The administration of President Joe Biden has not made a final decision on student loan forgiveness. After a news report, a White House spokesperson said on Friday that it was planning to cancel $10,000 in student debt per borrower.
Citing statements made by people familiar with the plan, the Washington Post reported that the $10,000 debt forgiveness would apply to those Americans who earned less than $150,000 in the previous year or less than $300,000 for married couples filing jointly.
What does “Student Loan Forgiveness” mean?
In the USA, “Student loan forgiveness” is actually a misnomer. The name makes it sound like loans are being canceled, but what actually occurs is that the borrower’s debt is being transferred to the government. Normally, student loan debts are owed directly to the lender. If a borrower has defaulted on his or her student loans, the lender may try to win a judgment against you in court and hire a collection agency to recover
In other cases where the borrower has more than one student loan, he or she may consolidate the debts into one new loan at a lower interest rate and payment schedule.
Views of Biden administration regarding the report
Denying the accuracy of the report, White House spokesman Vedant Patel said, “No decisions have been made yet. But as a reminder, no one has been required to pay a single dime of student loans since the president took office”.
The current government pause in student interest and payments due to COVID-19 expires at the end of August. The report says some unidentified sources said that the details could change.
Recent “data” on the student loan
A study, conducted by New York Federal Reserve economists, shows that forgiving $10,000 per student would amount to $321 billion of federal student loans and eliminate the entire balance for 11.8 million borrowers, or 31 percent.
Spokesperson Patel further said, “Administration actions have already provided more than $18.5 billion in targeted debt relief to more than 750,000 borrowers. Not to mention tens of billions more saved by the 41 million borrowers who have benefited from the extended student loan payment pause”.
In the United States, student debt cancellation has become a priority for many liberals and one that could shore up popularity with younger and more highly educated voters, who lean Democratic, before November’s midterm congressional elections.
However, the Biden administration has been criticized as being reluctant to unilaterally make an unprecedented cancellation of college debt owned by the U.S. government, a move that would test his legal authority. On the contrary, Biden has asked Congress to pass a bill forgiving debt that he could sign.
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The federal government has already let 43 million borrowers stop paying on a total of $1.6 trillion in student loans since the onset of the COVID-19 pandemic in 2020.
Speaking to reporters on 28 April 2022, Biden said, “I am considering dealing with some debt reduction”, adding that he was not considering the $50,000 debt reduction that some progressive Democrats had embraced.
Impact of “student loan forgiveness” on the US economy
If the decision is made for forgiving $10,000 of student debts for each taxpayer in the US, it will have a lot of ramifications.
Firstly, it would amount to $320 billion of debt cancellation for the US Treasury and would make this the latest Democratic bail-out aimed at helping middle-class Americans.
Secondly, it will have a massive impact on current investors and lenders. The US taxpayers’ money has been invested in student loans and if that is canceled, investors can lose money. In addition to that, many lenders are private companies that are bound by securities laws and cap their potential losses. This could create problems for private investors as well.
Nevertheless, the action will certainly benefit the middle class and the poor.
