Over the past decade, a student loan has skyrocketed in the US. While it was already surging, the COVID-19 crisis made the situation worse. By December 2020, 43 million Americans owed the government a collective debt of $1.6 trillion. As a new president, Joe Biden comprehended the situation and, transforming already existing policies, announced the Biden student loan forgiveness.
What does Biden Student loan forgiveness, or cancelation, mean?
Forgiveness, or cancelation of a loan, actually means that you are no longer asked to pay for some or the entire amount of loan that you took.
Evolution in loan debts’ compensation programs
Even though the idea that students should be forgiven their debts looks very fascinating, it is not as easy as it looks. Therefore, Biden says he wants to start by revamping the already existing loan debts forgiveness options offered by the Federal government. Those programs are known as income-based repayment and the first of these was passed by President Clinton’s administration. Bill Clinton liked the idea of having students pay a share of their income each month rather than a fixed dollar amount. One example of these programs is called Revise Pay As You Earn (REPAYE). In REPAYE plans, anyone who is struggling to pay their student loans. They can send a new minimum payment that is 10% of their income over $25,000. If the borrower makes these payments on time for twenty to twenty-five years, the government will forgive the remaining amount of their loan.
Biden’s proposal changes this program in a way that draws less money from borrowers. The minimum pay rate for these plans would be reduced from 10% to 5% of their income after their first $25,000 earned. And Biden wants to make it so that the forgiven debt would not be taxed as income. Biden also wants to sweeten the terms of forgiveness for public sector workers, like teachers and military personnel.
There was already a surge in enrollment in the REPAYE program. Now that President Biden has made it more convenient, it is more likely that people will go for it.
While Bill Clinton’s idea was reformed by President Biden. Democrats pressurized Biden to take into consideration the student loan debt forgiveness. Since then, there has been a huge uncertainty about whether the bill will be brought into action or not.
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What Democrats demanded and how did Biden respond?
Ever since Joe Biden has become the POTUS, democrats want Biden to issue an executive order to forgive some loans. The amount of cancelation asked by the Democrats is at least $50,000; however, President Biden has been in the favor of loan cancelation up to $10,000. While the borrowers are waiting for the Biden loan cancelation plan to come into action. Uncertain press conferences of Biden’s team reveal that the student loan cancelation program’s availability may still take time.
Biden student loan forgiveness program: Recent updates leading to uncertainties
On 31st July 2021, House Speaker Nancy Pelosi said that President Biden has no legal authority to cancel the huge loans that students have taken. This threw cold water on the long-debated argument that the President can abolish the loan debts that are due on students. Additionally, she said that President Biden has the legal authority to extend the deadlines for the loan repayments. And the President has already made it convenient for the borrowers to use his authority. She further added that it would be legally wrong and economically a bad decision to straightforwardly forgive the loans.
Her remarks were highly criticized by the advocates of the student loan cancelation program. The spokesperson for an organization advocating loan cancelation Debt Collective, Braxton Brewington said that “It is extremely appalling to hear Speaker Pelosi peddle right-wing talking points and do the political messaging work of Republicans for them,” and that “under the authority of the Higher Education Act of 1965, President Biden does indeed have the legal authority to cancel federally held student loan debt with executive action — this has been affirmed countless times by the nation’s greatest legal minds, along with Speaker Pelosi’s colleague, Senator [Elizabeth] Warren.”
While she presented the argument that only Congress can make the loan debt cancelation possible, Pelosi also argued that straightforwardly forgiving the loans will result in injustice to the taxpayers.
Loan debt cancelation and the externalities for the taxpayers
Students are very optimistic about Biden’s debt forgiving program, but the Biden administration has something else to show. They have shown the stats that are not good signs for the taxpayers and the US economy as a whole. The details are told as follows:
- The aid that the Democrats suggest i.e., cancelation of at $50,000 debt from each borrower, will incur a huge social cost of $68 billion which will result in burdening the taxpayers
- The above calculation is $54 billion higher than what was previously expected; and
- Earlier, it was calculated by the Federal government that the social cost incurred will be around $14 billion as a result of forgiving the loans straightforwardly.
There are numerous reasons why President Biden and his team are not ready to bring the loan debt cancelation program into action. The reasons are given as follows:
- This may result in more loan applications resulting in the surge in college and universities’ fees
- Another alarming aftermath is that it may lessen the enrollments in the convenient loan repayment programs. Resulting in decreasing the amount that could be paid back
In a nutshell, it is very easy for the public and loan debt cancelation advocates to ask for a certain amount to be forgiven or canceled. However, the biggest drawback that comes in the way is the social cost that may be incurred due to the Biden student loan forgiveness program. The loan cancelation program will indeed bring great ease for the borrowers, but the burden that taxpayers will have to face is unpayable. Those are a few things on the ground that looks alarming. According to the Biden administration, there could be many other unforeseen circumstances that may give rise to more economic crises.
Thus, currently, the execution of the Biden loan cancelation move is ambiguous. As Biden’s policies previously presented about forgiving $10,000 of debt.