What student loan debt forgiveness means for the economy

What student loan debt forgiveness means for the economy

But the economic impact of student loan debt relief varies depending on the amount of relief provided and whom it targets. Broadly, Moody’s holds that various forms of student debt relief would act like a tax cut stimulus to economic activity, leading to a modest increase in household consumption and investment. Long term, a reduction in student loan debt could help improve the formation of small businesses and households, as well as spur an increase in homeownership.

Blanket student loan debt forgiveness would mostly benefit people who would have likely paid off their loans over the long term. The Federal Reserve Bank of New York estimated that the average monthly loan payment in 2018 was between $200 and $299. And because the households of college graduates are more affluent, they’re more likely to save that extra money than spend it on necessary items, blunting its impact on the economy at large.

William Foster, Moody’s lead sovereign analyst for the U.S. government, warns of the “moral hazard” of widespread student debt relief.

While that extra cash would certainly be helpful to a college graduate’s finances, in the end, it would probably just add to their household’s disposable income

“You risk, somehow, creating a moral hazard, meaning that perhaps future students who didn’t benefit from the debt forgiveness today would expect debt forgiveness in the future,” says Foster, vice president and senior credit officer at Moody’s. “They would then, as a result, not worry as much about the debt they’re taking out because they’re expecting it to be forgiven in the future.”

In December, Biden extended the student loan payment freeze until May from February. Meanwhile, there was a backdrop of more generous unemployment benefits and rising wages that resulted in many people saving more money—and Foster says many households have a better financial footing than they did pre-pandemic.

Stimulus funds from the pandemic have added a complicating wrinkle when it comes to the student loan debt conversation

The big question that remains is what happens once the forbearance for student loan payments is phased out, Foster says. “What’s going to happen to people’s behavior, and, ultimately, what’s going to happen to the ratios [economists follow to understand student loan debt]?”В

Both in its scale and in its cost to taxpayers, widespread student loan debt forgiveness in any form would be one of the largest transfers of wealth in American history. Brookings reported that forgiving all federal student loans would cost an estimated $1.6 trillion as of ; a blanket one-time $10,000 to borrowers would cost about $373 billion.

A transfer of wealth of these magnitudes would have a positive effect on the economy, but the “bang for the buck is quite low” compared with other, more progressive endeavors, says Looney, who’s also a professor of finance at the University of Utah. Because people with student loan debt https://paydayloanstennessee.com/cities/pulaski/ generally earn more money, they won’t benefit as much from relief as other groups would.

“The economic effects of debt forgiveness are exaggerated,” says Looney, whose study of the issue finds that even $10,000 in debt forgiveness would cost roughly as much as the country has spent on food stamps since 2000. He suggests that continued targeted student loan relief efforts, such as additional assistance to borrowers who were Pell Grant recipients, might have a broader impact; Pell Grants are issued to students who demonstrate financial need.

According to Moody’s, universal student loan debt cancellation would only marginally increase the U.S. government’s debt burden and lead to forfeited revenue to the government equal to 0.4% of GDP annually. As of 2019, the vast majority of the $1.2 trillion in student debt owed to the federal government was in the form of direct loans, forgiveness of which wouldn’t add to the country’s debt stock. Direct loans are funded by U.S. Treasury bonds and are already incorporated into the debt America owes at the time of origination.

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