President Joe Biden’s efforts to cancel student debt for eligible borrowers would be welcomed relief and life-changing for many U.S. adults and families. Canceling this debt would be of particular benefit to households of color. But for people who never went to college or who have already paid off their loans, the impact would be minimal, and the economic impact may not be as positive as some think.

What Is Biden’s Plan to Cancel Student Debt?

On Aug. 24, 2022, the Biden-Harris administration announced its long-term student debt relief plan, but it was overruled by the U.S. Supreme Court in June 2023. The plan featured three prongs:

1. Borrowers earning less than $125,000 per year would have been eligible for $10,000 of federal student loan forgiveness. Married couples filing jointly or heads of household who make up to $250,000 still would have been eligible. Those who received the income-based Pell Grant while students would have been eligible for up to $20,000 in forgiveness.
2. The pause on federal student loan payments would end on Sept. 1, 2023.
3. Income-driven repayment (IDR) plans would have been capped at 5% of discretionary income rather than the current 10%.

The application process for student loan forbearance was briefly opened, but legal challenges prompted the U.S. Department of Education to stop accepting applications indefinitely and pause processing applications that already were submitted.

While the debt forgiveness plan was ultimately rejected by the Supreme Court, the administration continued to pursue alternative measures for debt relief through loan forgiveness and income-driven repayment (IDR) plans. The pause on student loan interest ultimately ended on Sept. 1, 2023, and payments resumed on Oct. 1, 2023.

Note that while the American Rescue Plan makes student loan forgiveness granted from Jan. 1, 2021, to Dec. 31, 2025, tax-free at the federal level, some states may see it differently. Currently, forgiveness is expected to be taxed as income in Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin.

Student loan forgiveness would apply to certain federal loans held by the Department of Education. Private loans are ineligible for forgiveness.

Positive Impacts of Canceling Student Debt

Though plenty of borrowers owe more than $10,000, any sort of student loan forgiveness would benefit them financially. Some economists believe loan forgiveness also would stimulate the economy as borrowers could use that money for other purposes, such as buying a home.

For example, if you have $35,000 in student loan debt, and pay $300 per month on the loan with a 4.66% interest rate, over the course of 13 years, you’ll pay almost $12,000 in interest. By canceling $10,000 of that student debt, you could save about $6,000 and pay off the rest of your debt five years sooner.

Canceling student debt could be of particular benefit to lower-income borrowers, especially women and people of color. An academic paper in 2020 maintained that the “median wealth for Black households overall, not just borrowers, would instantly increase by 42% with $75,000 in student debt forgiveness and around 34% with $50,000 in forgiveness.” Those are higher amounts than President Biden has suggested, but would be in keeping with his administration’s initiatives to address racial equity.

Negative Impacts of Canceling Student Debt

Critics argue against canceling any amount of student loan debt, in part because it would unduly benefit a relatively privileged class of people: college students. While more than 45 million Americans have at least some student loan debt, they represent only approximately 13.5% of the U.S. population.

In addition to concern regarding the fairness of the plan, it also is not without its costs. Fiscal experts estimate that loan cancellation would cost $519 billion over the course of a 10-year budget window. Add another $16 billion in forbearance for 2022 and potentially another $450 billion for the new income-driven repayment (IDR) program, and the total sticker price could be near $1 trillion.

That potential trillion dollars in forgiveness has to come from somewhere. Current estimates state that forgiveness will cost roughly $2,500 per taxpayer, whether they went to college or not.

While forgiving student loans may have an impact on current borrowers, an analysis by the Committee for a Responsible Federal Budget said they would expect student loan debt to return to $1.6 trillion by 2028. Since the plan does nothing to dampen higher education costs, it has no impact on current and future students facing historically high education costs.

Student loan debt cancellation may have another negative impact: higher inflation rates. The Committee for a Responsible Federal Budget estimates that the influx of $10,000 to $20,000 for millions of borrowers could push inflation rates even higher, with personal consumption expenditure (PCE) inflation increasing by 15 to 27 basis points.

The Bottom Line

Though there is a general consensus that higher education reform, particularly in regard to costs, is desirable, experts are divided as to whether canceling some or all student loan debt is the best way to go about it. While those receiving forgiveness will see a financial benefit, there may be longer-reaching ramifications that will be more costly for all taxpayers in the long run.