The Effects of Canceling Student Loans USA-2024

For many American adults and families, President Joe Biden's efforts to waive student loan debt for qualifying borrowers would be a welcome relief and a lifesaver. Households of color would particularly benefit from the cancellation of this debt. However, the impact would be negligible for those who never attended college or who have already paid off their loans, and the economic impact might not be as favorable as some believe.
 

Important lessons learned
A three-part student debt relief plan was unveiled by the Biden-Harris administration in 2022. It would have forgiven up to $10,000 in federal student loans for individuals earning less than $125,000 (or $250,000 for married couples) per year.
Pell Grant recipients would have been qualified for forgiveness of up to $20,000.
Federal student loan payments were paused during the pandemic but resumed in the fall of 2023.
After the U.S. President Biden unveiled the Savings on a Valuable Education (SAVE) Plan, an alternative strategy for forgiving student loan debt, after the Supreme Court struck down his initial plan.
August 2023 marked the official launch of the SAVE Plan for borrowers of student loans.

What Is The Biden Plan for Student Debt Cancellation?

The Biden-Harris administration unveiled its long-term student debt relief plan on August 24, 2022, but the U.S. Supreme Court overturned it in June 2023. There were three prongs to the plan:

1. $10,000 in federal student loan forgiveness would have been available to borrowers making less than $125,000 annually. Heads of household or married couples filing jointly with income up to $250,000 would still have been qualified. Recipients of the income-based Pell Grant during their academic tenure could have been eligible for forgiveness of up to $20,000.
2.     September 1, 2023, would mark the end of the federal student loan payment moratorium.
3.     Instead of the current 10% cap, income-driven repayment (IDR) plans would have been limited to 5% of discretionary income.

The U.S. Department of Education temporarily reopened the application process for student loan forbearance, but legal challenges forced the agency to halt both the processing of previously submitted applications and the acceptance of new ones indefinitely.

 

Important Notice:On June 30, 2023, President Biden unveiled the Savings on a Valuable Education (SAVE) Plan. Student loan borrowers could formally apply for it in August of the same year. Under the plan, undergraduate loan payments are halved, some borrowers' monthly payments are lowered to zero, balances are prevented from rising as long as payments are made on time, and low-balance borrowers are eligible for early forgiveness.

Even though the Supreme Court ultimately rejected the debt forgiveness plan, the administration persisted in pursuing loan forgiveness and income-driven repayment (IDR) plans as alternative debt relief strategies. On September 1, 2023, the interest rate halt on student loans was finally lifted, and on October 1, 2023, the payments started again.

Be aware that while the American Rescue Plan makes student loan forgiveness granted from January 1, 2021, to December 31, 2025, federally tax-free, state laws may differ.As of right now, states like Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin anticipate taxing forgiveness as income.

Certain federal loans held by the Department of Education would be eligible for student loan forgiveness. Forgiveness is not available for private loans.

Benefits of Eliminating Student Debt

Even though many borrowers owe more than $10,000, they would financially benefit from any type of student loan forgiveness. According to some economists, loan forgiveness would also boost the economy because borrowers could utilize the money saved for other things, like home purchases.

For instance, if you have $35,000 in student loan debt and make $300 monthly payments at a 4.66% interest rate, you will accrue nearly $12,000 in interest over the course of 13 years. You could pay off the remaining debt five years sooner and save roughly $6,000 by eliminating $10,000 of that student loan. 

Particularly women and people of color, lower-income borrowers may benefit most from the cancellation of student loans. The "median wealth for Black households overall, not just borrowers, would instantly increase by 42% with $75,000 in student debt forgiveness and around 34% with $50,000 in forgiveness," according to a 2020 academic paper. Although those sums exceed what President Biden has proposed, they are consistent with the racial equity initiatives of his administration.

Warning:You may no longer be eligible for student loan forgiveness if you refinance your federal student loans into private student loans.

The Negative impacts of Eliminating Student Debt

Opponents contend that waiving any amount of student loan debt would unfairly benefit college students, who are a relatively privileged group of people. Even though over 45 million Americans owe money on their student loans, they only make up about 13.5% of the country's total population.

Aside from questions about the plan's equity, there are expenses associated with it. According to fiscal experts, canceling the loan would come with a $519 billion price tag over a ten-year budget window. The total sticker price could approach $1 trillion if you include an additional $16 billion for 2022 in forbearance and possibly an additional $450 billion for the new income-driven repayment (IDR) program.

There has to be a source for that potential trillion dollars in forgiveness. Whether a taxpayer attended college or not, current estimates indicate that forgiveness will cost about $2,500 per taxpayer.

Although current borrowers might be impacted by student loan forgiveness, the Committee for a Responsible Federal Budget predicted that student loan debt would rise back to $1.6 trillion by 2028 based on their analysis.The plan has no effect on present or future students who must pay historically high tuition fees because it does nothing to reduce the cost of higher education. 

An additional drawback of student loan debt cancellation could be increased rates of inflation. According to the Committee for a Responsible Federal Budget, millions of borrowers would receive an additional $10,000 to $20,000, which would result in a 15–27 basis point increase in personal consumption expenditure (PCE) inflation.

Fast Fact:If your federal student loan forgiveness application is denied and you are not granted relief, you might want to think about refinancing or loan consolidation.

 

 Does Having a Specific Kind of Loan Make Me Eligible for Forgiveness?

Indeed. Only federal loans held by the US Department of Education are covered by the student debt relief plan. These loans include direct loans for undergraduate and graduate study, Federal Family Education Loans (FFELs), Perkins Loans, and some Department of Education-owned defaulted loans.

 Which Three Benefits Come With Student Loan Debt Cancellation?

Three main justifications for a widespread cancellation of student loans are as follows:

• Student loan debt restricts consumer spending and slows the growth of new businesses. By making it more affordable for borrowers to participate in the economy, widespread student loan debt forgiveness may contribute to its growth.
  
• In comparison to White borrowers, Black borrowers have a disproportionate amount of student loan debt because of a variety of factors, including generational wealth, family income, and other considerations. Reducing student loan debt may help close the wealth gap between races.
• An entire generation has been deprived of life milestones such as marriage, home ownership, and even retirement savings due to excessive debt loads. Reducing student loan debt would probably benefit thousands of people in terms of their credit, financial and personal well-being, job security and happiness, and even family stability. It would also enable more people to take advantage of early homeownership, emergency fund building, human capital investments, and wealth accumulation.

Is it automatic to enroll in the Savings on a Valuable Education (SAVE) Plan?

It varies. The new Savings on a Valuable Education (SAVE) Plan will be automatically enrolled for borrowers who are currently enrolled in the Revised Pay as You Earn (REPAYE) plan. The application process will be required for other borrowers who wish to be eligible for forgiveness.

The Final Word

Experts disagree on whether it is best to cancel all or part of student loan debt, despite the general agreement that higher education reform is desirable, especially with regard to costs. Although there will be a financial benefit for those who receive forgiveness, there might be longer-term effects that end up costing all taxpayers more in the long run.