N.Y. Fed: Biggest student debt relief favors least well off

© Reuters. FILE PHOTO: Activists demonstrate outside an entrance to the White House calling for the cancellation of student debt in Washington, U.S., April 27, 2022. REUTERS/Evelyn Hockstein/File Photo

By Michael S. Derby

NEW YORK (Reuters) - The Biden administration's plan to provide student loan debt forgiveness will most benefit Americans who live in less affluent parts of the country - the South in particular, a report from the Federal Reserve Bank of New York said Tuesday.

The administration's plan "pushes more forgiveness dollars toward borrowers living in lower- and middle-income neighborhoods than borrowers living in higher-income communities," the New York Fed said in a post on the bank's website. If implemented, "the reduction in student debt prevalence and balances will create a substantial financial improvement for borrowers."

The report noted that some 65% of government student loan borrowers live in neighborhoods with annual median household incomes below $83,000.

The New York Fed said that regionally those in southern states - where Republican-led criticism of Biden's plan has often been the loudest - will see the biggest benefit from the debt forgiveness plan.

The bank said that the president's proposal will cancel out just under half a trillion dollars in outstanding loans, eliminating outstanding balances for 40.5% of those who'd taken out federal loans, while eliminating nearly a third of all outstanding federal student loans.

Student loan forgiveness by state https://graphics.reuters.com/USA-ECONOMY/LOANS/movanxnbepa/chart.png

The White House says the typical undergraduate student graduates with $25,000 in student loan debt, with total federal student loan debt spread among 45 million borrowers standing at $1.6 trillion.

The New York Fed report takes stock of the president's plan, announced at the end of August, to forgive up to $20,000 in student loans per borrower. The debt forgiveness plan excludes high-income earners, although the New York Fed report says only 5.1% of borrowers would be ineligible for forgiveness due to being above the income threshold.

The debt relief proposal has courted controversy on a number of fronts. Some have worried it will exacerbate already large federal budget deficits, while others think it favors the well off, many of whom hold substantial levels of student debt.

The president's plan faces an uncertain future and it may face legal challenges that could delay or derail its implementation. The administration has defended its cost in a climate of general deficit reduction, with the federal budget gap in the fiscal year through August down 65% from the prior period.

Others have also said the plan doesn't address the root cause of rising student loan debt, which is the rapid expansion in the cost of college. The New York Fed reports that the one-time forgiveness plan should nevertheless help those who hold government loans, as these households are on balance more financially stressed than other Americans.