Biden Student Loan Forgiveness Plan
US President Joe Biden’s student loan forgiveness plan will forgive up to $10,000 per borrower and, for Pell Grant recipients, up to $20,000. The plan is eligible for individual borrowers with income up to $125,000 or households with income up to $250,000. Overall, the debt forgiveness plan would reduce student loan balances by about $400 billion (1.6% of gross domestic product) if all borrowers eligible for the program.
- Signed up On the surface, this plan appears inflationary as it lowers US consumer debt levels, which has led many to regard it as Biden’s new version of fiscal stimulus. However, we believe that this is far from the reality. The Congressional Budget Office estimates that the $10,000 student debt forgiveness would have a fiscal.
- Multiplier of 0.13x, 2compared to COVID-19 relief measures, which had a 0.4x-0.9x multiplier. Given that student loan forgiveness has a much lower fiscal multiplier, we expect the impact on consumer spending to not be as strong as the fiscal stimulus payments issued during the COVID-19 pandemic. In addition, the benefits of loan forgiveness will be extended
over time as consumers will pay their reduced monthly repayments thereafter. Those who have had their monthly payments eliminated entirely from loan forgiveness will not see a significant effect on spending, given that nearly all student loan borrowers have not been making monthly payments since the enactment of the loan deferral during the COVID-19 pandemic.
- 10% of total household debt. It can be argued that there is a deflationary impact of the Biden plan once the student loan repayment moratorium ends. Since the beginning of the COVID-19 pandemic, there has been a repayment freeze on these loans, but this will end in January 2023. As the graph below shows, about 1.2% of all student debt borrowers have repaid their loans. This will increase dramatically once the moratorium ends and forces cash outflows for consumers amid persistently high inflation (leaving less money to spend on goods and services). The deflationary impetus of this rebound in payments will likely outweigh any potential inflationary aspects of loan forgiveness.
Biden student loan plan