In this week’s article, I am going to go Stateside and look at why the college debt forgiveness deal that Joe Biden announced is actually good for the US when you compare it to the tax deal that Donald Trump signed.
Donald Trump oversaw the biggest overhaul in the US tax code in thirty years when he signed the Tax Cuts and Jobs Act 2017. Without going into the ins and outs of it, it disproportionately favoured the wealthy with the top 20% of earners receiving 65% of the benefits. This is sold that as they will then spend more money on goods and services, creating employment in both manufacturing and in the service industry. It is called “trickle down economics”. The money trickles down from the top and into the pockets of lower earners.
Except it doesn’t work. Wealthy people already have enough money and they aren’t going without goods and services as it is. Having additional income does not mean that they can now afford something that they couldn’t before. The extra money doesn’t trickle anywhere, it is saved. The rich people get richer and others don’t benefit…except for the fund managers who charge fees on the additional money that they are managing.
The cost of college in the US is off the scale with costs of $70,000 a year. While many reductions are available, if your parents can’t afford to cover all the costs, students take out a loan, mostly given by the US government. Given the government aren’t a commercial entity, they have the ability to offer low interest rates. But they don’t. Rates currently range between 4.99% – 7.54%. If you have $50,000 in student debt at 7.54%, that is $1,000 a month for five years to pay it off. That is a big obligation for someone to have to pay from their first job.
The Joe Biden Student Loan Relief provides $10,000 of student loan forgiveness for borrowers with income levels below $125,000 for single borrowers and $250,000 for married couples. The top 5% of earners in the US do not benefit, so the vast of Americans can benefit from this package.
There has been uproar in the US over this debt forgiveness. People who have just paid off loans fell hard done by while Republicans think people should repay their debts (the White House put out a very funny tweet listing all the Republican politicians who had PPE loans forgiven!).
Ignoring the overall costs of both, the debt forgiveness deal is much more beneficial to the US economy. Easing the debt burden will release more funds for those starting out their working lives and therefore are on lower incomes. There is a bigger demand on their incomes, so their ability to save is lower. Unlike the rich person who is saving their additional income, the beneficiaries of this package will actually spend the money, which is obviously better for the economy.
05 September 2022