By now, you've probably heard the announcement. After promising student loan forgiveness in his 2019 campaign, Biden finally announced his administration's plan. While some argue that the plan does not go far enough, others view it as an unnecessary handout that could hurt inflation.
Regardless of opinion, student loans are a significant problem for many individuals. Nearly 45 million Americans owe student loans, and more than 1 in 10 of those borrowers were delinquent or in default before the coronavirus crisis struck. On a macro-economic level, student loans are holding a generation back from fully participating in the economy.
In this blog post, I will break down the Biden administration's forgiveness plan and discuss the potential effects on people's personal finances and the macro-economy.
The Facts
On Wednesday, August 24th, President Biden announced his administration's long awaited student loan forgiveness plan. The administration's plan included forgiveness of up to $20,000 for Pell grant recipients and $10,000 for non-Pell grant recipients. According to the White House, approximately 60% of borrowers were Pell grant recipients. The administration also announced that the forgiveness was subject to an income limit of $125,000 per year for individuals and $250,000 per year for married couples.
The vast majority of federal student loan types will qualify including Direct Stafford loans, Parent Plus loans, and Grad loans. Private student loans, however, are excluded from the loan forgiveness program.
The Biden administration announced that student loan forgiveness won’t be a taxable event at the federal level for borrowers. At the state level, according to the Tax Foundation, 13 states could treat Biden’s student loan forgiveness initiative as taxable income to borrowers. The states are Arkansas, Hawaii, Idaho, Kentucky, Massachusetts, Minnesota, Mississippi, New York, Pennsylvania, South Carolina, Virginia, West Virginia, and Wisconsin.
The pause on student loan payments has been extended until the end of the year. This should give the administration time to process the new loan forgiveness plan. Borrowers who received the forgiveness should expect a change in their payment plan with loan payments resuming in 2023.
The Education Department said it will launch an application soon where borrowers can input data and request the loan forgiveness. The application will be available before the end of the year. The department also said it already has the income data for nearly 8 million borrowers because they were enrolled in income-driven repayment plans that already required this data. These people may get automatic cancellation.
Personal Finance Implications
Depending on an individual's current financial situation, the effect of this loan forgiveness could be either huge or negligible. For those that qualify and have less than $10,000 in student loan debt, this would completely eliminate your student loan debt. However, if you just got out of law school and have $200,000 in student loan debt, this would only lower your overall debt amount by around 5%. Regardless of your debt amount, if you qualify for student loan forgiveness, it's going to save you money in some way. If you still have debt outstanding after the loan forgiveness, you may not notice a difference until loan repayment resumes in 2023. At that point in time, you can expect a lower principal amount on your loan and therefore will likely have a lower payment than before. This makes paying back student loans a smaller portion of your budget and gives you more savings and spending power.
Nearly 45 million people owe student loans, and a majority of those people with qualify for loan forgiveness. While the impact may vary depending on loan size, the loan forgiveness program should take some of the burden off of these borrowers and allow them to become full participants in our economy.
Macro-Economic Implications
The macro-economic impact of this loan forgiveness program will be studied for many years. It presents a classic macro-economic debate. On one side of the debate are the classic economic thinkers that say loan forgiveness stimulates the economy as a whole and can increase inflation. Currently, inflation is already at 30 year highs and a huge problem, so many are concerned that injecting this stimulus into the economy could make the problem of inflation harder to tackle.
Many economists who agree with this in theory, however, are skeptical of the actual impact on inflation. While student loans are a large problem for many people in the economy, tackling the student loan problem might only have a minor impact on the economy as a whole.
Other economists argue that, in the long term, the macro economy will benefit from eliminating the student loan problem. In economics, student loans are considered a drag on the free market, and eliminating them could lead to more efficient markets.
The jury is still out on the macro-economic implications of student loan forgiveness. Our team will be monitoring the impact both within our client's personal financial plans as well as the impact on the economy & markets. To discuss how the forgiveness program will impact you, schedule a meeting with one of our planners.
Best,
Alex
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