Student loan forgiveness is top of mind for 45 million student loan borrowers, but will it really stimulate the economy?
Here’s what you need to know.
Student Loan Forgiveness
Student loan forgiveness has taken center stage in congressional legislation and presidential campaigns alike. A few recent examples:
Heroes Act: The Heroes Act — the $3 trillion stimulus package that House Democrats passed — initially proposed $10,000 of student loan forgiveness for your federal student loans and $10,000 of private student loan forgiveness. However, House Democrats passed the Heroes Act with a weaker provision that would cancel $10,000 of student loan debt only for borrowers who are struggling financially (rather than every student loan borrower).
Joe Biden: Former Vice President Joe Biden reiterated his support for student loan forgiveness and his support to discharge student loans in bankruptcy.
Senate Democrats: Senate Democrats have proposed to cancel $10,000 of student loan debt.
House Democrats: House Democrats, led by Rep. Ilhan Omar (D-MN) and Rep. Ayanna Pressley (D-MA) proposed to cancel $30,000 of student loan debt.
Cancel Student Loan Debt: The COVID-19 Student 5 Loan Relief Act of 2020 would make it easier to cancel both private student loans and federal student loans, and would be available to all Americans impacted by Covid-19.
Coronavirus: The Medical Bankruptcy Fairness Act would allow you to cancel your student loans in bankruptcy and provide relief to student loan borrowers who are struggling to make student loan payments.
Cancel Student Loans Petition: Student Debt Crisis, a leading student loan advocacy not-profit, recently sent Sen. Elizabeth Warren (D-MA) a petition for student loan forgiveness with 1.2 million signatures.
Despite these proposals, Congress has not passed any student loan forgiveness. U.S. Secretary of Education recently revamped a student loan forgiveness tool, but does not support outright student loan forgiveness for borrowers. Similarly, the Heals Act — the $1 trillion stimulus package that Senate Republicans proposed — does not include any student loan forgiveness. What does the next stimulus package mean for your student loans? As Congress crafts the next stimulus with second stimulus checks and unemployment benefits, it’s likely that student loan forgiveness will not be included. Sen. Lamar Alexander (R-TN) proposed a new student loan repayment plan that would help borrowers without income make no student loan payments until they earn income. For those student loan borrowers with income, Alexander’s plan includes student loan forgiveness after 20 or 25 years of student loan payments. However, this student loan forgiveness proposal is similar to current income-driven repayment plans.
Does student loan forgiveness stimulate the economy?
What proponents say:
Given this focus on student loans, would student loan forgiveness stimulate the economy? Proponents argue that student loan debt is a major financial crisis. According to the latest student loan debt statistics, 45 million student loan borrowers collectively owe $1.6 trillion in student loan debt. They argue that student loan debt has materially impacted borrowers’ ability to buy a home, save for retirement, get married and start a family. Proponents say that cancelling student loan debt, in part or in whole, would stimulate the economy and provide necessary financial relief to millions of Americans. Proponents also argue this: By freeing up money that otherwise would go toward student loan repayment, borrowers will have excess capital to spend in the economy.
What opponents say:
Opponents cite several reasons why they don’t support student loan forgiveness. This includes that student loan forgiveness is too expensive for the federal government and taxpayers, and that student loan forgiveness is not the optimal way to stimulate the economy. According to the Urban Institute, opponents also say that student loan forgiveness is not “a cost-effective form of stimulus and would direct the most benefits to higher-income households.” The authors make several points regarding why student loan forgiveness would not stimulate the economy in the near-term. According to the authors:
- Little Economic Impact: If a borrower has $30,000 of student loan debt, the borrower would pay about $300 a month over 10 years. If the borrower received $10,000 of student loan forgiveness today, that would provide $100 of additional monthly spending over the next 10 years. That’s not much of an immediate economic impact compared with giving each student loan borrower $10,000 upfront to spend in the economy.
- Income, Not Balance: The authors point out that student loan repayment is based on income, not student loan balance. For borrowers on income-driven repayment plans, their monthly payment would not be reduced materially if their student loan balance was reduced by $10,000, for example. Why? Income-driven repayment plans are based primarily on income, with some monthly payments as low as $0. In these cases, borrowers would be unlikely to spend more in the economy today and therefore would not provide immediate economic stimulus.
The authors note that borrowers with the lowest incomes could benefit from student loan debt cancellation. The authors also argue that stimulus checks to 90% of Americans is a more effective way to stimulate the economy than student loan forgiveness, which impacts a smaller constituency.
How to pay off student loans
What’s next for your student loans? The new stimulus package is expected next week, if Congress can agree on a bi-partisan basis. The next stimulus is not expected to include student loan forgiveness. Absent Congress extending the student loan benefits from the Cares Act, student loan payments will resume on October 1, 2020. Importantly, don’t wait for Congress to act. Make sure you have your own game plan to pay off student loans. Even if there is student loan relief available, it doesn’t mean that you should ignore your student loans. What’s the best way to start? Start with these four options, all of which have no fees: