How Biden's Student Loan Plan Works

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There is a lot of conflicting information about the Biden-Harris debt relief plan. I have read articles that say it favours poorer families and I have read others that say it favours wealthy, upper middle-class families. Some articles say this will cost the tax-payer, but they do not say how this is so. Others say that this plan will cause inflation, when this is not possible. The Federal loans are owed to the government, so amounts are being deleted from government accounts, and if the debts are cancelled in this way then there is no requirement to print money. In this case the monetary supply is being reduced, that is deflation. If it printed (or today more accurately it would be typed), however, and then transferred to pay off those amounts, this adds exactly zero to the monetary supply. However, there are no details mentioned about how it is being cancelled, people are only speculating at this point.  

The US Federal government website does help us with some of our questions though. The plan favours lower income borrowers: 

"To smooth the transition back to repayment and help borrowers at highest risk of delinquencies or default once payments resume, the U.S. Department of Education will provide up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the Department of Education and up to $10,000 in debt cancellation to non-Pell Grant recipients. Borrowers are eligible for this relief if their individual income is less than $125,000 or $250,000 for households.

In addition, borrowers who are employed by non-profits, the military, or federal, state, Tribal, or local government may be eligible to have all of their student loans forgiven through the Public Service Loan Forgiveness (PSLF) program. This is because of time-limited changes that waive certain eligibility criteria in the PSLF program. These temporary changes expire on October 31, 2022. For more information on eligibility and requirements, go to PSLF.gov."

So, those saying that the debt forgiveness is largely going to the affluent, are not correct. The plan does not favour high income workers. Pell Grants are given to lower income families to help poorer kids get into college: 

"In order to qualify for the Pell Grant, students need "exceptional financial need," per the FSA website.

• The grant is often awarded to students whose families earn less than $60,000 per year, according to the Washington Post."

And the debt forgiveness is capped at 125,000 dollars per person. This is hardly rich, though that is not a bad wage. It is true that college educated people can have better outcomes over the course of their life. But this does not necessarily mean they start off from this platform, and that they do not need assistance. 

The Studentaid information site also implies the debt is being wiped, cancelled, or credited to them as paid. This would suggest that the monetary supply is about to be reduced. Money owed is being wiped from the system. This is both good, and necessary. Yes, this money was lent from government money, which is largely gathered from people's taxes. But the US, as a reserve currency, also have the ability to print its own money, and does do this often. In this case, it would appear it is doing the opposite, it is deleting money from the system, by wiping debts. But this is still not completely clear. 

But the best part of the plan is also to make student debt more affordable going forward:

"Income-based repayment plans have long existed within the U.S. Department of Education. However, the Biden-Harris Administration is proposing a rule to create a new income-driven repayment plan that will substantially reduce future monthly payments for lower- and middle-income borrowers.

The rule would:

• Require borrowers to pay no more than 5% of their discretionary income monthly on undergraduate loans. This is down from the 10% available under the most recent income-driven repayment plan.
• Raise the amount of income that is considered non-discretionary income and therefore is protected from repayment, guaranteeing that no borrower earning under 225% of the federal poverty level—about the annual equivalent of a $15 minimum wage for a single borrower—will have to make a monthly payment.
• Forgive loan balances after 10 years of payments, instead of 20 years, for borrowers with loan balances of $12,000 or less.
• Cover the borrower's unpaid monthly interest, so that unlike other existing income-driven repayment plans, no borrower's loan balance will grow as long as they make their monthly payments—even when that monthly payment is $0 because their income is low."

This is a remarkable policy and it actually brings the American College loan system closer to the Australia fee help system. This is a good partial step towards correcting injustice in their university system. They still need to do much more, like cutting off the supply of federal money to universities, which drives up the cost of degrees and courses, they need to make universities responsible for the loans they give, so they are incentivized to produce a better product. But as a start this is a better system than they currently have. 

These are not my full thoughts on this issue. I simply wanted to address what I saw as a lack about the information out there about this policy. Society wide debt forgiveness is needed, and we should be working towards it. It is not likely, but it is slightly more likely now than it was a week ago. This is a tiny step in the right direction, but more needs to be done.