Will Cancellation of Student Debt Boost the Economy? – Quartz
With an economy in slow recovery, and the weight of student loans higher than ever, US President Joe Biden faces increasing pressure from Democrats to eliminate $ 50,000 in student debt by borrower, through action by the executive. But Biden suggests more modest measures, saying the government should not cancel student debt at “Harvard, Yale and Penn”.
In the countryside, Biden pledged to release $ 10,000 of federal student loan debt per borrower – a small nick in the more than $ 1.5 trillion in student loans issued or guaranteed by the US government.
Forgiving $ 10,000 in debt would completely remove the student loan burden for a third of America’s 43 million federal borrowers, US Department of Education data suggests.
But the cancellation of the debt would be, overall, mainly benefit the rich. Those with incomes over $ 74,000 owe nearly 60% of unpaid student debt and make almost three-quarters of the payments, according to at the Brookings Institution.
The most indebted Americans tend to be those with graduate degrees. Data analyzed by Brookings found that 56% of student debt is owed by those with master’s and doctoral degrees. But these borrowers also have better financial results. Masters with a master’s degree are expected to earn $ 2.7 million over their lifetime, compared to $ 1.3 million for Americans with only a high school diploma, according to the Center on Education and the Workforce from Georgetown University.
Will Student Debt Relief Boost the US Economy?
Data of the Committee for a Responsible Federal Budget shows that debt cancellation would give a small enough boost to stimulate the economy, compared to increasing unemployment benefits and state and local aid. “You spend a lot of money not to give people so much money,” says Constantine Yannelis, an assistant professor at the Booth School of Business at the University of Chicago, whose research focuses on household finances, including student loans.
He says the evidence shows that the stimulus is more effective at the onset of recessions. But with student loan forgiveness, where you forgive payments over 10 years or more, a large part of the forgiveness will likely come during good economic times. “So it would be a fairly ineffective stimulus compared to simply giving checks to low-income households,” said Yannelis. “There’s a lot of work that shows that what matters is getting money back to people immediately. “
But with U.S. student debt currently standing at $ 1.7 trillion, calls for student debt cancellation are on the rise.
“The discussion has taken off at this point because so many people are feeling it,” says Nicole Smith, chief economist at the Center on Education and the Workforce at Georgetown University.
Will Canceling Student Debt Help Close the Racial Gap?
For those with small debts, the immediate relief of $ 10,000 in canceled loans could make a big difference, says Smith. Advocates of the cancellation point to the psychological effect of debt for decades and how it could affect people’s career choices or their decision to buy a home. But since debt cancellation wouldn’t immediately increase income, it’s hard to analyze what the $ 10,000 cut would do for someone, says Austin Clemens, a social scientist in computer science at the Washington Center for Equitable Growth.
We do know, however, that black students, on average, more debt than their white counterparts to get the same education and are more likely to be late on their loan repayment. But canceling all student debt would reduce US debt racial wealth gap by only 3 percentage points, estimates Yannelis. “We’re talking about a drop,” he says. Disparities in ownership and property values are more important factors in the wealth gap than education, he says.
What explains the increase in American student debt?
While Biden’s policy may provide relief to many borrowers, it would do little to address the fundamental problems of the student loan system – for example, the high cost of going to college.
The growing volume of student debt is also due in part to the growing number of people borrowing and people taking longer to repay their debt, says Yannelis.
But plans to protect people from poor performance have also taken off. Between 2010 and 2017, the the number of borrowers with income-based repayment plans has grown rapidly, as so-called IDR plans, which set a supposedly affordable monthly payment based on the borrower’s income and family size, have become more widely available and their terms have become more favorable. The share of IDR users among borrowers who took out loans for undergraduate studies increased from 11% to 24%; among those who borrow for higher education, the share of IDR users rose from 6% to 39%, according to the Congressional Budget Office (pdf).
Can more IDR plans help?
Yannelis says the US student loan system can be improved by making everyone default to IDR plans, like in the UK and Australia, where student loan systems are managed by the national tax service. IDR plans are especially ideal for low income earners, and payments from those with too low income are not required. Under IDR plans, loan balances typically become eligible for forgiveness after 20 or 25 years.