Canceling student loan debt will barely boost the economy, but a targeted approach could help certain groups
The Biden government has already canceled nearly $ 3 billion in student loan debt from 113,000 borrowers. Paul Morigi / Getty Images for We The 45 Million
As of June 2021, 43 million borrowers - or about 14% of all adults in the United States - owed around $ 1.59 trillion in outstanding federal student loans. Although in many cases the media has focused on borrowers with extremely high balances - such as the orthodontist who owes over $ 1 million in student loans - the average balance is a more modest $ 39,351 per borrower with an average monthly payment of $ 393 per month. The standard repayment period for student loans of $ 39,351 is 20 years.
The amount of outstanding student debt varies greatly depending on the type of degree you are aiming for. The average undergraduate degree debt is less than $ 29,000 while the average dental school debt is over 10 times higher at over $ 290,000. In general, those pursuing careers with lower salaries owe less student debt.
Policy makers have made proposals to allocate between $ 10,000 and $ 50,000 or more per borrower.
President Biden has stated that he is "ready to write off a $ 10,000 debt," but not $ 50,000.
If up to $ 10,000 per borrower were canceled for every 43 million student loan borrowers, the cost would be $ 377 billion. This would completely eliminate student loan balances for over 15 million borrowers. The total cost of forgiving up to $ 50,000 for all 43 million borrowers would be just over $ 1 trillion. It would also clean up student loan balances for over 36 million people. Some limited student loans have already started. The Biden government has canceled a total of nearly $ 3 billion in student loans for 131,000 borrowers who have either been defrauded by their school or have total and permanent disability.
The effects of credit waiver
Some economists see the staggering level of student debt outstanding as a drag on the economy. These economists argue that any student debt relief will boost the economy. However, I and other economists argue that any boost to the economy from student loan waivers would be small compared to the cost to taxpayers.
If $ 10,000 is given per borrower, it is not that the borrower will get $ 10,000 to spend today. It is estimated that this would only give the average borrower about $ 100 per month to spend or save over 10 years. If all of the $ 1.5 trillion in federal student loans were waived, the average borrower would have an additional $ 393 per month. It is estimated that if all of the $ 1.5 trillion in federal student loans were cut, the economy would only grow by about $ 100 billion, or about 0.5%. Looking ahead, it would be like making $ 20,000 a year and getting a one-time raise of $ 100 for a new salary of $ 20,100, but it costs the company $ 1,500 today to give you that $ 100 -Give increase.
The immediate economic impact would likely be less as the Department of Education currently allows 90% of borrowers not to make their required monthly payments until September 2021 due to the pandemic.
With most borrowers already failing to pay for student loans, the financial benefit may already be reflected in current economic activity.
Overall, the evidence suggests that broad credit relief could have a modest positive impact on the economy. It is estimated that every dollar that a student loan is made represents only 8 to 23 cents of economic benefit. By comparison, the economic checks had an estimated economic benefit of 60 cents for every dollar sent to taxpayers.
Eliminating some or all of the student debt can help with other problems outside of business. Borrowers may delay getting married or buying a home due to the size of their student debt. The student debt burden has been shown to be the cause of mental and physical health problems and “less general life satisfaction”.
One criticism of canceling student debt for everyone is that most of the benefits go to those with higher incomes. In addition, relatively few benefits would be paid to those who have taken out loans to fund undergraduate studies. 68 percent of those who took out student loan for a bachelor's degree borrowed less than $ 10,000.
Only 2% borrowed more than $ 50,000. Borrowers with the highest loan balances typically have a college degree that makes higher incomes. Households with incomes above $ 74,000 owe nearly 60% of outstanding student loans.
If the idea behind loan waiver is to stimulate the economy, I believe that loan facilitation should be aimed at those who are most likely to spend the savings from student loan waivers. This suggests that student loan forgiveness should be targeted towards those on low incomes who typically have less than $ 10,000 in student loan debt but are more likely to default on those loans.
Any student loan assistance program should consider the impact it may have on borrowers as student debt affects some groups more than others. For example, women owe about two-thirds of the outstanding student loan debt. About 69% of white college graduates owe student loans, compared with 85% of black college graduates. The point is, women and people of color would benefit most from student loan issuance.
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A question of fairness
If the government issues ongoing student loans and then continues to issue new student loans, it may lead prospective students to accept or hope to borrow or hope that the government will cancel their loans as well.
If the underlying problem of the rising cost of a college degree is not addressed, a similar “crisis” in student debt may recur.
Another difficulty with any student loan forgiveness program is the perceived fairness or injustice of the program. Let's say two students have the same bachelor's degree, have taken out the same amount of student loans to finance their education, and have secured jobs with the same salary in cities with the same cost of living. Both borrowers have made their monthly payments for the past five years, but borrower number 1 has made higher payments than required. Because of this, borrower number 1 has just paid off his loan while borrower number 2 still has a balance. Is it fair that borrower number 2 loan will be given out? Should borrower number 1 be compensated for early loan repayment? The legislature has to deal with the issue of fairness.
This article was republished by The Conversation, a non-profit news site dedicated to sharing ideas from academic experts. It was written by: William Chittenden, Texas State University.
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William Chittenden does not work for, advise, own or fund any companies or organizations that would benefit from this article, and has not disclosed any relevant connections beyond their academic appointment.
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