Biden announces student loan forgiveness plan

President Joe Biden's student loan plan is a potential game changer for Americans drowning in debt. And yet the impact on the economy at large is likely to be so tiny that it will be hard to measure.

Biden announced Wednesday that his administration will forgive $10,000 for borrowers who make less than $125,000 per year. Low-income borrowers who went to college on Pell Grants will receive up to $20,000 in student loan forgiveness.

This debt relief will give tens of millions of borrowers some breathing room at a time when the cost of living has skyrocketed.

Critically, the cancellation of student debt is being paired with a plan to lift the freeze on federal student debt payments, beginning in Jan. 2023. That means many Americans who haven't had to pay down student loans since March 2020 will have to begin doing so, eating into their cash flows.

Despite fears that Biden's student debt relief will fuel already-crippling inflation, economists say the combined impact will be minimal on the economy at large.

"The end of the moratorium will weigh on growth and inflation, while the debt forgiveness will support growth and inflation," Moody's Analytics chief economist Mark Zandi told CNN. "The net of these cross-currents is largely a wash."

Moody's estimates that the combined impact will reduce real GDP in 2023 by 0.05 percentage points, drive down unemployment by 0.02 percentage points and cut inflation by 0.03 percentage points. In other words, a very tiny effect.

"We're not talking about raising or lowering inflation by a percentage point or even a half a percentage point. We're talking about a really small impact," Dean Baker, co-founder of the Center for Economic and Policy Research, told CNN in a phone interview. "But for individuals this makes a big difference. It wipes out more than half the debt for more than half the borrowers. That's a big deal."

Millions of borrowers impacted: The typical undergraduate student with loans graduates with nearly $25,000 in debt, according to a Department of Education analysis cited by the White House.

Up to 43 million borrowers will receive relief from Biden's student debt plan, including eliminating the full remaining balance for about 20 million borrowers, according to the White House.

The inflationary impact would have been larger if Biden did not impose an income threshold on the debt relief or if he heeded calls from some progressives to wipe out $50,000 in student debt.

$300 billion price tag: Of course, there is a cost to canceling student debt. And that cost will be picked up by taxpayers just when deficit reduction had suddenly become a bipartisan trend in Washington.

A one-time cancellation of $10,000 for each borrower earning less than $125,000 will cost the government approximately $300 billion, according to an estimate this week from the Penn Wharton Budget Model. (The Penn Wharton model did not include the cost of wiping out up to $20,000 in student debt for Pell Grant recipients).

Although $300 billion isn't massive for a $25 trillion economy, the cost of the student debt forgiveness would cancel out the projected federal budget deficit savings from the just-passed Inflation Reduction Act.

"All the deficit reduction will be wiped out," Marc Goldwein, senior vice president and senior policy director for the Committee for a Responsible Federal Budget, told CNN's Poppy Harlow.

Note that the White House has hailed the deficit reduction aspect of the Inflation Reduction Act as an important inflation-fighting measure. And this marked a significant shift after years of both parties adding to America's mountain of debt to fight the Covid-19 pandemic.

For Sara Archibald and her husband, becoming foster parents was something they always wanted to do. Now, with the Biden administrations new proposal to forgive up to $20,000 in student loan debt for some borrowers, she says it's a step closer to reality.

Archibald graduated from the University of West Georgia with her bachelor's in English in 2016. She works full-time now as a private nanny in Dayton, Ohio, where her husband works as an attorney.

"There was pressure from my parents: you go to college and you get a degree, so that’s what I did," she told CNN. “The other side of that was there was no financial support from my parents to go to school."

During her time as an undergraduate, which took longer than four years due to financial hardships and having to work jobs to supplement the loans she had taken out, she said she was on her own. Having to pay for tuition and books, she said she didn't fully understand how interest or finances work — and found herself in tens of thousands of dollars of debt.

Something she has wrestled with in her adult life.

Now, because she did receive some Pell Grants, Archibald anticipates $20,000 of forgiveness would eliminate half of her debt. She said she will pay the remaining balance using the money she saved working a second job at Target.

