Home NewsEconomy News Explainer-How Biden’s student loan forgiveness will impact U.S. consumers By Reuters

Explainer-How Biden’s student loan forgiveness will impact U.S. consumers By Reuters

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Explainer-How Biden’s student loan forgiveness will impact U.S. consumers By Reuters


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© Reuters. FILE PHOTO: A student walks on the campus of Howard University in Washington, US, January 31, 2022. REUTERS/Sarah Silbiger

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WASHINGTON (Reuters) – President Joe Biden announced on Wednesday a long-awaited plan to cancel billions of dollars in student debt, making good on a campaign promise to aid debt-strapped younger Americans even as some Republicans argue the move could worsen inflation.

HOW MUCH WILL BE CANCELED AND FOR WHOM? The government will cancel $10,000 in student loan debt for borrowers making less than $125,000 a year, or $250,000 for married couples. Students who received Pell Grants, low-interest federal loans to benefit lower-income college students, will have $20,000 of their debt canceled.

Canceling $10,000 in student loan debt for every borrower would cost the US government $321 billion, the New York Fed calculated in April, but the income cap means the actual cost will be lower than that.

The New York Fed estimated that forgiving $10,000 per borrower would eliminate student debt for 11.8 million borrowers, or 31% of the total number. The White House said that figure will be 20 million borrowers.

HOW BIG IS AMERICA’S STUDENT DEBT PROBLEM? US borrowers hold about $1.75 trillion in student debt, according to the latest Federal Reserve figures. The vast majority of that, some $1.62 trillion, is held by the federal government.

The cost of higher education has skyrocketed in the United States in the past three decades, doubling at private four-year colleges and universities and rising even more than that at public four-year schools, according to research from the nonprofit College Board.

The debt is split among 43 million borrowers, a figure that includes students and their parents or other family members, but is dominated by borrowers under age 40, the New York Fed said.

WHEN WILL BORROWERS WITH REMAINDER NEED TO REPAY?

A COVID-19 pandemic-related program that paused federal student loan payments, started under the Democrat Biden’s Republican predecessor Donald Trump, will be extended until the end of this year. Any borrowers with remaining balances after debt forgiveness would start making payments again in January.

WHO WILL NOT BENEFIT

Excluded from the program are borrowers who earn more than $125,000 a year, or $250,000 for married couples. The White House said no high-income individual or high-income household, which it defines as in the top 5% of incomes, will qualify.

HOW COULD THIS IMPACT INFLATION?

Republicans opposed to the plan and some economists including former Treasury Secretary Larry Summers have argued that new consumer spending power unleashed by forgiving loans could drive up prices for homes, cars and other consumer goods.

The White House and some economists including Moody’s (NYSE:) Mark Zandi have said they believe the impact of restarting loan payments in 2023 will be deflationary.

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