Biden’s $10,000 student loan forgiveness could wipe out the debts of nearly half of all borrowers. But for others, it won’t even make a dent

The long-awaited executive action includes $10,000 in loan forgiveness for individual federal borrowers earning less than $125,000 per year and households earning less than $250,000 as well as $20,000 in forgiveness for Pell Grant recipients, according to the White House. Pell Grants are awarded to undergraduate students who “display exceptional financial need.”

The Biden administration also announced that the COVID-19 emergency relief program for student borrowers, which suspended loan payments and stopped collections on defaulted loans, will be extended through Dec. 31.

Roughly 43 million student loan borrowers would qualify for some debt forgiveness under the Biden administration’s new program, and some 20 million could have their debts completely canceled, according to the White House.

“This move marks the first wide-sweeping measure to address the $1.6 trillion student loan debt burden that’s no doubt caused financial pain for so many,” Sarah Foster, a senior analyst at Bankrate, said of the executive action.

About 46 million Americans currently have some form of federal student loan debt, meaning that over 43% of borrowers could potentially see their federal student debts completely forgiven this year. The program is expected to cost around $300 billion and will help pare down Americans’ $1.6 trillion in total student loan debt, according to a new study from the University of Pennsylvania. 

Student loan forgiveness—but not for everyone

Biden’s loan forgiveness program is geared toward the working and middle class. 

One-third of the benefit of student loan forgiveness will go to households earning less than $50,795 a year, while over half will go to those earning between $50,795 and $141,096, and just 14% will go to families making more than $141,096 per year, according to the University of Pennsylvania study.

But not all student loan borrowers will see relief from Biden’s new student debt relief plan. Some borrowers simply make too much money to qualify. 

The program caps who qualifies for loan forgiveness at $125,000 for individuals and $250,000 for households, which Matthew Chingos, the vice president of education data and policy at the Urban Institute, a nonprofit research organization, notes will essentially “zero out” loan forgiveness for families in the top 20% of earners.

That means the program likely won’t help high-earning professionals like doctors, whose student loan debt averaged $200,000 after graduating medical school in 2021, according to the Association of American Medical Colleges (AAMC).

Borrowers who have financed their education using other forms of debt will also be excluded. Some 24% of borrowers have used one or more forms of debt besides student loans, including credit card debt or personal loans, to pay for educational expenses, according to the Federal Reserve.

Communities of color win big

The executive action should have outsize benefits for communities of color due to the income cap and Pell Grant loan forgiveness. 

In an April article, the Urban Institute pointed out that Black students receive Pell grants at a much higher rate than white students and therefore “would be more likely to receive forgiveness under a Pell-based approach.”

“This income cap would also direct a greater share of forgiven dollars to Black borrowers (and a smaller share to white borrowers),” said Chingos.

Student debt relief doesn’t help most Americans

While the positive impacts of Biden’s actions are clear to most economists, including relief for communities of color and increased consumer spending, the student debt relief program still won’t benefit the majority of Americans who haven’t attended college.

As of 2021, just 37.9% of U.S. adults aged 25 or over held a bachelor’s degree, Pew Research Center data shows. And only about 19% of households that have total incomes below $125,000 have student loan debt, according to an analysis by the Urban Institute. 

Still, democrats celebrated the executive action on Wednesday, as Biden has been weighing forgiving student debt for several months, with progressive lawmakers, civil rights groups, and labor leaders pushing for an even more substantial debt relief program.

“Today is a day of joy and relief. President Biden is canceling up to $20,000 of federal student debt for as many as 43 million Americans—a powerful step to help rebuild the middle class,” Massachusetts Sen. Elizabeth Warren said in a tweet. “This will be transformative for the lives of working people all across this country.”

But House Minority Leader Kevin McCarthy and other Republicans have argued that most of the benefits of student debt forgiveness will go to “top earners,” and it will only serve to exacerbate inflation.

“Critics of federal student loan forbearance and forgiveness are quick to point out how the program favors people who don’t need the help. They’re right in that the unemployment rate for individuals with or without a high school diploma is two times higher than for those with a bachelor’s degree or more,” Foster said. “Still, we know an extension to the forbearance period at the very least will positively impact nearly three in four student loan borrowers, with half saying it’ll be a very positive impact, according to a recent Bankrate poll.”

Foster also noted that more than 50% of Americans say they’ve delayed major financial decisions due to their student debt. And Jason Furman, a Harvard economist, argued on Tuesday that student debt forgiveness will only add between 0.1 and 0.2 percentage points to inflation. 

Michael Pugliese, an economist at Wells Fargo, agreed.

“Student loan forgiveness of this magnitude could increase inflation modestly, along the lines of a couple of tenths of a percentage point over the next couple years. However, there is tremendous uncertainty around this estimate given that the full details of the plan were just announced today, and the timing/legality of student loan forgiveness are still somewhat uncertain,” he told Fortune.

However, Furman warned that the program could impact the federal budget deficit. “This is not free money,” he cautioned.

The Biden Administration’s student debt relief programs

This isn’t the first move by the Biden Administration to make good on campaign promises to cancel student debt. 

Some 175,000 borrowers have had $10 billion in student loan debt forgiven under the revamped Public Service Loan Forgiveness (PSLF) process, the U.S. Department of Education announced on Tuesday. The cancellations came after the Biden administration announced changes to the PSLF process in October of last year, simplifying the process of discharging debts after 10 years of on-time payments as the program originally intended.

Last week, Biden also wiped out $4 billion in student debt of 208,000 borrowers who attended ITT Technical Institute, an online university that U.S. Secretary of Education Miguel Cardona said has “intentionally misled students about the quality of their programs in order to profit off federal student loan programs.”

The move follows a March decision by the Education Department to forgive $1.9 billion in loans for 130,000 ITT Tech students.