On August 24, the White House announced a student loan forgiveness plan via executive order that hopes to “provide breathing room to America’s working families as they continue to recover from the strains associated with the COVID-19 pandemic.” This plan will be implemented in three distinct phases.
First, the Department of Education will provide up to $20,000 in debt cancellation for Pell Grant recipients with loans held by the Department of Education. They will also provide up to $10,000 in debt cancellation to non-Pell Grant recipients. These debt cancellation measures are eligible for individuals earning less than $125,000 or married couples earning less than $250,000.
Second, the executive order proposes a new income-driven repayment plan that would cap monthly payments for undergraduate loans at 5% of a borrower’s income.
Third, the administration will prioritize reducing the cost of college and holding schools more accountable when they hike prices.
Notre Dame economics professor Forrest Spence said that there will be economic benefits to the Biden administration plan. “It’s going to give more purchasing power to the people who no longer have to pay as much interest on these federal student loans that have been forgiven,” Spence said.
Spence added that he believes fears about the inflationary effects of the plan are overblown. Because the action is spread out over years and is not a direct transfer of cash, he said, it is one of the least inflationary measures since the pandemic began.
In economics, moral hazard is a situation where a person or business will tend to take risks or alter their behavior because the negative costs or consequences that could result will not be felt by the person taking the risk. “The bill may be signaling to students that if they go to a university, choose a major, don’t get a job, and end up with catastrophic student loan debt, that [the federal government] will help you out,” Spence said. He fears that students, universities, and lenders are all going to internalize this new paradigm.
In response to being asked about the student loan forgiveness executive order, Joey Sorrentino, a senior in O’Neill Family Hall, said that student debt is an obstacle for students seeking degrees. “Nobody should have to go into crippling student debt to advance their education,” he said.
Bethany Cummings, a senior in Farley Hall, had mixed feelings regarding the announcement by the Biden administration. This policy will most likely support the middle class to help them reach a higher economic standing but will not lift those that were unable to pursue a degree, she said.
“On one hand, it will benefit those that need it and especially those that have pursued a post-graduate degree. On the other hand, this may be a misplaced policy because it is not the ideal step to alleviate poverty for those that have been unable to attain an education in the past,” Cummings said.
As the average cost of attendance at a public four-year university has grown from approximately $8,000 annually in 1980 to over $22,000 in 2022, concern has been raised that continued loan forgiveness incentivizes future tuition hikes by undergraduate universities. There are already subsidies for higher education in the form of federal loans, nonprofit status and tax benefits; so, this executive order, on the margin, allows Notre Dame to increase their tuition and pay their professors more, according to Spence.