Some are advocating for student debt cancellation to provide an economic stimulus. But there is … [+]
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There are a lot of conversations about student debt cancellation happening right now. In addition to addressing the $1.5 trillion outstanding student debt balance, one of the reasons some are advocating for it is to provide an economic stimulus.
But aside from the merits of the policy itself, there is debate on the effectiveness of the policy as a stimulus. Some question how much of a stimulus it would be, while others argue there are better ways to stimulate the economy.
Proposals to cancel student debt range widely. President-elect Joe Biden has backed Senator Elizabeth Warren’s proposal to provide $10,000 in debt cancellation as a part of coronavirus relief. Warren herself has also proposed canceling up to $50,000 per borrower. In his presidential campaign, Senator Bernie Sanders called for wiping out the totality of the student debt.
Each of those plans would provide varying degrees of relief and understandably differing economic impacts. If Senator Sanders got his way, all of the $1.5 trillion in student debt would be gone. An infusion of $1.5 trillion into the economy would surely stimulate the economy, but that’s not exactly how student debt cancellation would work — at least in the short run.
Borrowers make monthly payments under repayment plans that vary from 10 to 30 years. According to the Federal Reserve, the median monthly student loan payment is $222, though that differs based on the amount borrowed and the repayment plan. Of course, freeing up borrowers’ monthly payments would allow them to spend that money in other ways, but it is not the same as giving families an amount of cash equivalent to their loan balance. Still, $222 is not an insignificant amount of money, especially for student borrowers who might be struggling.
If a smaller amount of student debt was cancelled, that would change the impact on payments. A $10,000 cancellation would likely just reduce the payment of most borrowers. For a borrower with $30,000 in student debt—roughly that of the median bachelor’s degree graduate—the Urban Institute estimates those in a standard 10-year repayment plan would see their payment reduced from $300 to $200.
However, according to data from the Department of Education, it would eliminate the total balance for a third of borrowers. A $50,000 cancellation would cancel the entire balance for more than three-quarters of borrowers.
Still, because cancellation isn’t the same as putting an equivalent amount of cash into the pockets of Americans, the short-term stimulus looks different. The Committee for a Responsible Federal Budget estimates that eliminating $1.5 trillion in student debt “would translate to $90 billion or less of cash available in 2021 and $450 billion or less over 5 years.” Smaller amounts of cancellation would have a smaller economic impact.
One argument against student debt cancellation as stimulus, not as good or bad policy, is that the price tag could provide a different and better stimulus that would have a greater impact right now. For example, the $10,000 proposal would cost more than providing another round of direct stimulus payments that more Americans, not just student loan borrowers, could spend today.
Additionally, some argue that compared to a payment suspension as is happening right now, the stimulus effect is small. The suspension has already allowed borrowers to use that freed up money for other purposes. However, others argue that the effect would be more pronounced. If borrowers had their balance or a portion of it cancelled it would change their behavior more. If they weren’t required to pay back all or a portion of their debt, they might be more willing to make bigger purchases—such as buying a car or a home—where payments are also made over a longer time period.
It’s clear there is certainly no consensus on whether or not student debt cancellation is the best way to stimulate the economy. However, President-elect Joe Biden is already facing pressure to act to provide student debt cancellation. More than 200 organizations recently wrote a letter to Biden calling on him to use executive action to cancel student debt, though there are outstanding legal questions on his ability to do so.
Related Readings:
Will The Biden Administration Give Students $10,000 In Loan Relief?
