UNITED STATES: President Joe Biden said Wednesday that the U.S. government will forgive $10,000 in student loans for millions of former college students who have taken on debt, keeping a promise he made while campaigning for the 2020 White House.
The move could boost support for his fellow Democrats in November’s congressional elections, but some economists said it could fuel inflation, and some Republicans in the US Congress questioned whether the president had the legal authority to cancel the debt.
Debt cancellation will free up hundreds of billions of dollars in new consumer spending that could be focused on home purchases and another big spending on airline tickets, according to economists who said it would add a new wrinkle to the country’s fight against inflation.
The measures are “for the families who need them most — working and middle-class people have been hit especially hard during the pandemic,” Biden said during an appearance at the White House. He pledged that no high-income households would benefit, addressing a major criticism of the plan.
“I will never apologise for helping working Americans and the middle class, especially not the same people who voted for a $2 trillion tax cut that mainly benefited the wealthiest Americans and the biggest corporations,” Biden said, referring to the Republican tax cuts which was approved by former President Donald Trump.
Many Democrats pushed for Biden to forgive up to $50,000 per borrower. Republicans have mostly opposed student loan forgiveness, calling it unfair because it will disproportionately help people with higher incomes.
“President Biden’s student loan socialism is a slap in the face to every family who made sacrifices to save for college, every graduate who paid off their debt, and every American who chose a career path or volunteered to serve in our armed forces, to avoid taking on debt,” Senate Minority Leader Mitch McConnell said Wednesday.
American consumers carry a whopping $1.75 trillion in student loan debt, much of it held by the federal government, a result of college tuition substantially higher than in most other wealthy countries. Biden said other countries could bypass the United States economically if economic relief is not offered to students.
The Biden administration will extend a pause in student loan repayments related to the COVID-19 pandemic through the end of the year while forgiving $10,000 in student debt for borrowers whose income falls below $125,000 a year or $250,000 for a married couple, the White House said.
The forgiveness could automatically affect 8 million borrowers, the Education Department said, while others would have to apply for forgiveness.
The administration is also forgiving up to $20,000 in debt for recipients of federal Pell Grants, about 6 million students from low-income families, and is proposing a new rule that protects some income from repayment and forgives some loan balances after 10 years of repayment, the Ministry of Education said.
Republican US Representative Elise Štefánikova called President Biden’s plan “reckless and illegal” on Wednesday.
A $10,000 reduction in federal debt for each student would mean $321 billion in federal student loans and eliminate the entire balance for 11.8 million borrowers, or 31% of them, a study by the New York Federal Reserve found.
Borrower balances have been frozen since the start of the COVID-19 outbreak, and as of March 2020, no payments are required on most federal student loans.
A senior Biden administration official told reporters that the student loan forgiveness plan could benefit up to 43 million student borrowers, eliminating debt for about 20 million.
After December 31, the government will again require payment for the remaining student loans that were suspended during the COVID 19 pandemic. The official said the move will offset any inflationary effects of the forgiveness. The resumption of payments could even have a dampening effect on prices, the official said.
Former US Treasury Secretary Larry Summers disagreed. He tweeted that debt relief “uses resources that could be better used to help those who for whatever reason didn’t have the chance to go to college. It will also be inflationary by raising tuition.”
Similarly, Jason Furman, a Harvard professor who led the Council of Economic Advisers during the Obama administration, has said that debt cancellation would repeal the deflationary powers of the Inflation Reduction Act. “To pour roughly half a trillion dollars of gasoline on an already burning inflationary fire is ill-advised,” he said.
Moody’s Chief Economist Mark Zandi sided with the White House, saying that resuming billions of dollars a month in student loan payments would “shrink growth and be disinflationary.”