Aug 25, 2022 - News

Arkansas' student debt cancellation explained

Data: Federal Student Aid; Note: Includes outstanding principal and interest balances from Direct Loans, Federal Family Education Loans and Perkins Loans; Table: Simran Parwani/Axios

ICYMI, President Joe Biden announced plans to cancel some student debt for most borrowers.

Catch up quick: Biden says he'll knock $20,000 off the student loan bills for Pell Grant recipients and $10,000 for those who did not receive Pell Grants. The forgiveness applies only to those who make less than $125,000 a year.

Why it matters: The decision — which comes days before the Aug. 31 deadline, when loan repayments were set to resume after a series of pandemic pauses — is expected to alleviate some of the debt burdens of 43 million Americans while also fulfilling a key campaign promise, Axios' Sophia Cai and Erin Doherty write.

  • Approximately 20 million Americans could have their debt completely canceled.

What they're saying: Debt forgiveness generally produces what economists call the "wealth effect," in which people spend more money when they have a perceived increase in available funds, Mervin Jebaraj, director of the Center for Business and Economic Research at the University of Arkansas, told Axios.

  • However, he does not expect this debt forgiveness to produce an immediate wealth effect because student loan payments have been on pause for two years.
  • Student loan forgiveness will likely have an effect on longterm behaviors and factor into people's calculations as they consider buying a house or car or having children. Less debt can also make it easier to get a mortgage loan.
  • Arkansas generally has a higher percentage of people with Pell Grants than other states, which means the state could see a somewhat higher impact, Jebaraj said.

Zoom in: About 390,000 Arkansans — 13% of the state's population — have student debt, according to the Education Data Initiative.

  • The average borrower in Arkansas has $33,333 in student debt, meaning the average Arkansan will have just under one-third of their debt cleared.

Yes, and: Arkansas has an average of 64,697 Pell Grant recipients.

What's next: Logistics and housekeeping.

  • Biden said Wednesday that the Education Department will in the coming weeks release a "short and simple" form for borrowers to apply for student loan relief.

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