She said the new proposal has given her and her husband the "freedom of time" as they prepare to become foster parents. Having one parent with the flexibility to spend more time at home opens them up to take more placements from the foster agency, she explained.

“Not having to work full time is invaluable when you have children in your home that need so much attention and love and support," Archibald said. "We're kind of opening ourselves up to the ability to say yes to more."

She said having debt does not just come as a financial burden, but it also has a human impact on families too.

"Theres a lot of shame built around student loans and I think this alleviated a lot for a lot of people," she said. "Just knowing how many student loans I had and I didn't feel like I had a lot to show for it. At points i was like ‘why did I even do this. This was so dumb, I could have done other things and not put myself in this situation.’”

President Biden on Wednesday announced new steps to address federal student loan debt, which includes forgiving up to $20,000 for some borrowers and extending the payment freeze one final time until the end of the year.

We asked readers to tell us what this plan means for them. We received mixed reactions from Americans — both from individuals with student debt and others who already paid their balance in full.

Gabrielle, who lives in West Virginia and did not provide her last name, said the announcement would "lower the burden of monthly expenses" for her and she would no longer have to pay on one of her loans.

"I could actually save a little each month towards my future" and not have to live paycheck to paycheck, she said.

Greg Barrett from Yakima, Washington, called the announcement "wonderful news." He said he was able to help his two daughters through college, leaving them both with about $20,000 of debt. The President's move to forgive up to $10,000 for each of them will help them start their adult lives "without this massive debt hanging over their heads."

Sarah Jensen from Minnesota told a similar story, expressing that forgiving some loans will help alleviate some stress that comes with debt.

Others with high debt said the announced plan is not enough.

Some readers called the plan to forgive up to $10,000 for some borrowers who make less than $125,000 a year or up to $20,000 for Pell Grant borrowers who meet that same income threshold "a drop in the bucket."

Paul from Ohio, who did not provide his last name, said the cost of higher education is the real root of the problem, adding that Biden's plan is "treating symptoms not the causes." He wrote that he wants to see other changes to fix the college system that's not just money.

Others who submitted their thoughts to CNN said they worry that forgiving some loans rewards predatory lending and irresponsible borrowing. Some also said the more money the government makes available to help pay for loans, the higher colleges and universities will push tuition costs.

Paul Mouer from Dallas, Texas, wrote he is "torn" about Biden's plan, saying he is "worried this will do nothing to stop the escalation of college costs."

Some readers said they are frustrated about the plan — especially those who have already paid off their college debt. Several wrote to CNN voicing feelings of "a slap in the face" because they lived frugally, made sacrifices or worked multiple jobs to achieve their financial position without any assistance.

Juan in Texas wrote, "I voluntarily took out loans to pursue higher education, and I knew what I was applying for. I worked extremely hard, lived frugally, and paid off 100k in debt. I doubt this will improve the outrageous inflation our country is facing."

Tell us what the cancellation of some federal student loan debt means for you here.

White House officials on Wednesday could not provide a topline price estimate for President Biden's plan to erase some student loan debt, saying too many unknowns exist to calculate how much the plan might eventually cost. 

Susan Rice, the domestic policy adviser, said it would depend on how many eligible borrowers sign up through the Department of Education to have their loans relieved.

"That remains to be determined," she said when asked about the cost of the plan.

Bharat Ramamurti, the deputy director of the National Economic Council, offered more explanation in the difficulty in providing a top-line number. He said there are also differing estimates of default rates, which would affect the total figure. 

"The assumptions and the analysis about how much are we expecting to collect — some of that changes over time based on certain macroeconomic conditions and other factors," he said. 

And he said providing relief would also bring in additional tax revenue if those benefiting start small businesses or purchase homes.

A one-time cancellation of $10,000 for each borrower earning at least $125,000 a year could cost the government nearly $300 billion, according to an estimate from the Penn Wharton Budget Model. Additional forgiveness for Pell grant recipients was not included in the estimate.

