The Debate Around Student Debt and Biden’s Plan to Address it
In today’s polarized political climate, Democrats and Republicans have very little common ground but they do agree that there is one major issue that needs to be resolved: student debt. In fact, American students and working adults owe over $1.5 trillion, equivalent to 7% of GDP in 2020, in student loans and continue to accumulate more debt because of rising tuition costs and increased rates of college attendance -- particularly by low and middle-income families. Furthermore, a whopping one in five adults with student loans are behind on payments, prompting many to label this problem a student debt crisis.
Biden’s Plan
Currently, the United States offers income-driven repayment (IDR) schemes that allow students to pay 10% of their income above $18,000 each year. After 20 to 25 years, the government forgives the remaining debt, but the forgiven debt is still susceptible to taxation, leading to what some have described as a “tax bomb”. Currently, the first $18,000 of annual income is not factored into the percentage paid in these IDR schemes and interest rates on such loans are typically around 6%. Some have criticized the system, arguing that the income thresholds are too low and that interest rates are too high, especially when compared to the UK’s income-driven repayment scheme. Additionally, students with debt from for-profit colleges default at rates three times higher than those from non-profit colleges.
President Biden’s plan to deal with the nation’s student debt involves offering up to $10,000 in student debt forgiveness. This would eliminate federal student loan debt for a third of all borrowers. Regarding the current IDR plan, President Biden has promised to have borrowers pay 5% of their discretionary income over $25,000 and forgive the remainder after 20 years in an opt-out IDR scheme. The debt forgiveness would also no longer be taxed under the new plan. Additionally, President Biden also plans to double the maximum value of Pell Grants and deny federal aid and loan forgiveness for low-quality for-profit colleges.
A Closer Look
An often-proposed solution is blanket debt forgiveness, but many experts have pointed out that the top 40% percent of households by income owe almost 60% of student debt while the bottom 40% of households owe 20% of student debt. Furthermore, education debt is disproportionately held by households with graduate degrees which have a median income over twice of what the overall median income is. As a result, Biden’s plan to give $10,000 of student debt forgiveness to everyone could result in forgiveness for many who do not actually need it. A poll from the US Economic Experts Panel shows that most economists who responded believe that paying off all current outstanding student loans would be regressive and paying for student loans up to a threshold for lower-income borrowers could be progressive.
The other critical component of the plan is the proposed revision to the current income-driven repayment scheme. While seemingly small, a very impactful part of this revision is to make income-driven repayment plans opt-out instead of opt-in. Professor Susan Dynarski from the University of Michigan has shown that there are many bureaucratic hurdles to overcome with the ‘Pay As You Earn’ program (PAYE), an income-driven repayment scheme signed into law by Obama. Borrowers must apply and demonstrate financial distress, recertify yearly, and report changes in income. Making these repayment plans the default could drastically increase their respective enrollment rates. Professor Dynarski also states that income-driven repayment systems in the UK could serve as a good model for the United States. The proposed changes would bring the threshold for discretionary income closer to the UK’s $34,000, and could also bring repayments to even lower rates than the UK’s 9%, which may vary based on which payment option the state offers. That, however, is not to say that these plans are infallible since the long period of repayment can end up increasing the overall amount that is paid. Additionally, this could increase the burden of the “tax bomb” at the end of the 20 or 25 years. However, Biden’s plan appears to account for this by proposing to make the debt forgiven tax-free.
Fairness in the Bigger Picture
Aside from the technical aspects of policy surrounding student debt, many have claimed that student debt is unfair. Critics of student debt forgiveness ask why prioritize forgiving student debt specifically? In fact, mortgages and home equity make up 71% of outstanding consumer debt: about 14 trillion, a value much higher than the 1.5 trillion in outstanding student debt. On top of that, based on the demographics of who owns this debt, forgiving auto loan debt, medical debt, and debt from payday loans could be even more progressive.
However, education is unique among other kinds of expenditure in that it benefits society as a whole by increasing productivity and human capital. Furthermore, there may be a less tangible and more intrinsic value to education in a society that we should further incentivize such as cultivating an informed citizenry. Also, student debt relief could also improve access to higher education for many low-income Americans.
Conclusion
Overall, the debate over student debt shows that well-intentioned policy can often go wrong. The design of any policy around student debt must be well-structured around helping those who need it the most, responding to high-frequency shocks to earnings, and fairness concerns.
Written by Yohan Wang, Undergraduate Economics Student