Biden Student Loan Plan Squarely Targets Middle Class

WASHINGTON — The big winners from President Biden’s plan to forgive hundreds of billions of dollars in student loans are not rich graduates of Harvard and Yale, as many critics claim.

In fact, the benefits of Mr. Biden’s proposals will largely go to the middle class. According to independent analyses, the people eligible for debt relief are disproportionately young and Black. And they are concentrated in the middle band of Americans by income, defined as households earning between $51,000 and $82,000 a year.

The Education Department estimates that nearly 90 percent of affected borrowers earn $75,000 a year or less. Ivy League graduates make up less than 1 percent of federal student borrowers nationwide.

Economists say the full scope of Mr. Biden’s plan, including significant changes meant to reduce the payments that millions of borrowers will make for years to come, will help middle-income earners from a wide range of schools and backgrounds.

“You’ll have a lot more people who are making zero payments and will have significant loan forgiveness in the future,” said Constantine Yannelis, an economist at the University of Chicago’s Booth School of Business. “The relief to borrowers is going to be more targeted to the people who really need it.”

Yet despite the appeal of such debt relief, the program still has set off a contentious debate as economists and political figures assess the full consequences of the plan. By some estimates, it will cost as much as a half-trillion dollars over the course of a decade, imposing a future burden on American taxpayers.

The plan also could encourage colleges to raise tuition even faster than they already are. Schools could try to persuade borrowers to take on as much debt as possible to cover higher tuition, with the belief that the federal government would help pay it back.

Some conservative and Democratic economists also say the program could add significantly to what is already the highest inflation rate in four decades. Evidence suggests those claims are overstated, however, and American shoppers are not likely to see prices spike because of the program.

The announcements Mr. Biden made, including both debt forgiveness and a restart next year of loan payments for all borrowers after a nearly three-year pause, will most likely be a wash for consumer prices, a wide range of economists say.

“Debt forgiveness that lowers monthly payments is slightly inflationary in isolation,” analysts from Goldman Sachs wrote in a research note on Thursday, “but the resumption of payments is likely to more than offset this.”

The real burden of the plan is likely to be carried by future taxpayers, who will shoulder what could be a half-trillion dollars in additional federal debt from the proposals. Economists generally agree that the distribution of that burden will depend on future tax and spending policies — who pays any increased taxes lawmakers might impose to reduce the federal budget deficit, or who suffers from spending cuts meant to do the same.

Experts say at least some future college students could also end up paying higher costs as universities respond to some of Mr. Biden’s moves by raising tuition.

The debt relief will only touch Americans who pursued higher education, not those who attempted to climb the income ladder with a high-school diploma alone.

“The very poorest Americans aren’t going to benefit very much,” Mr. Yannelis said. “Many of that group don’t go to college, so they don’t have the opportunity to take out student loans.”

But in choosing to extend more generous debt relief than even many of his allies had expected, Mr. Biden is offering what independent analysts suggest would be his most targeted assistance yet to middle-class workers, and one that could help more young people make it to the middle class.

Although legal challenges to the plan are expected, the proposal has the potential to help tens of millions of borrowers crawl out from under debt.

Mr. Biden said on Wednesday that the Education Department would forgive $10,000 in loan debt for borrowers with individual incomes of up to $125,000 or household incomes below $250,000. Students who received Pell grants in school, which are available to lower-income families, would be eligible for an additional $10,000 in debt relief.

He also announced plans that would limit many borrowers’ loan payments to 5 percent of their discretionary income and ensure they were not buried in accumulated interest costs if they keep up with payments.

The Pell grant component and the moves to limit lower-income borrowers’ future payments were seemingly late additions to Mr. Biden’s plans. Mr. Yannelis and other researchers say they likely added significantly to the cost, while also tipping a much larger share of the benefits toward middle-class borrowers.

The Committee for a Responsible Federal Budget, a deficit-reduction advocacy group in Washington, estimates the total cost of the moves could now exceed $500 billion over the next decade.

The University of Pennsylvania’s Penn Wharton Budget Model was set to release a similar estimate of the plan’s cost on Friday. That estimate will also show that the middle fifth of income earners — households earning between about $51,000 and $82,000 a year — will reap more than a third of the benefits from the president’s student loan moves, more than any other income group by far.

In contrast, the Budget Model estimated that the nearly $2 trillion collection of tax cuts that Republicans passed in 2017 would spread more than two-thirds of its gains to the top fifth of earners.

Mr. Biden has cast his plan as a victory for future members of the middle class as well, saying high student debt has effectively broken an economic promise America offered to young people in recent decades: Do what you can to pay for a college education, and you will be rewarded with a job that can afford the comforts of a home, health care and more.

“An entire generation is now saddled with unsustainable debt in exchange for an attempt, at least, at a college degree,” Mr. Biden said on Wednesday, announcing the proposals. “The burden is so heavy that even if you graduate, you may not have access to the middle-class life that the college degree once provided.”

Even supporters of the move acknowledge that debt cancellation will not reach anywhere close to a majority of American voters, a fact that Republicans have played up in making a case to voters that Mr. Biden has sought to help elites at the expense of everyone else.

Supporters of the move say shaking free of a student debt burden has the potential to transform lives in a way few other policies — and perhaps none available to Mr. Biden through executive action — could.

“Not every American says I’m for this, like, say, reducing prescription drug costs,” said Senator Chuck Schumer, Democrat of New York and the majority leader, in an interview. “But it has huge depth.”

Critics from the left say that Mr. Biden should go further — and that he will not be providing full relief to the truly needy until he does so.

“While the student debt forgiveness plan is a positive step forward that will bring some measure of relief to millions of Black borrowers, the reality is that it’s simply not enough,” said Rashad Robinson, president of Color of Change, a racial justice group. “The Biden administration must fully eliminate student loan debt to create a meaningful, lasting impact on people’s lives and close the racial wealth gap.”