With Wednesday’s long-awaited announcement forgiving the debts of certain student borrowers, President Biden hopes to give Democrats a boost in this fall’s midterm elections. Whatever the short-term political gains, the decision is a costly mistake – and one that the administration will almost certainly come to regret.
About the best that can be said of President Biden’s decision to cancel $10,000 in student loan debt for those making less than $125,000 a year is that it could’ve been worse: Progressives had pressured the White House to cancel up to $50,000 in debt per borrower, with no income caps. Craig Hudson/The Washington Post
Biden’s plan cancels $10,000 in federal student-loan debt for borrowers with annual incomes of $125,000 or less, or $250,000 for married couples. Students who received Pell Grants, which help low-income families pay for college, will have up to $20,000 forgiven. Biden also extended the freeze on loan repayment for all borrowers through the end of the year – the seventh such extension since the start of the pandemic.
The new policy provides relief to more than 90 percent of the 45 million Americans carrying federal student-loan debt. The White House estimates that 20 million borrowers would see their ledgers wiped clean altogether. Yet student loan forgiveness of any kind is highly regressive, benefiting those who graduated college at the expense of the roughly 60 percent of Americans who didn’t.
The combined impact of canceling debt and extending the repayment freeze will cost taxpayers hundreds of billions of dollars. Worse, by depriving the government of expected revenue, it will reduce funding available for investments in K-12 and early childhood learning that would do far more to promote economic opportunity and future growth.
While loan forgiveness won’t put cash in borrowers’ pockets, it still risks fueling inflation by encouraging consumers to spend money they would otherwise have put toward paying off their debts. And wiping out debt now will only encourage students to take out still-bigger loans in the future, reducing incentives for colleges to hold down tuition costs – thus, in all likelihood, making higher education even less accessible for the middle class.
About the best that can be said of this decision is that it could’ve been worse: Progressives had pressured the White House to cancel as much as $50,000 in debt per borrower, with no income caps – an even bigger bonanza for the rich and those with graduate degrees. That this order was advanced under a dubious legal rationale – and will surely face challenges in court – only emphasizes that the administration’s goals are more political than practical.
What now? At a minimum, Biden needs to remove any lingering ambiguity about the end of the repayment freeze and make clear that all borrowers will have to resume making loan payments at the start of 2023. The administration should do more to protect taxpayers, for instance, by narrowing the public-service loan forgiveness program, which allows workers in public-sector and nonprofit jobs to wipe out their remaining student-loan balances after making 10 years of payments. Biden’s income-driven repayment plan would allow current and future borrowers to make monthly payments of 5 percent of their discretionary incomes, half the current amount; the Education Department should work to make it easier for borrowers to enroll in the program and pay automatically, which would reduce their likelihood of default.
These steps would help to limit the damage, but only up to a point. With one announcement, Biden has undermined any commitment to fiscal discipline, reinforced his party’s reputation for catering to elites, created a significant moral hazard, and likely made higher education less affordable for a generation. Canceling these debts may well please parts of Biden’s base. But everyone else will be stuck footing the bill.
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