Student loan forgiveness unlikely to boost economy
The Biden administration has been considering a plan to cancel at least $10,000 of federal studentloan debt. President Biden promised something of the sort during the 2020 presidential campaign. And with about 45 million current and former students carrying $1.76 trillion in debt, some sort of debt forgiveness is appealing both as policy and as politics.
But what kind of debt forgiveness, and how much for whom?
What makes that a hard question is that there is not one student debt problem; there are dozens. They range from mega-loans for Harvard Business School degrees that yield Wall Street jobs with megasalaries to much smaller amounts borrowed to pay for vocational training that proved almost worthless, if not an outright scam.
Some advocates of student loan forgiveness argue that the overall economy would also get a boost by enabling debtors to become bigger consumers.
Most economists say the overall impact of reducing student debt would be modest, but others say forgiveness would enable the beneficiaries to move forward with their lives instead of being dragged down by burdens that — in many cases — are all but impossible to bear.
What's the plan being considered?
Since COVID-19 descended on the U.S. in March 2020, the White House, first under President Trump and then Biden, has put on hold the repayment requirement and interest accrued on federal student loans, providing relief to some 37 million people.
About 80% of all outstanding student loan debt, or about $1.38 trillion, was borrowed directly from the government, says Ben Kaufman, research director at Student Borrower Protection Center, an advocacy group. The rest came from banks and other private lenders, some of which are covered by federal guarantees.
The payment pause was among various emergency steps taken in response to the pandemic. But this moratorium, uniquely, has been extended six times, now through Aug. 31.
Student borrowing for college, trade school and graduate work has skyrocketed in the last two decades, in large part due to soaring tuitions. Americans are now carrying more than triple the amount of student debt in 2006, when the Federal Reserve began tracking the data. That's more than either the nation's total borrowing on credit cards or for auto loans.
On average, a borrower owes about $39,000 in education debt, but the median amount is about half that.
While another extension is possible, even likely, the Biden administration is said to be weighing a plan to cancel around $10,000 for people making less than $125,000 a year, although reports indicate that setting an income cutoff may prove hard to get through Congress.
Who would most benefit from partial forgiveness?
Canceling $10,000 would eliminate the student debt for about a third of all borrowers, according to data from the College Board. Another one-fifth would stand to have their student debt balance cut by at least half.
But Biden doesn't have authority to cancel private student debt. Millions of students also borrowed under the Family Federal Education Loan, and most of that debt is owned by commercial banks.
All told, the New York Fed says 10 million people with student loans did not get relief from the payment pause, and most of them would be left out of a forgiveness plan because their loans came from private lenders and legally the government cannot just erase them.
Among others who won't benefit are those who've already paid off their student loans. And then there's the question of fairness to the even larger segment of the population who never had any college debt because they never went beyond high school.
"Many of the people who are struggling the most [in the economy as a whole] are people who didn't go to college at all," said Sandy Baum, an economist at the Urban Institute.
Wouldn't canceling student debt benefit everyone because it would boost the economy?
On the surface, it would seem that lifting the weight of $10,000 for tens of millions of adults in their prime spending years would give a big boost to the economy.
In one recent study by Bankrate.com, about 7 out of 10 Gen Z'ers (ages 18 to 25) and millennials (26 to 41) who took out loans to finance higher education said they had delayed a major financial decision, such as having children or buying a car, as a result of that debt.
But while forgiving debt would certainly free up some cash to spend, economists widely agree that the impact to the economy would be small.
The U.S. economy is huge — $25 trillion in current dollars — and canceling $10,000 per student would reduce annual loan payments by only about $18 billion a year, according to the Committee for a Responsible Federal Budget. Most student loans are paid back over 10 to 30 years.
And some borrowers will want to use the monthly savings to draw down other debts, or just sock away the cash for emergencies.
"In the near term, it's a small positive," said Mark Zandi, chief economist at Moody's Analytics. Longerterm, it's more complicated, he said. You're shifting the burden from borrowers to other taxpayers, Zandi said, and it raises questions about fairness and moral hazards, like the temptation to borrow more because you think you'll never have to pay it back.
Of course, the government funds many programs that may or may not benefit everyone economically — corporate tax breaks and farm aid and price supports, among many others.