Local experts look at Biden's student loan forgiveness plan: What does it mean for borrowers?

President Joe Biden announced a highly anticipated student loan relief plan on Wednesday in a speech at the White House.

The comprehensive three-part plan would cancel up to $10,000 in student loan debt for borrowers, and up to $20,000 for Pell Grant recipients with loans held by the Department of Education.

According to the White House, no high-income individual or household — in the top 5% of incomes — will benefit from this action. The plan excludes individual borrowers whose annual income is at or above $125,000, or married couples jointly earning at or above $250,000.

Around 43 million borrowers will benefit from the plan, and 20 million will have their debt completely canceled, according to a senior administrative official. Parent PLUS loans also qualify for cancellation.

Biden will also extend the federal pause on student loan repayment through Dec. 31, to prevent any unnecessary defaults and promote a smooth repayment transition. Borrowers can expect payments to resume in Jan.

According to data from the Federal Reserve Bank of New York, Iowa has 465,500 total student loan borrowers, with an average of $29,845 in debt as of Aug. 9. Illinois has 1,713,900 student loan borrowers, carrying an average debt of $37,869.

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Biden's plan would effectively bring the average Iowan's student loan debt down to $19,845, lessening the blow for Illinois borrowers to $27,869.

For those who got the news their student loan amounts would be slashed, they received better news: it's nontaxable.

Mark Grywacheski, an advisor with the Quad Cities Investment Group, said this is highly unusual.

"Normally, anytime loans are forgiven, that amount is treated as income on your tax return," he said. "But under this decision by Biden and the White House, it's not treated as income and is not taxed."

The economic impact of this decision is immediate, Grywacheski said. While this may sound like good news, he added that studies are showing the plan will cost individual American taxpayers about $2,000 annually.

"That's going to have to be covered by the American taxpayers," he said. "Somebody has to pay for this."

According to Forbes, the government will take on the bulk of this financial burden, as federal student loans directly impact the federal deficit. This cancellation will increase the deficit, the Forbes report said.

Joanna Short, associate professor of economics at Augustana College, said the plan doesn't hurt borrowers' credit and may help loosen up national spending.

"Especially if you're on the last $10,000 that you owe," she said. "With that forgiveness, you don't have to make those payments anymore, then it could free up some spending."

As far as inflation goes, both Short and Grywacheski said a reduction of this liability is concerning.

This week, inflation dropped from 9.1% to 8.5% — but with less money coming in, that number could rise again.

"It does have the potential to make it worse," Grywacheski said.

Short seconds these sentiments, saying that with the inflationary period, it doesn't feel like we need extra spending.

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With the nation already trying to grapple with a 40-year inflationary high, it's not surprising that some are concerned Biden's plan may stoke the flames.

However, others don't think that's the case.

William Polley, an associate professor of economics at Western Illinois-Quad-Cities, suspects the plan won't have as big of an impact as people may think.

"The numbers we're looking at for an individual are fairly small, in the sense that loan payments are spread over time," he said. "Forgiving $10,000 might save you $100 a month. Of course, that's significant to the individual, but it won't have a very large impact on total spending in the United States. It won't generate a boost in spending that could stave off a recession or contribute to inflation."

Polley said "there's no question" about how significant $10,000 could be for individual borrowers — but the main factor to determine the national scope of a policy like this, is size.

"If it were $50,000 like some were pushing for, that would be a little bit more noticeable in terms of boosting national spending," he said. "But, obviously, the administration chose a smaller amount for a variety of reasons."

According to the White House, the cost of a four-year education has tripled since 1980 — Grywacheski said there's been no regulation to bring those figures under control.

"Now, it's simply loan forgiveness and you get into an ethical dilemma," he said.

Those who chose to attend less-costly community colleges, trade school or already paid off their loans may feel cheated, Grywacheski said.

"It could really create this divide of who gets this sudden windfall," he said.

Student loan forgiveness, in any sense, may prompt more people to pursue higher education. But like national spending, Polley doesn't think Biden's plan will impact enrollment.

"It's not the kind of thing that'll cause students to to change their decision about whether or not to go to college," he said. "This is mostly going to affect people who have already been through college and have accumulated debt."

For Biden's plan to influence enrollment numbers, Polley said people would have to expect a similar plan to happen in the future.

"I could be wrong, but I don't think this would be something that's coming again in the future," he said. "I think this is a policy that's generated a considerable amount of controversy."

Speaking of controversy, the Iowa GOP released a statement condemning Biden's announcement.

"Student loan debt cannot be 'forgiven,' it can only be transferred to the hardworking men and women of Iowa. Shifting the burden of this debt from Ivy League Elites to factory workers, farmers, and single parents is a slap in the face," chairman Jeff Kaufmann said in the statement. "While inflation is at a 40-year high and our economy in a recession, treating the American economy as if it were a game of monopoly is only going to deteriorate our country."

Polley thinks it will be interesting to see how Biden's move politically aids Democrats in the midterm elections.

Student loan forgiveness is an area Biden championed during his 2020 presidential campaign.

While some progressive lawmakers urge Biden to forgive more debt than what's highlighted in his plan, others believe this should be a "first step" toward a more sweeping plan to address college affordability.

"The task ahead is the restoration of higher education as a foundational engine of opportunity in this country. Government must redress the ills in this system that have too often harmed those most in need of its benefits, but it cannot stop there," Jesse O'Connell, senior vice president for Education at the Center American Progress, said in a report.

O'Connell continues with a call for reform in the report, which was titled "After Biden Cancels Student Debt."

"... It must go on to hold education providers, accreditors, loan servicers and other actors accountable for their service to students and borrowers, as it affirmatively redesigns the higher education system to restore that early promise to serve individuals, restore social trust and ultimately build a stronger nation," he said.

Still, Biden holds the title for "most student loan canceled" compared to any other president. His administration authorized the cancellation of almost $32 billion, notably for permanently disabled borrowers and those defrauded by for-profit institutions.

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