Reactions continue to pour in after President Biden announced his plan for forgiving student debt for some borrowers, with some lawmakers praising the plan and others railing against it.

Here's what Democrats and Republicans are saying:

Senate Majority Leader Chuck Schumer and Democratic Sen. Elizabeth Warren

In an interview with CNN after the announcement, Warren said it was "a great day."

With regards to college affordability, she said “This is the first step: we deal with the debt, we deal with payments going forward and now it is going to be up to Congress to make sure we do more to hold colleges and universities accountable.”

Senate Minority Leader Mitch McConnell

In a statement, the Kentucky Republican said that Biden's "policy is astonishingly unfair.”

House Speaker Nancy Pelosi

On Twitter, the California Democrat said that Biden's action is "bold" and "a strong step in Democrats’ fight to expand access to higher education."

"By delivering historic targeted student debt relief to millions of borrowers, more working families will be able to meet their kitchen table needs as they recover from the pandemic," she continued.

Sen. Bernie Sanders

Sanders called Biden's student loan relief plan "an important step forward in providing real financial help to a struggling middle class," adding that more has to be done.

"If the United States is going to effectively compete in the global economy we need the best educated workforce in the world, and that means making public colleges and universities tuition free as many other major countries currently do – and that includes trade schools and minority-serving institutions as well. In the year 2022, in the wealthiest country on earth, everyone in America who wants a higher education should be able to get that education without going into debt," Sanders continued.

Democratic Sen. Jeanne Shaheen

Republican Sen. Chuck Grassley

Republican Sen. Mitt Romney

President Biden said cutting the federal budget deficit will pay for his student loan relief plan.

"I hear it all the time: 'how do we pay for it?' We pay for it by what we've done; last year, we cut the deficit by more than $350 billion. This year, we're on track to cut it by more than $1.7 trillion by the end of this fiscal year, the single largest deficit reduction in a single year in the history of America. And the Inflation Reduction Act is going to cut it by another $300 billion over the next decade," Biden said at the White House.

"I will never apologize for helping ... working Americans and middle class, especially not to the same folks who voted for a $2 trillion tax cut that mainly benefitted the wealthiest Americans and the biggest corporations, that slowed the economy, didn't do a hell of a lot for economic growth, and wasn't paid for and racked up this enormous deficit," he said.

Biden then referenced Covid-19 pandemic loan forgiveness to small businesses. "They needed help. It was the right thing to do," he said.

"The outrage over helping working people with student loans, I think, is simply wrong. Dead wrong," he added.

In closing his remarks, President Biden touted his student debt relief plan as an action that makes good on his promise to "grow the economy from the bottom up and the middle out." 

"Because when we do that, everybody does better. Everybody does well. The wealthy do very well. The poor have a way up and the middle class can have breathing room," he added.

The President said that this plan will help America "remain the most competitive nation in the world with the strongest economy in the world with the greatest opportunities in the world." 

In addition to forgiving the student loan debt of some borrowers, President Biden said he is also proposing a federal rule aimed at making the student loan system more manageable.

Biden called the proposal an "income driven repayment plan" that he wants to be "simple and fair." It is aimed at both current and future borrowers, as payments are set to resume after Dec. 31.

Discretionary income is the money left over after paying for necessitates like housing and food, Biden explained. That 5% rate is cut in half from the current 10% payment rate that exists now, he added.

For those whose original balance was less than $12,000, Biden said these students will be done paying after 10 years.

"These changes will save more than a thousand dollars a year on average for the borrower," the President said.

President Biden said he knows his federal student loan relief plan will not "make everybody happy."

He noted that some critics say his plan is addressing too little and some say that the cuts are too much.

"I find it interesting how some of my Republican friends who voted for those tax cuts and others think that we shouldn't be helping these folks," he said.

Biden also noted that this plan is part of his administration's effort to make college more affordable.

"It includes unprecedented investments — nearly $6 billion in historic Black colleges, much of which is focused on pandemic relief to help students cover tuition and other costs so they can stay in school," he added.