According to an updated assessment from a reputable research company, the working and middle class are likely to benefit the most from President Joe Biden’s student loan debt relief plan. This is a change from its earlier prediction that more debtors with higher incomes will gain access to basic loan forgiveness.
According to the Penn Wharton Budget Model estimate published on Friday, households earning $88,000 or less will receive around 75% of the benefit. According to Penn Wharton, the three-part relief package may cost as much as $605 billion over ten years, while the total cost might reach $1 trillion depending on how the proposed income-driven repayment programme is actually implemented and how many individuals sign up for it. That is significantly more expensive than its initial projection for a less extensive debt reduction plan.
The plan’s provision to erase up to $20,000 of debt owned by people who qualified for Pell grants as undergraduates as well as the provision to forgive up to $10,000 for those who did not obtain such grants is taken into account in the amended report. Borrowers must earn less than $125,000 annually if they are single and less than $250,000 annually if they are married or the head of the family in order to be eligible.
The initial Penn Wharton research, which was issued prior to the announcement of Biden’s package and only took into account loan forgiveness of $10,000 for borrowers, discovered that 70% of the benefits would go to those with incomes in the top 60% of earners. That translates to households earning $88,000 or less receiving 55% of the benefit. Republicans seized on Penn Wharton’s study as evidence that Biden’s proposal would benefit a large number of high-earners.
Pell Grant Initiative
But the inclusion of the Pell grant clause changed the focus of the support. The Pell grant adjustment, according to Kent Smetters, faculty director at Penn Wharton, is significantly more focused on student borrowers with lower incomes.
Pell grants are a significant way that the federal government assists students from lower-income families in attending college. For the academic year 2022–2023 they offer up to $6,895 in financial aid to those who qualify. Usually, the grants are not required to be paid back. However, since they only cover around one-third of the price of college, many students also need to take out loans in order to graduate.
The Biden package also suggests significant adjustments to student loan income-driven repayment plans, such as capping monthly payments for borrowers of undergraduate loans at 5% of discretionary income rather than the current 10%.
According to Penn Wharton, the idea would probably target lower-income households even more than the loan forgiveness programme did. However, it hasn’t yet calculated the gains for particular income categories.
Just cancelling $10,000 in student loan debt would cost more money, according to Penn Wharton’s projection of $330 billion over ten years. The three-part proposal is more expensive. Depending on whether existing and new students are included, the more extensive forgiveness programme may run between $469 billion and $519 billion over a ten-year period.
Additionally, Biden extended the student loan repayment moratorium until December 31. The cost of loan forbearance for 2022 might increase by $16 billion, per Penn Wharton’s research. Furthermore, the income-driven repayment option might be expensive, coming in at $70 billion if current programme participation rates are maintained. However, the plan might result in an additional $450 billion or more, depending on how it is set up and how many borrowers take part.
The final cost might surpass $1 trillion as a result. Karine Jean-Pierre, the press secretary for the White House, said on Thursday that, assuming a 75% take-up rate, the rescue package might cost around $24 billion annually. Penn Wharton’s assessment was also disputed by the White House on Friday, which described it as “rather speculative” and “obviously at the top end of the spectrum.”
At a news conference, Bharat Ramamurti, deputy director of the National Economic Council, said, “I want to make it quite clear that we don’t think that a trillion dollars is anywhere in the ballpark of what this is going to cost.” According to him, the Penn Wharton analysis assumed that all borrowers would take advantage of the income-based repayment programme, which has since undergone revision. According to the White House, 75% of qualified candidates applied for a similar loan forgiveness programme. Among other things, he claimed, it failed to take into account debtors who were already in arrears on their debts.
Budget watchdogs have criticised the plan’s costs, noting that they would eliminate the deficit reduction that was part of the recently passed budget reconciliation deal that Biden and congressional Democrats had hailed as a victory. According to Maya MacGuineas, president of the Committee for a Responsible Federal Budget, the recently announced student loan measures might cost up to $600 billion over a ten-year period and rank among the most expensive executive initiatives in history. “The Inflation Reduction Act, the one truly significant step the White House has taken to decrease deficits, would see its reduction doubled over,” she said.