How wiping out all student loan debt would change the economy

How wiping out all student loan debt would change the economy

Since taking office last year, President Joe Biden has announced the cancellation of $ billion in student loan debt. That figure may sound high, but it actually accounts for less than 1% of the estimated $1.75 trillion of existing student loan debt in the United States.

Recently, prominent Democrats have proposed varying levels of student loan debt forgiveness, with U.S. Rep. Alexandria Ocasio-Cortez recommending cancellation of all student loan debt, while Senate Majority Leader Chuck Schumer and Sen. Elizabeth Warren have proposed canceling up to $50,000 per borrower; Sen. Bernie Sanders, an independent who maintains a close relationship with the Democratic Party, also supports universal debt cancellation.

On the 2020 presidential campaign trail, then-candidate Biden promised to cancel $10,000 per borrower upon taking office. Biden has targeted debt relief at specific groups so far, including borrowers who are public servants and those with permanent disabilities.В

Providing $10,000 in relief to the country’s 43 million existing borrowers would cost an estimated $373 billion, according to the Brookings Institution. While borrowers may be happy to have their debt forgiven, experts say the expense of widespread efforts to reduce or wipe away student loan debt may not provide much of a boost to the broader economy.

Who holds student loan debt?

Student loan debt is primarily held by borrowers who were raised in higher-income households and now live in higher-income households. According to Brookings, in 2019 only 7% of students who would benefit from student loan forgiveness were living below the poverty line. People who held any student debt lived in households with a median income of $76,359, compared with the national average of $69,560; people who were making payments on their student debt had a median household income of $86,540.

“People who go to college, and graduate from college, are often in much better economic and financial shape than everybody else,” says Adam Looney, a nonresident senior fellow at Brookings who worked on student loan debt proposals in the U. S. Department of the Treasury during the Obama administration. “They’re better educated, they’re from more affluent backgrounds, and they earn more income.”

More prosperous, advantaged, and whiter than the public at large, this group generally has more disposable income, especially if they attended graduate school. According to a 2019 report from bond credit rating business Moody’s Investors Service, 63% of student loan debt at the time was held by households in the upper half of U.S. household income.В

Still, student loan debt has ballooned. In that same 2019 report, Moody’s stated that student loan debt had doubled in the prior 10 years, growing faster than any other category of household debt. All of this has been impacted by higher college enrollments, rising undergraduate costs, an increase in borrowing, and a reduction in state funding to public four-year institutions.

And there are downsides for Americans who take on too much student loan debt, including weaker creditworthiness, reduced consumption and investment, and widening income and wealth inequality. This debt can hold people back from making decisions that would benefit the broader economy, such as buying a home, having children, and starting businesses.

“People clearly feel like there’s this huge psychological cost of student debt where they agonize over the balance and worry that it impairs their long-term prospects,” Looney says.В

What student loan debt relief means for borrowers

In the conversation over canceling student loan debt, Warren is one of the most strident voices. She argues that Biden has the power to cancel student loan debt on his own without the help of Congress—citing evidence presented by Toby Merrill, the cofounder and former director of the Project on Predatory Student Lending who is now deputy general counsel for the Education Department’s Office of the General Counsel.

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