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The Debate Over Interest Subsidies On Federal Student Loans – We have a demand that journalism is free so that everyone can understand our world. Reader support helps us do this. Will you give today? x
Student loan borrowers organized a rally on August 25 in front of the White House to celebrate President Biden’s cancellation of student debt and begin the fight to cancel any remaining debt. Paul Morigi/Getty Images for Ne the 45m
The Debate Over Interest Subsidies On Federal Student Loans
Libby Nelson is policy editor, leading coverage of how government action and inaction shapes American life. Libby has more than a decade of experience in political journalism, including at Inside Higher Ed and Politico. She joined in 2014.
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For many of the 43 million Americans with federal student loan debt, President Joe Biden’s plan to forgive up to $20,000 in debt is clearly good news.
But in the days since the policy was announced, it has also led to objections, debates and controversies — arguments that are likely to be studied for months and judged by scholars for years, if not decades.
There are two main — and overlapping — criticisms of the loan forgiveness plan. One question is whether debt forgiveness is the right thing to do. He questions whether student loan forgiveness is the best way to spend about $500 billion, given that some, though not all, of those who benefit have college degrees and relatively high family incomes.
The other is whether debt forgiveness is the right thing to do now. If households relieved of their debt burdens spend more money, this could increase inflation – meaning that the consequences of loan forgiveness will be borne by everyone, and soon. To reduce inflation, the Federal Reserve is actively trying to get consumers to spend less.
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Not surprisingly, Biden’s political opponents have raised these concerns. But criticism has also extended to some economists who served in previous Democratic administrations or consider themselves sympathetic to Biden’s goals. “Pouring roughly half a trillion dollars of gasoline on an already smoldering inflationary fire is reckless,” wrote Jason Furman, President Barack Obama’s chief economist, when Biden’s plan was announced.
Not all economists agree with Furman’s view. But the fact that the inflation debate is happening at all is a sign of how far broader economic trends have shifted.
The push for student debt forgiveness was born a decade ago in the depths of the Great Recession, when even college graduates struggled to find work. Inflation was low and falling. It has become a reality under very different economic circumstances, and this change is part of what is driving the current debate.
The Biden administration crafted its student debt forgiveness proposal in an effort to avoid benefiting wealthier families. To qualify for $10,000 in loan forgiveness, student debtors must have earned less than $125,000 (or $250,000 for a married couple) in the 2020 or 2021 tax years.
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Students who receive Pell Grants to attend college — meaning they came from low-income families, earning substantially less than the median family income in the United States — are eligible for debt relief additional $10,000. This is an added incentive for those who entered higher education without the safety net of intergenerational wealth.
The proposal would completely wipe out student debt for 20 million people — nearly half of the 43 million Americans who took out loans to pay for college and are still paying off the loans. An analysis by the Department of Education found that almost 90 percent of the benefits would go to people earning less than $75,000 a year, although because any loans taken out before July 2022 are eligible for forgiveness, that figure includes students current and recent graduates. whose salaries may increase in the near future.
The backlash from Biden’s opponents has been to call the pardon unfair, both for those who didn’t attend college and for those who have already paid off their loans.
Senate Minority Leader Mitch McConnell, who would probably have the most to gain from a political backlash against the program, called the idea “a slap in the face to every family that sacrificed to save for college, every graduate that pay off their debt and every American who chose a certain career path or volunteered to serve in our Armed Forces to avoid taking on debt.”
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This attitude is consistent with how policymakers in the United States have typically viewed higher education. The federal government helps some students from poor families by offering Pell grants that don’t have to be repaid, although the grant, which totals just under $7,000, means most recipients still need loans. But most federal financial aid for students comes in the form of loans.
The American system of higher education finance is based on the idea that a college degree primarily benefits the individual who earns it. The federal government takes a small step by offering loans at a cheaper rate than a private bank would offer an 18-year-old with no credit history or a young person trying to support a family while earning a degree. (The current rate for a college student loan is just under 5 percent, compared to up to 14 percent from a private lender.)
Several assumptions underlie all of this: that most student loan borrowers are young people working toward bachelor’s degrees, that they will graduate, and that the degree will help them earn more than they need to pay off their debt. Theirs. Hence the argument against loan forgiveness: Why help a 20-year-old who majored in philosophy at an expensive private college, rather than the 50-year-old next door with no degree at all?
But these assumptions are no longer always true. Biden’s plan aims to adjust to the reality of the student loan program as it exists today. The lines between those who will benefit from debt forgiveness and those who are left out are blurrier than blue-collar versus white-collar, working-class versus middle-class, old versus young.
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One in five people with outstanding student loans are over the age of 50, some of whom are likely to have taken out loans in their own name (including those pursuing postgraduate degrees) and some of whom have taken out loans to repay their children’s education. Many student debtors are no longer young adults starting at a four-year college; they are older and more likely to attend a community college or for-profit program. An analysis by Mark Huelsman, director of policy and advocacy at the Hope Center for College, Community and Justice at Temple University, found that nearly 40 percent of those who entered college in the 2011-12 school year and took on student debt never earned a credentials.
The pardon will be especially helpful for those who have not been absent – The terrible upheaval of the financial aid system, where, after at least 9 months of missed payments, the Department of Education can garnish wages and even Social Security checks in order to return the money. The typical offender did not graduate and owes just under $10,000.
There are other versions of the fairness argument floating around. One feels that forgiveness is unfair to those who borrowed but paid off their debts—an argument that could be leveled against any social program on behalf of those born too early to benefit from it.
The counter to these criticisms is that critics are holding student debt forgiveness to a standard of fairness applied to some other government programs or benefits. A pardon could change the lives of millions of people, especially those struggling with default, the argument goes, without hurting anyone.
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The student debt forgiveness movement emerged about a decade ago from the crisis of the Great Recession. Students were borrowing more than ever to pay for college and, amid the struggling economy, were scrambling to find jobs that would help pay off their loans.
In 2012, the unemployment rate for bachelor’s degree holders was about 4.5 percent and nearly 8 percent for college dropouts and those with two-year degrees. Interest rates were low. A prominent argument against student debt for the next eight years was that it was slowing the economy: debt-burdened young adults were being prevented from buying homes, starting businesses and spending money.
Few could have predicted that by the time the pardon became a reality, unemployment for bachelor’s degree recipients would have been cut in half, interest rates would have more than doubled, and inflation would be a major economic concern. Even in 2019, when loan forgiveness became a serious issue in a Democratic primary campaign for the first time, inflation was rarely mentioned; until the 2020 election, with the economy reeling from the shock of the coronavirus pandemic, student debt forgiveness seemed to have a credible path to becoming a reality as a form of stimulus.
In the past year, however, things have changed. With consumer prices up 8.5 percent from a year ago, some economists now argue that debt relief is too big a risk. The worry is that, relieved of loan debt or facing reduced payments, student borrowers will spend more at a time when the Federal Reserve is doing its best to get
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