November 24, 2020

Will Student Loan Forgiveness Really Stimulate The Economy? – Forbes

Will Student Loan Forgiveness Really Stimulate The Economy? - Forbes

According to a new report, the plan to cancel student loans won’t really stimulate the economy.

Here’s what you to need know.

Student Loans

Millions of student loan borrowers may be excited about the prospect of cancelling student loans. However, a new report from the Committee For A Responsible Budget—whose bipartisan board includes Leon Panetta and Erskine Bowles, two former White House chiefs of staff to President Bill Clinton— says that any plans to cancel student loans may provide limited economic stimulus. “[O]ne thing is clear: student debt cancellation would be an ineffective form of stimulus, providing a small boost to the near-term economy relative to the cost.”

The authors of the report also argue that:

1.  Student loan forgiveness doesn’t give much cash for people to spend in the economy

The authors estimate that if the federal government spends approximately $1.6 trillion to cancel student loans, the net effect would be only $90 billion of available cash to spend in 2021 and less than $450 billion over the next five years. Even if a borrower receives $10,000 of student loan forgiveness now, they don’t receive $10,000 of cash. Rather, that borrower would not have to make principal or interest payments, which could free up several hundred of dollars of cash each month. This is especially true for borrowers who pay off student loans over 10-30 years and have relatively lower monthly payments. The authors also note that this cash impact may be overstated due to income tax. For example, if a student loan borrower receives student loan forgiveness under an income-driven repayment plan, for example, the amount of student loans forgiven is taxable. If Congress or the president cancels student loans and does not somehow waive the tax liability, then the authors note the stimulus effect could be closer to zero.


2. Student loan forgiveness isn’t targeted at people with low income or who are unemployed

One chief goal of economic stimulus is to encourage recipients to spend money to boost the economy. With student loan forgiveness, the authors say that student loan debt statistics show that the recipients of student loan forgiveness are not who you think they might be. They say that student loan forgiveness would not properly target individuals with low income or those who are unemployed. Why? Many of these borrowers have relatively little or no student loan debt.

MORE FOR YOU

  • 70%+ of current unemployed workers do not have a bachelor’s degree.
  • 43% of the 70% did not attend any college.
  • Approximately 30% of all student debt is held by households without a bachelor’s degree.
  • Less than 10% of student loan debt is held by those with no college education. 
  • Approximately 40% of student loan debt is held by households with graduate degrees.
  • Less than 10% of graduate degree holders are unemployed due to the current economic crisis.

3. Stimulus checks boost the economy more than cancelling student loans

The authors estimate that cancelling student loans would only yield an economic benefit of $115 – $360 billion, which represents an economic multiplier of 0.08x – 0.23x. Compare this to other stimulus policies and their economic multiplier:

  • State and local aid: 0.88x
  • Enhanced unemployment benefits: 0.67x
  • Stimulus checks: 0.60x
  • Small business loans: 0.36x

The authors say that President-Elect Joe Biden also could extend student loan relief through executive action in 2021, and continue to defer federal student loan payments and interest accrual. They believe that could achieve roughly the same economic benefit at a fraction of the cost.


Next Steps

Will you qualify for student loan forgiveness? You likely have questions about your student loans and how student loan forgiveness works. As Congress and the president consider a plan to cancel student loans, the proposal to cancel student loans may become reality even if some believe student loan forgiveness won’t stimulate the economy. For example, Sen. Elizabeth Warren (D-MA) and Senate Minority Leader Chuck Schumer (D-NY) have proposed that the president cancel up to $50,000 of student loans for every borrower through executive action. (However, others say that Biden can’t cancel student loans through executive action). Warren believes that student loan debt cancellation will help provide economic relief, decrease social and racial disparity, and help young Americans save more, invest, buy a home and start a family. Biden, who supports a plan to cancel $10,000 of student loans for every borrower, has not committed to use an executive order to cancel student loans. That means Congress may have to forgive student loans. That said, Congress may prioritize other economic measures such as stimulus checks, unemployment benefits and state and local aid ahead of student loan forgiveness. The composition of the U.S. Senate, the state of the economy and the availability of a Covid-19 vaccine all my influence Biden and Congress whether to proceed with cancelling student loans.


How To Pay Off Student Loans

There’s no guarantee that your student loans will be forgiven. As Congress and Biden evaluate various policies for economic stimulus, student loan forgiveness may be one of many measures. In the meantime, understand all your options for student loan repayment. What’s the best way to pay off student loans? Get a student loan game plan. Here are three smart approaches, all of which have no fees:

Student Loans: Related Reading

Biden: Student loan forgiveness “figures in my plan”

No, Joe Biden can’t forgive $50,000 of student loans