federal Reserve is poised to aggressively raise interest rates in hopes of bringing prices under control.
Not all economists believe that debt cancellation will do much to fuel inflation.
Debt cancellation is not like the $1,200 relief checks the government sent out last year, which some experts say added to inflationary pressure. Borrowers won’t suddenly have $20,000 deposited into their bank accounts. Instead, they will be relieved to make loan repayments for many years.
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Because the relief is flowing slowly, Ali Bustamante, who is at the left-leaning Roosevelt Institute, says Biden’s decision won’t move the inflation needle much.
“It really is a drop in the ocean when it comes to the enormous level of consumer spending in our very service- and consumer-driven economy,” he says.
The White House also notes that borrowers who still have outstanding student debt will have to start making payments again next year. These payments have been suspended throughout the pandemic.
Restarting them will cost money out out of the borrower’s pockets, offsetting some of the additional purchasing power that comes with loan forgiveness.
Help low-income Americans or make a concession to the rich?
Another big point of contention has to do with fairness.
The cancellation of the loans would effectively transfer hundreds of billions of dollars in debt from individuals and families to the federal government and ultimately to taxpayers.
Some believe that the transfer effectively penalizes people who have saved and saved to pay for their education, as well as the majority of Americans who do not go to college.
They might not mind subsidizing a new social worker, who earns $25,000 a year. But they might be hesitant to take out debt relief for a business school grad who’s about to go to Wall Street and make six figures.
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The White House estimates that 90% of debt relief will go to people earning less than $75,000 a year. Low-income borrowers who qualified for Pell Grants in college are eligible for twice as much debt forgiveness as other borrowers.
But individuals earning up to $125,000 and couples earning up to $250,000 are eligible for debt forgiveness. Subsidizing college for high-income borrowers might rub people the wrong way.
“I still think a lot of that benefit will go to doctors, lawyers, MBAs, and other graduates who have very high earning potential and may even have very high earning this year. already,” said Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget.
Help those in need or make tuition worse?
Goldwein also complains that the loan forgiveness does not address the larger problem of soaring college tuition.
In fact, he suggests, it could make that problem worse — like a bandage that masks a more serious infection underneath.
For years, the cost of a college education has been rising much faster than inflation, which is one of the reasons student debt has skyrocketed.
By canceling part of this debt, the government will relieve current and former students.
But Goldwein says the government could encourage prospective students to take on even more debt, while doing little to instill cost discipline in schools.
“People are going to assume that debt is likely to be written off over and over again,” Goldwein says. “And if you assume it’s likely to be canceled, you’ll be more likely to take on more debt up front. This will give colleges more pricing power to raise tuition without pressure and offer more low value diplomas.
The old rule in economics is that when the government subsidizes something, you tend to get more of it. And that includes high tuition fees and college debt.