Joe Biden’s administration will cancel $10,000 in student loan repayments for millions of Americans in a move that has pleased progressives but threatens to push up inflation.
The US president announced the decision on Wednesday, following months of deliberations over the exact structure of the debt forgiveness scheme.
Biden paused most student debt repayments during the coronavirus pandemic but has been under pressure from many on the left of his party to cancel a large chunk, if not all of it, outright. However, some economists have warned that doing so could add further fuel to the country’s high inflation rates.
The plan announced on Wednesday includes cancelling $10,000 of repayments for anyone earning less than $125,000. Those in receipt of Pell Grants, which are given to those in particular financial need, will qualify for $20,000 worth of forgiveness.
A moratorium on all payments, which has been in place during the pandemic, will be extended until the end of the year, and borrowers will not have to repay more than 5 per cent of their income each month.
Announcing the policy from the White House, Biden said: “An entire generation is now saddled with unsustainable debt in exchange for an attempt at least at a college degree. The burden is so heavy that even if you graduate you may not have access to the middle-class life that the college degree once provided.”
He acknowledged the criticism the plan has received, both from those on the right who argue it is unfair on those without student debt and those on the left who say it does not go far enough. But he added: “I believe my plan is responsible and fair. It focuses the benefit on middle-class and working families, it helps both current and future borrowers and it will fix a badly broken system.”
US consumers hold about $1.6tn in outstanding student debt and it can take many decades, especially in minority communities, to complete their repayments.
Many on the left of the party wanted the president to go further. Elizabeth Warren, the Democratic senator from Massachusetts, has called for years for student debt forgiveness and promised during her failed presidential bid in 2020 to cancel $50,000 for 95 per cent of borrowers.
Warren welcomed Wednesday’s announcement, however, saying in a statement: “Millions of working people will have a chance to build a more secure economic future because of President Biden’s decision to cancel student debt.”
Shares in the fintech lender SoFi rallied 8 per cent to $6.58 following the news, indicating investor relief that the plan was smaller in scale than feared. Student loan refinancing accounted for roughly 60 per cent of the bank’s loan book before the pandemic, and its stock is down 58 per cent this year.
But Marc Goldwein, the senior policy director at the Committee for a Responsible Federal Budget, a hawkish think-tank, has calculated that debt cancellation would almost completely eliminate the deflationary impact of the recently passed Inflation Reduction Act.
The administration believes that the inflationary impact will be minimal because while many will have part of their debt cancelled, they will also have to restart payments on the remainder for the first time since the pandemic.
One senior official said: “There are certain conditions and assumptions under which [this move] could well be neutral or deflationary.”
Additional reporting by Imani Moise in New York