Shall we jubilate or be worried about this news? Everything depends on where you stand as a student loan borrower. For existing borrowers, this is great news as it would take a load off their balance sheets. For future borrowers, however, this is worrisome because it will make the cost of higher education far more expensive than it already is.
President Biden did forgive $39 billion of student debt. However, it was not a single event. The $39 billion in student debt forgiveness was the result of a series of actions taken by the Biden administration. This series of actions includes fixing the Public Loan Forgiveness program, canceling debt for borrowers who were defrauded by their colleges, and extending the pause on student loan payments.
It is essential to state that President Biden did not cancel student loans out of charity or out of altruism. He did it because it was politically suitable for his re-election campaign. Indeed, the cancellation of student loans would energize young voters.
Student loan debt is, certainly, a major issue for young people, and forgiving student loans would be a popular move with this demographic. Young voters are also more likely to vote for Democrats, so forgiving student loans could help Biden turn out this important voting bloc.
Proponents of student loan forgiveness have argued that student loan forgiveness reduces the racial wealth gap. Student loan debt is disproportionately held by Black and Hispanic borrowers. Thus, they maintain that forgiving student loans would help to reduce this racial wealth gap and improve the financial security of these communities. Those who believe that argument would ultimately support President Biden since it portrays him as a leader who fights for the disenfranchised and people of color. Black Democrats and independents with left-leaning tendencies see Biden’s cancellation of student loan forgiveness as a form of economic justice.
At the same time, however, forgiving student loans would hurt the economy because it will increase government debt, inflation, and the incentive to repay the debt. If inflation and government debt increase, then the racial wealth gap wouldn’t be reduced because the purchasing power of Blacks, Latinos, Whites, and Asians would be reduced. If their purchasing power is reduced, then they wouldn’t be able to increase their net wealth. and catching up to Whites and Asians.
Reducing the racial wealth gap means that Blacks and Latinos would have a higher net worth since it would take the debt off their household balance sheet. Even if the debt is taken off their balance sheet, and they have other debts that are equal to the same amount they had for their student loans (credit card debt, car loans, mortgage,…etc.), this then would not reduce the monetary amount of their liabilities.
Average Households Net Worth by Race, Q3-2022
Source: Federal Reserve
According to USAFacts, in the third quarter of 2022, the nation’s white households had $124.5 trillion in assets as measured by the Federal Reserve. In comparison, all Black households had under $8 trillion in total assets, and Hispanic households had $5.5 trillion, and all other racial groups combined had roughly $15.7 trillion. With such a wide gap in net worth between races, it is not realistically possible to reduce such a wide gap even if student loans were forgiven. According to Forbes, the total amount of student loans owed is $1.6 trillion. So even if these whole $1.6 trillion were cancelled, it wouldn't bring the total net worth Black and Hispanic households close to White households. But this is, of course, no concern for President Biden as long as people see the immediate effect of his policy rather than the long-term repercussions that it will create on future borrowers.
The political benefits of forgiving student loans could outweigh the risks. However, there is no guarantee that forgiving student loans would help Biden win re-election.