ADVICE

How a targeted approach to student loan debt could help certain groups

SOURCE: BRENDAN SMIALOWSKI / AFP
US President Joe Biden has stated that he is “prepared to write off a US$10,000 debt,” but not US$50,000.


By The Conversation 

Read all stories


At the end of June 2021, 43 million borrowers – or about 14% of all adults in the US – owed approximately 1.59 trillion US dollars in outstanding federal student loan debt.

Although in many cases the media has focused on borrowers with extremely large balances – such as the orthodontist who owes over US$1 million in student loans – the average outstanding is a more modest US$39,351 per borrower with an average monthly payment of US$393 per month. The standard repayment period for US$39,351 in student loans is 20 years.

YOU MIGHT LIKE

The amount of student debt outstanding varies greatly based on the type of degree pursued. The average bachelor’s degree debt is under US$29,000 while the average dental school debt is more than 10 times higher at over US$290,000. In general, those who pursue careers that pay lower salaries owe less in student debt.

Policymakers have put forth proposals to forgive anywhere from US$10,000 to US$50,000 or more per borrower.

President Biden has stated that he is “prepared to write off a US$10,000 debt,” but not US$50,000.

If up to US$10,000 per borrower were to be canceled for all 43 million student loan borrowers, the cost would be US$377 billion. This would completely eliminate the student loan balances for over 15 million borrowers.

The total cost of forgiving up to US$50,000 for all 43 million borrowers would be just over US$1 trillion. It would also wipe clean the student loan balances for over 36 million people.

Some limited student loan forgiveness has already begun. The Biden administration has canceled a combined nearly US$3 billion of student loans for 131,000 borrowers who either had been defrauded by their school or have a total and permanent disability.

The effects of loan forgiveness

Some economists view the staggering amount of outstanding student debt as a drag on the economy. These economists argue that any forgiveness of student debt will stimulate the economy. However, I and other economists argue that any boost to the economy from student loan forgiveness would be small compared to the cost to taxpayers.

If US$10,000 per borrower is forgiven, it is not as if the borrower is receiving US$10,000 that they can go out and spend today. Rather, it is estimated this would free up only about US$100 per month for the average borrower to spend or save over 10 years.

If all US$1.5 trillion in federal student loans were forgiven, the average borrower would have an extra $393 per month. It is estimated that the economy would only grow by about US$100 billion, or about 0.5%, if all US$1.5 trillion in federal student loans were canceled.

For perspective, it would be like making US$20,000 a year and getting a one-time raise of US$100 for a new salary of US$20,100, but it costs the company US$1,500 today to give you that US$100 raise.

The immediate economic impact would likely be lower, as the Department of Education is currently allowing 90% of borrowers to not make their required monthly payments through September 2021 due to the pandemic.

Since most borrowers are already not making payments on student loans, the financial benefit may already be reflected in the current level of economic activity.

Overall, the evidence suggests that broad-based loan forgiveness may have a modest positive impact on the economy. It is estimated that every dollar of student loan forgiveness translates to only eight to 23 cents of economic benefit. By comparison, the stimulus checks had an estimated economic benefit of 60 cents for each dollar sent to taxpayers.

Eliminating some or all student debt may help with other issues beyond the economy. Borrowers may delay marriage or buying a home because of the amount of student debt they owe. The student debt burden has been shown to be the cause of mental and physical health problems and “less overall satisfaction with life.”

Uneven benefits

One criticism of forgiving student debt for everyone is that most of the benefits will go to those with higher incomes. In addition, relatively few of the benefits would go to those who borrowed to finance an undergraduate education. Sixty-eight percent of those who took out student loans for a bachelor’s degree borrowed less than US$10,000.

Only 2% borrowed more than US$50,000. Borrowers with the highest loan balances tend to have graduate degrees earning higher incomes. Households with incomes above US$74,000 owe nearly 60% of the outstanding student loans.

If the idea behind loan forgiveness is to stimulate the economy, I believe loan relief should be targeted to those most likely to spend any savings from student loan forgiveness. This suggests student loan forgiveness should be targeted to those with low incomes, who typically have less than US$10,000 in student loan debt but are more likely to default on those loans.

Any student loan relief programme should consider the effect it may have on borrowers, as student debt impacts some groups more than others. For example, women owe approximately two-thirds of the outstanding student loan debt. About 69% of white college graduates owe student loans, compared to 85% of Black college graduates. The point is that women and people of colour would benefit the most from student loan forgiveness.

YOU MIGHT LIKE

A matter of fairness

If the government forgives current student loans and then continues to make new student loans, this may lead future students to borrow with the assumption or hope that the government will cancel their loans too.

Unless the underlying issue of the increasing cost of a college degree is addressed, a similar student debt “crisis” may occur again.

Another difficulty of any student loan forgiveness programme is the perceived fairness or unfairness of the programme. Assume two students pursued the same undergraduate degree, took out the same amount in student loans to finance their education and secured jobs with the same salary in cities where the cost of living is the same.

Both borrowers have been making their monthly payments for the last five years, but borrower number one made larger payments than required. Because of this, borrower number one just completed paying their loan off, while borrower number two still has a balance. Is it fair for borrower number 2’s loan to be forgiven?

Should borrower number one be compensated for paying the loan off early? Lawmakers will need to consider the issue of fairness.The Conversation

William Chittenden, Presidential Fellow, Texas State University

This article is republished from The Conversation under a Creative Commons license. Read the original article.