Explained: Biden’s Student-Debt Relief Programme In Numbers

President Joe Biden has announced the student-debt relief programme ahead of the November midterms.

Under attack for the high inflation, the debt-relief has been announced to give the lower-income and middle-class families some breathing room given the fears of an imminent economic crisis and to boost consumption.

What Has Been Promised

Biden’s debt relief programme promises a waiver of $10,000 for all individuals earning less than $125,000 annually or households with an income of less than $250,000.

Thus, a married couple earning more than $250,000 together would not be eligible for the waiver.

The programme allows a waiver of up to $20,000 for all students who were recipients of the Pell Grant. The grand is federal aid, reserved for those without a professional or undergraduate degree and prove an exceptional financial need for monetary assistance.

The moratorium for the federally held student loans, making up 92 per cent of the student debt, has been further extended until the end of the year. This is the fifth consecutive extension introduced during the Trump regime, stoking inflation fears.

In monthly repayments, borrowers will now not be required to pay more than 5 per cent of their income.

While this would aim at the consumption potential of an average borrower, it would also extend the loan duration extensively, adding to the risk of defaults.

How Significant Is The Relief

In totality, around 43 million borrowers in 2022 collectively owe $1.7 trillion in student loan debt. This number increased from $577 billion in 2008 to $1.2 trillion in 2016. The waiver will cost the government around $300 billion, thus reducing the debt by merely 17 per cent.

To put things in perspective, America's collective credit card debt is around $1.1 trillion.

On an average, each student owes around $30,000 in student debt. However, the debt parity between students from Ivy League colleges and second-tier universities is quite far apart. The lack of debt equality is even visible on a community level.

There is also the difference between being an undergraduate and a graduate. Thus, while undergraduate loans do not extend beyond $30,000-odd, graduate students can take up loans that run into hundreds of thousands of dollars.

For instance, an average loan for Harvard Law School is around $143,000.

However, the undergraduates or college dropouts are at the risk of default, even with relatively smaller debt, given they do not earn enough without professional degrees.

Thus, a college dropout with a few thousand dollars in debt may be closer to default than an Ivy League graduate with a debt of more than $150,000.

According to the government data, of the 43 million odd borrowers, 15 million owe less than $10,000 and would be the primary beneficiaries of the waiver.

Another 9 million owe anything between $10,000-$20,000 and, therefore, would see their debt come down by at least 50 per cent.

It is important to note that the default risk is higher when the loan amount is smaller, as concluded by several studies on student debt in the United States.

The pandemic aggravated this trend, given almost 80 per cent of the borrowers, across all categories, skipped or missed all their payments since the beginning of the pandemic.

The Early Response

The response to the waiver has been mixed for now. For the graduates, the relief depends on the size of the debt they have.

Thus, this is a welcome move for someone owing $15,000 to $45,000 in student loans, but for graduate students with more debt, this is merely like a drop in the bucket.

The economists, too, have a less favourable response, citing credit discipline and inflation fears. However, some also claim that this would open up opportunities for creating intergenerational wealth through investments in financial products or homes.

Some analysts see this waiver as an opportunity for students to eliminate their credit card debt.

However, the elephant in the room remains unaddressed.

Many observers are now questioning the government’s financial support for many universities that allows them to pump up the tuition fee for programmes that do not yield as much in the real world in terms of earnings.

Also Read: Explained: Why Chinese Companies Are Delisting From US Stock Exchanges