Over the past few months, Biden has repeatedly spoken about his debt forgiveness scheme and has been under constant pressure by his party to make this true. However, he is finally going to take action. During the pandemic, Biden put a pause to student debt payments, with it was set to continue through 31 August 2022. However, not only is he going to extend the pause but he will also cut student debt for millions: 43 million will be eligible and, of those, 20 million will be completely debt-free.
According to the senior administration officials, Biden will officially announce two major modifications. Firstly, the pause in student debt payments will be extended, for the seventh time,“probably until Jan. 31, 2023,” says Robert Farrington, CEO of The College Investor. Also, Biden will cancel $10,000 in student debt repayments for all borrowers with wages below $125,000 (and $250,000 if married). Additionally, students with a Pell Grant (a subsidy given out by the US government to students who need to pay for college and are in exceptional financial need) will be relieved of $20,000 of their student debt. All other borrowers with remaining undergraduate loans will be allowed to put a cap on their repayments of 5% of their monthly income.
According to the federal reserve, if Biden follows through with the cuts, the debt excused sums up to a staggering $321 billion of the total $1.75 trillion currently owed in student debt, this is roughly 18%.
Source: US Federal Reserve
Student debt has more than tripled over the past 15 years, hence, making Biden’s decision significant and paramount to the US economy.
Why is Biden taking action now?
The main reason as to why Biden is making his move now are the midterm elections. Taking place in November, it would be “political suicide” to restart student loan payments now says Mark Kantrowitz. During his previous presidential campaign in 2020, he supported cancelling $10,000 in loan payments and so going back on his word could harm his power for the remaining years of his presidency as the Democratic Party might not come out on top. In addition, when it comes to student debt, student loan services are required to send up to 6 billing notices starting 2 months before the repayment. Borrowers are yet to receive any billing notices. This would make a reinstatement in payments both unethical and unfair.
This may seem too good to be true, especially for postgraduates, but there are some potential downsides which could result to be dangerous to the US economy. Firstly, inflation could rise. There is a big risk here since inflation rates are currently at 8.52% (this is up by 3.15% from last year) and thus, it would only be a matter to time before the bubble bursts if inflation kept rising.
Source: US Bureau of Labour Statistics
In the graph above you can see that inflation is at 8.5% again for the first time in 40 years posing a threat. After inflation rates rose this much, a recession followed.
The typical undergraduate leaves university with $25,000 in debt so these cuts would lead to a spike in demand, further increasing inflation. Bill Galston, who served in the Clinton White House, says, “The fact they have hesitated for so long to put their chips down on the table suggests they’re fully aware of the potential economic and political implications of taking a major step in this direction.” Many experts agree with Galston’s opinion and believe that Biden is only thinking about the short-term and his presidential reputation due to the borrowers naivety of the problems that come with this debt relief. However, administration is taking a different stance, believing that the impact may be neutral or even deflationary since the remainder of those with loans will have to restart their payments since the beginning of the pandemic.
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