4 in 5 borrowers could get student loan forgiveness, but the price is high: NY Fed

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If President Biden keeps his loan forgiveness promise, it could potentially benefit millions of borrowers. However, debt cancellation is an expensive policy, according to the New York Fed. (iStock)

Since President Joe Biden took office, lawmakers and progressive advocates have called on his administration to forgive $10,000 in student loan debt per borrower — something Biden campaigned on as a presidential candidate. Many prominent Democrats, including Sen. Elizabeth Warren and Senate Majority Leader Chuck Schumer, have even urged the president to increase the maximum amount of the rebate to $50,000.

Opponents argue that blanket student loan forgiveness would disproportionately benefit wealthy borrowers while adding to the federal deficit. House Republicans on the Education and Labor Committee recently told Biden that “reckless loan forgiveness policies would crush American taxpayers” rather than get to the root of the problem: a federal service system down.

This week, economists at the Federal Reserve Bank of New York released a study finding that blanket student loan forgiveness could cost up to $904 billion, while mainly benefiting young and sometimes affluent borrowers. . However, the addition of an income cap of $75,000 “significantly reduces the cost of student loan forgiveness” and ensures that the most vulnerable borrowers would also benefit.

Keep reading to learn more about the New York Fed’s report on student loan debt cancellation, including who benefits from these proposals and who is eligible. And if you have private student loans that don’t qualify for federal debt relief, you may be able to lower your monthly payments and pay off your debt faster by refinancing. You can visit Credible to compare student loan refinance rates for free without affecting your credit score.

100,000 BORROWERS ARE NOW ELIGIBLE FOR STUDENT LOAN DISCLAIMER UNDER LIMITED PSLF WAIVER

Cancellation of student debt mainly benefits young, middle-income borrowers

Federal Reserve economists found that canceling up to $10,000 in student debt per borrower would wipe out the entire loan balance of 11.8 million Americans, or nearly a third (31%) of all federal borrowers – but it would also cost the government $321 billion. .

By increasing the maximum forgiveness amount to $50,000, the number of borrowers who would have all of their student loan debt forgiven would increase to 29.9 million, or about 80% of all Americans with federal student loans. It also significantly increases the burden on taxpayers, costing an estimated $904 billion.

THE ‘WIDE’ STUDENT LOAN DISCOUNT STILL ON THE TABLE: EDUCATION SECRETARY MIGUEL CARDONA

The study found that widespread student loan forgiveness is more likely to benefit wealthier borrowers. Middle-income people make up the largest share of recipients of $10,000 and $50,000 debt forgiveness proposals, followed by high-income borrowers. The lowest income group (living in an area where the median annual income is less than $46,310) would benefit the least from general relief policies.

This is likely because borrowers in higher-income areas “are more likely to owe federal student loans and hold higher balances,” the authors said. The wealthiest borrower quartile holds 33% of all outstanding federal loan balances, despite representing 25% of the total population.

DEFAULTED AND DEFAULT STUDENT LOAN BORROWERS WILL RECEIVE A “FRESH START” UPON END OF FORGIVENESS

In addition, about two-thirds (67%) of borrowers who would benefit from student debt cancellation are under 40 years old. But these borrowers represent only 57% of loan balances due, suggesting that those with large debt balances are likely to be older. Raising the maximum forgiveness amount to $50,000 “transfers a greater share of forgiven debt to older borrowers.”

Americans over 40 may have higher debt balances due to borrowing for higher education, the authors said. Additionally, graduate student borrowers may have private student loan debt in addition to their federal loans due to borrowing limits set by the Department of Education. If you have private student loans that don’t qualify for federal student loan programs, you might consider refinancing them at a lower interest rate. You can read more about student loan refinancing on Credible.

BIDEN ANNOUNCES EXTENSION OF STUDENT LOAN PAYMENT BREAK

Income cap could target neediest borrowers

Some policymakers have suggested putting in place an income cap to address the high price of large student debt forgiveness and ensure that wealthy borrowers do not benefit disproportionately. Under Senator Warren’s proposal, for example, the maximum rebate amount is phased out among higher income thresholds.

Fed economists determined that adding a $75,000 income cap would cut the cost of canceling student loans by nearly half. The cost of canceling $10,000 of student loan debt rises from $321 billion to $182 billion with this income threshold. And for a maximum discount amount of $50,000, the price is reduced from $904 billion to $507 billion.

Importantly, the income restrictions would essentially redirect funding from wealthy borrowers to those with low incomes. Adding an income cap of $75,000 would benefit a greater proportion of low-income borrowers and reduce the number of high-income beneficiaries. The share of middle-income earners receiving student loan forgiveness would remain about the same.

A GUIDE TO STUDENT LOAN REPAYMENT PROGRAMS

Although an income cap makes student debt forgiveness fairer, it would disqualify many borrowers. According to the Education Data Initiative, Americans with incomes over $74,000 hold about 60% of all student loan debt.

Importantly, the Biden administration has yet to announce its intention to cancel student loans, with or without an income cap. But if you earn too much to qualify for federal student loan relief, you might consider refinancing a private loan at a lower interest rate. Keep in mind that refinancing your federally held debt would make you ineligible for future debt deferment, forbearance, and cancellation proposals.

For borrowers who don’t plan to use these benefits, however, refinancing a student loan can mean thousands of dollars in savings on the remaining balance. You can use Credible’s student loan refinance calculator to determine if this repayment plan is right for your financial situation.

WHAT YOU NEED TO KNOW ABOUT THE TEACHER LOAN REPAYMENT PROGRAM

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