I woke up Wednesday morning to some pleasant news – after months of speculation, President Biden officially had decided to cancel $10,000 in student debt for borrowers earning less than $125,000 per year and up to $20,000 for borrowers who had received a federal Pell Grant.
“Good news as your loan may be forgiven,” my mom texted me, adding the “fingers crossed” and “thumbs-up” emojis for good measure.
But the action from the Biden Administration also comes more than two years after the federal government paused all student loan payments at the beginning of the COVID-19 pandemic, and economists have pointed out that a one-time forgiveness plan will likely not address the underlying problems that led to student debt becoming such a massive problem.
In total, outstanding student loans account for the second-largest category of all consumer debt in the nation, with Americans owing a staggering $1.6 trillion in student debt. That number is second only to mortgage debt, with Americans owing more than $10 trillion in mortgage payments as of the last quarter of 2021.
An estimated 20% of all Americans, adding up to 45 million people, owe money on student loans, according to The Washington Post, and 67% of the borrowers are younger than 40.
Supporters of Biden’s forgiveness plan say the $10,000 or $20,000 will go a long way toward helping borrowers, as more than half of them owe less than $20,000 on their loans. But the story of student debt is also a story of racial disparity and inequality. One year after graduation, 76% of Black borrowers owe at least $25,000 on their student loans, while that number is 53% when it comes to white borrowers, according to the Education Data Initiative.
Four years after graduation, nearly half of Black borrowers owe 12% more than they originally took out in loans, but more than 80% of white borrowers owe 12% less than what they borrowed. As a result, white people make up a disproportionate percentage of those who owe less than $20,000, while Black Americans are overrepresented among those who owe more than $20,000.
So, will student loan forgiveness do much of anything to address the racial wealth gap? The answer, according to University of Chicago Professor Constantine Yannelis, is no. Forgiveness will primarily benefit high-income Americans who do not have much trouble making their monthly loan payments, Yannelis argues, while low-income workers with high student debt who struggle to make payments will continue to suffer.
One potential solution is an option that actually already exists for some borrowers, which involves limiting the percentage of monthly income that a borrower has to use on loan payments. Luckily, the Biden Administration is reportedly proposing a new income-driven repayment plan as a part of its forgiveness program that would ensure borrowers pay no more than 5% of their income on student loans, down from the 10% required under previous income-driven repayment plans.
In the meantime, the federal government is expected to launch an application for borrowers to apply for student loan forgiveness in the next few weeks, and you can sign up for updates from the U.S. Department of Education here. The current pause on loan payments, which has lasted since March 2020, will officially end on Jan. 1, 2023.