Solving for Change

Section 9.8 Solving for Change

In August $2022\text{,}$ President Biden committed to forgiving $\$10,000$ in student debt for around $43$ million debtors in the U.S., with an additional $\$10,000$ being forgiven for Pell Grant recipients. The debt was forgiven only for single adults earning under $\$125,000$ a year and married couples earning under $\$250,000$ a year [9.11.144].

Student debt in the U.S. in $2022\text{,}$ when President Biden proposed his student loan debt forgiveness plan, was roughly equal to the size of the economy of Brazil [9.11.157]. Additionally, the amount of funding for higher education provided by state governments has declined from around $70\%$ in the $1970$s to slightly under $60\%$ in $2019$ \cite{koezeTollStudentDebt2022"/>.

An independent analysis by the University of Pennsylvania Wharton School of Business found that about two-thirds of the financial benefit from Biden's student loan forgiveness plan will be to households making $\$88,000$ or less per year, especially households earning between $\$51,000$ and $\$82,000$ a year [9.11.169]. The impact to the U.S. budget will be between $\$469$ and $\$519$ billion.

The Wharton School also released the data in Table 9.8.1 on the distribution of student loan forgiveness benefits by income.

Table 9.8.1. Student Loan Debt Forgiven by Income Level

	All Ages	Age $25$-$35$
Income Group	Percentage of benefit	Percentage of benefit
Bottom $20\%$	$13.27\%$	$10.97\%$
21st to 40th percentile	22.89%	24.56%
41st to 60th percentile	30.90%	30.62%
61st to 80th percentile	23.19%	23.03%
81st to 90th percentile	8.06%	10.39%
91st to 95th percentile	1.70%	0.43%

Table 9.8.1 shows the distribution of student loan forgiveness benefit by income under the $2022$ Biden student loan forgiveness plan. Most of the debt forgiven would have accumulated for those in the $25$-$35$ age group; hence, this column may be more representative of the plan's effects. No benefit is expected to go to the top $5\%$ of earners in either age group. Data from Wharton School of Business [9.11.169].

Assume for a moment that these policies stay constant for the next $10$ years (perhaps an unlikely assumption given the changes in policy between Presidential administrations as well as Supreme Court challenges).

What percentage of the benefit will your age and income group receive $10$ years from now?
If you are in one of the groups (single adults earning under $\$125,000$ a year and married couples earning under $\$250,000$ a year, plus an additional $\$10,000$ for Pell Grant recipients) that President Biden targeted for debt forgiveness in $2022\text{,}$ what amount of debt will you have forgiven?
Do you believe that President Biden's student loan debt forgiveness policy is a good idea? Why or why not? Do its benefits for lower-income debtors outweigh its impats on the U.S. budget? Estimate whether your taxes will rise as a result and, if so, by how much, using a well-explained dimensional analysis.
The following note from the Wharton Budget Model [9.11.169], describes the income groups listed in Table 9.8.1: "Estimate household income percentile thresholds for 2022 all age: 20%: $28,784; 40%: $50,795; 60%: $82,400; 80%: $141,096; 90% $212,209; 95%: $321,699; 99%: $961,711; 99.9%: $3,668,499."
1. Given this information, estimate the percentage of the student loan forgiveness plan your income group will receive.
2. The Congressional Budget Office [9.11.175], a nonpartisan organization within the legislative branch of the United States government, estimated the total cost of Biden's student loan forgiveness program at $\$400$ billion. Use this estimate, together with the information above, to estimate how much total debt relief (in U.S. dollars) your income and age group wlil receive $10$ years from now.
President Biden's loan forgiveness program involves an ``income cap'', which means that the program only applies to individuals who earn below $\$125,000$ or households who earn below $\$250,000$ each year. According to the Wharton analysis shown in Table [9.11.169], whether or not an income cap is applied, the most loan forgiveness would go to households earning between $\$51,000$ and $\$82,000$ a year.
1. What income percentile(s) in Table 9.8.1 do these earners belong to?
2. Assuming that the loan forgiveness policy stays constant for the next $10$ years, estimate the percentage of loan forgiveness that will apply to these income percentile(s). Make the simplifying assumption that all student loan borrowers are individuals and not households.
3. Does the Wharton estimate make sense? Why or why not?