Canceling student loan debt is unlikely to spur the economy, but a targeted approach may help some groups


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<p>As of the end of June 2021, 43 million borrowers – or about <a rel=14% of all adults in the USA – about USD 1.59 Trillion outstanding federal student loans. Although in many cases the media has focused on borrowers with very large balances such as orthodontist with over $ 1 million in debt in student loans – the average balance is more modest USD 39,351 per borrower with an average monthly payment of $ 393 per month. IN standard maturity for $ 39,351 student loans is 20 years.

The amount of outstanding student debt varies greatly depending on the type of degree earned. The average bachelor’s degree debt is less than $ 29,000 while the average dental school debt is more than 10 times higher more than $ 290,000… As a rule, those who make a career pay lower wages owe less student debt.

Politicians put forward proposals to forgive anywhere From 10,000 to 50,000 US dollars or more per borrower

President Biden has stated that he “I am ready to write off a debt in the amount of $ 10,000”, but not $ 50,000.

If up to $ 10,000 per borrower were canceled for all 43 million student loan borrowers, the cost will be $ 377 billion… This will completely eliminate student loan balances over 15 million borrowers… The total cost of forgiveness up to $ 50,000 for all 43 million borrowers will be just over $ 1 trillion… It would also wipe out more than 36 million people… Some forgiveness of the limited student loan has already begun. Biden’s administration canceled cumulatively nearly $ 3 billion student loans for 131,000 borrowers who were either robbed by the school or have a complete and permanent disability.

Consequences of a loan forgiveness

Some economists treat the staggering amount of outstanding student debt as slow down the economy… These economists argue that any student debt write-off will stimulate the economy. However, I and other economists argue that any economic growth from student loan forgiveness will be marginal compared to the cost to taxpayers.

If $ 10,000 is forgiven for a borrower, it does not mean that the borrower is getting $ 10,000 that they can spend today. This will most likely only free up about $ 100 per month for the average borrower who can spend or save more than 10 years. If all of the $ 1.5 trillion in federal student loans were forgiven, the average borrower would have earned extra income. 393 $ per month… Estimated economy will only grow by about $ 100 billion, or about 0.5%if all $ 1.5 trillion in federal student loans were canceled. To a prospect, it’s like making $ 20,000 a year and getting a one-time $ 100 raise for a new $ 20,100 salary, but today the company is worth $ 1,500 to give you a $ 100 raise.

The immediate economic impact is likely to be lower as the Ministry of Education currently allows 90% of borrowers do not make the required monthly payments until September 2021 due to the pandemic.

Since most borrowers no longer pay off student loans, the financial gain may already be reflected in the current level of economic activity.

Overall, the evidence suggests that broad-based loan forgiveness can have a modest positive impact on the economy. It is estimated that every dollar of student loan forgiveness means only 8 to 23 cents economic benefits. In comparison, incentive checks yielded an estimated economic benefit of 60 cents for every dollar sent to taxpayers.

Eliminating some or all of student debt can help with other problems outside of economics. Borrowers can delay getting married or buying a home due to the amount of student debt they owe. The burden of student debt has been proven to be the cause of mental and physical health problems and “lower overall life satisfaction… “

Uneven benefits

One criticism of the forgiving student debt for everyone is that most of the benefits will go to those with higher incomes. In addition, a relatively small portion of the grants will go to those who borrowed to fund their undergraduate studies. Sixty eight percent of those who took student loans for their bachelor’s degrees, borrowed less than $ 10,000.

Only 2% borrowed more than $ 50,000… Borrowers with the largest loan balance tend to have an advanced degree with a higher income. Households with revenues above $ 74,000 account for almost 60% outstanding student loans.

If the idea of ​​loan forgiveness is to stimulate the economy, I believe that loan relief should be directed at those who most likely will spend any savings from student loan forgiveness. This suggests that student loan forgiveness should target low-income people who typically have less than USD 10,000 student loan debt but more likely to default on these loans.

Any student loan assistance program must consider the impact it can have on borrowers, as student debt affects some groups more than others. For example, women need about two-thirds outstanding student loan debt. ABOUT 69% of White College Graduates Own Tuition Loans, compared with 85% of black college graduates. The point is, women and people of color will benefit the most from student loan forgiveness.

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Fairness issue

If the government forgives current student loans and then continues to issue new student loans, it could lead prospective students to take out loans with the assumption or hope that the government will also cancel their loans.

If only the main problem increasing cost of a higher education diploma addressed to, a similar student debt crisis could happen again

Another complication of any student loan forgiveness program is the perceived fairness or unfairness of the program. Suppose two students received the same bachelor’s degree, took the same amount of student loans to fund their education, and found a job with the same salary in cities with the same cost of living. Both borrowers have made monthly payments for the past five years, but borrower # 1 has paid more than was required. Because of this, Borrower # 1 has just completed the loan repayment and Borrower # 2 still has a balance. Is borrower loan number 2 forgiveness fair? Should borrower # 1 receive compensation for early loan repayment? Legislators will need to consider the issue of equity.

This article has been republished. Conversation, a non-profit news site dedicated to the exchange of ideas from academic experts. It was written: William Chittenden, Texas State University

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William Chittenden does not work, advise, own shares, or receive funding from any company or organization that could benefit from this article, and has not disclosed any relevant affiliates other than their academic designation.

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