Student Loan Cancellation won’t stimulate the economy, according to new research.
Here’s what you need to know.
Proponents of student loan forgiveness claim that student loan forgiveness is the perfect financial incentive: Forgive $50,000 in student loans, and student borrowers will have more money to spend on local businesses. Sen. Elizabeth Warren (D-MA) and Senate Majority Leader Chuck Schumer (D-NY) have been strong supporters of student loan forgiveness as a means of fiscal stimulus. However, according to new research from the Committee for a Responsible Federal Budget, a nonpartisan, nonprofit organization, full and partial student loan forgiveness will have an effect minimal effect on the economy. Here is what they found:
- Total cancellation of the student loan: only $0.08 to $0.23 of economic activity for every dollar of student loan forgiveness.
- Partial cancellation of the student loan: $0.02 to $0.27 of economic activity for every dollar of student loan forgiveness.
- Cancellation of $10,000 student loan: results in an economic multiplier of 0.13x.
- Cancellation of $50,000 student loan: results in an economic multiplier of 0.10x.
This means that if you cancel all student loans, then only 8% to 23% of the amount of student debt canceled would stimulate the economy. If you cancel some student loans, then only 2-27% of the amount of canceled student debt would stimulate the economy.
3 reasons why canceling a student loan won’t stimulate the economy:
According to the research, there are three main reasons why canceling student loans will not stimulate the economy:
- Due to income-driven repayment plans, student loan forgiveness has minimal impact on cash flow;
- Student loan forgiveness is poorly targeted at those less likely to spend; and
- The Current State of the Macroeconomics Given Supply and Demand Constraints
Here are the details.
Cancellation of student loans and stimulus measures
Here’s how much impact partial student loan forgiveness would have on the economy, according to the research:
Cancellation of student loan: $10,000
- eliminate student loans completely for 15 million borrowers
- partially cancel student loans for 28 million borrowers and would cost between $210 billion and $280 billion.
- cut annual student loan repayments by $18 billion a year (after temporary student loan forbearance ends)
- even after three years, the savings would be $54 billion, or about 20-25% of the amount of student loans forgiven
Cancellation of student loan: $50,000
- eliminate student loans completely for 36 million borrowers
- partially canceling student loans for 7 million would cost more than 950 billion dollars.
- would reduce annual student loan payments by $55 billion per year (after ending temporary student loan forbearance)
- even after three years, the savings would be $165 billion, or about 17% of the amount of student loans forgiven
Why Canceling a Student Loan Doesn’t Really Impact Cash Flow
According to research, canceling student loans has a relatively minimal impact on cash flow. Here’s why:
- $50,000 of student loan forgiveness does not mean that a student borrower now has $50,000 to spend in the economy.
- Instead, a student borrower would save their student loan payment each month, which could vary depending on their student loan balance, but could be several hundred dollars (not $50,000).
- For an individual student borrower, saving hundreds of dollars each month could make a significant financial difference. For example, it could mean the difference between paying rent, renting daycare, or buying food.
- Overall, however, the researchers found that the economic impact was lower when analyzing the entire population of student borrowers (which seems counterintuitive). Why?
- Here’s a startling statistic: Nearly 50% of all student loan dollars are tied to defaulting borrowers, either in school, in student loan delinquency, student loan forbearance (separate from ‘current student loan temporary forbearance due to the Covid-19 pandemic), student loan deferral or student loan default.
- And of those student loan repayment student borrowers, about 40% of the dollars come from income-driven repayment plans. Unless their student loan debt was fully or mostly forgiven, these student borrowers would continue to make student loan payments each month based on their income.
- Nearly 90% of student borrowers under an income-focused repayment plan have student loan balances over $10,000, while about 40% have student loan balances over $50,000.
Biden supported financial stimulus, but did not write off student loan debt
President Joe Biden has been a proponent of stimulus measures to help Americans in the response to the Covid-19 pandemic. Through measures such as stimulus checks and enhanced unemployment benefits, Biden has championed providing direct checks to those who need them most. The researchers found that “fiscal stimulus is most effective when directed at those most likely to spend, such as low-income people or those who have recently experienced a loss of income.” However, they argue that canceling student debt does not completely the opposite distributing money primarily to those who are most likely to to safeguard and least likely to spend. How does student loan forgiveness compare to stimulus checks and enhanced unemployment benefits? The researchers estimate that the savings of a student borrower with lower debt repayment will be only about 50% as effective in stimulating demand as expanded unemployment benefits and 20% less effective than stimulus checks. “Given high levels of savings, massive stimulus underway, pent-up demand, supply constraints, inflationary pressures and expectations of a strong economic recovery, the additional liquidity pumped into the economy will have few places to go. To the extent that this leads to further spending – as opposed to saving – it is likely to lead to additional inflationary pressures (especially in the short term).”
Student Loan Cancellation: Is This Research Accurate?
Proponents of large-scale student loan forgiveness say this research is Totally wrong. If student borrowers don’t have to repay their student loans, they obviously save money that they could spend elsewhere. They argue that large-scale student loan forgiveness will help millions of student borrowers buy homes, start families, save for retirement and break free from the shackles of high-interest debt. . Put simply, proponents of student loan forgiveness say debt forgiveness, by definition, puts more money in people’s pockets, which will stimulate the economy.
Importantly, the researchers claim that relative to stimulus checks or unemployment benefits, canceling student loans would not stimulate the economy as much. As the researchers note, canceling student loans would stimulate the economy. Their claim is that, given the limited federal funds available for economic stimulus from Congress, for example, they believe there are better economic policies (such as stimulus checks or improved unemployment insurance) that could spur growth. economy more than the large-scale cancellation of student loans. Their research does not assess the merits of student loan forgiveness as a stand-alone public policy or whether student loans should be forgiven. Nor are they saying that canceling student loans wouldn’t help individual borrowers or help them save money. On the contrary, their main objective is the cancellation of student loans as an economic issue and stimulus policy.
Student loans have been forgiven and will continue to be forgiven, even though some believe there are better ways to stimulate the economy. Why? The potential stimulus effect of student loan cancellation isn’t the only reason Biden or Congress would pass large-scale student loan cancellation. There are many other reasons — including economic justice and racial justice — why proponents of large-scale student loan forgiveness believe large-scale student loan forgiveness is essential now. As Biden and Congress debate the future of student loan forgiveness, Biden has forgiven $3 billion in student loans since becoming president. Biden is likely to continue to sue target cancellation of the student loan, but there is no guarantee that there will be large scale student loan cancellation. Therefore, make sure you have a clear strategy for student loan repayment. Here are some popular options: