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Will Student Loan Forgiveness Really Stimulate The Economy?



According to a new report, the plan to cancel student loans won’t really stimulate the economy.

Here’s what you to need know.

Student Loans

Millions of student loan borrowers may be excited about the prospect of cancelling student loans. However, a new report from the Committee For A Responsible Budget—whose bipartisan board includes Leon Panetta and Erskine Bowles, two former White House chiefs of staff to President Bill Clinton— says that any plans to cancel student loans may provide limited economic stimulus. “[O]ne thing is clear: student debt cancellation would be an ineffective form of stimulus, providing a small boost to the near-term economy relative to the cost.”

The authors of the report also argue that:

1.  Student loan forgiveness doesn’t give much cash for people to spend in the economy

The authors estimate that if the federal government spends approximately $1.6 trillion to cancel student loans, the net effect would be only $90 billion of available cash to spend in 2021 and less than $450 billion over the next five years. Even if a borrower receives $10,000 of student loan forgiveness now, they don’t receive $10,000 of cash. Rather, that borrower would not have to make principal or interest payments, which could free up several hundred of dollars of cash each month. This is especially true for borrowers who pay off student loans over 10-30 years and have relatively lower monthly payments. The authors also note that this cash impact may be overstated due to income tax. For example, if a student loan borrower receives student loan forgiveness under an income-driven repayment plan, for example, the amount of student loans forgiven is taxable. If Congress or the president cancels student loans and does not somehow waive the tax liability, then the authors note the stimulus effect could be closer to zero.

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