Canceling the student loan will not stimulate the economy, according to new research.
Here’s what you need to know.
Proponents of student loan cancellation say student loan cancellation is a great financial incentive: cancel a $ 50,000 student loan and student loan borrowers will have more money to spend on local businesses. Senator Elizabeth Warren (Massachusetts) and Senate Majority Leader Chuck Schumer (New York) were strong supporters of the abolition of student loans as a financial incentive. However, according to a new study by the Committee on Responsible Budget, both a complete abolition of a student loan and a partial cancellation of a student loan will have minimal impact on the economy. Here’s what they found:
- Complete cancellation of student loan: just $ 0.08 to $ 0.23 of economic activity for every dollar of student loans canceled.
- Partial Cancellation of Student Loan: Between $ 0.02 and $ 0.27 of economic activity for every dollar of student loans canceled.
- Cancellation of US $ 10,000 student loan: results in an economic multiplier of just 0.13x.
- Cancellation of US $ 50,000 student loan: results in an economic multiple of 0.10x.
This means that if you cancel all student loans, then only 8% to 23% of the canceled student loan will stimulate the economy. If you cancel some student loans, then only 2% to 27% of the canceled student loan will stimulate the economy.
3 reasons why student loan cancellation does not stimulate the economy:
- Due to income-driven repayment plans, student loan cancellation has minimal impact on cash flow;
- Canceling a student loan is poorly targeted at those less likely to spend; and
- Current state of macroeconomics subject to supply and demand constraints
Here are the details.
Student loan cancellation and incentives
Here’s how much canceling a student loan will affect the economy, according to the study:
Student Loan Cancellation: $ 10,000
- completely cancel student loans for 15 million borrowers
- Partial cancellation of student loans of 28 million will cost 210-280 billion dollars.
- will cut annual student loan payments by $ 18 billion per year (after the end of the temporary cancellation of the student loan)
- even after three years, the savings will amount to $ 54 billion, which is approximately 20-25% of the amount of canceled student loans.
Student Loan Cancellation: US $ 50,000
- completely cancel student loans for 36 million borrowers
- Cancellation of $ 7 million in student loans will cost over $ 950 billion.
- will cut annual student loan payments by $ 55 billion a year (after the end of the temporary cancellation of the student loan)
- even after three years, the savings will be $ 165 billion, which is about 17% of canceled student loans.
Why Canceling a Student Loan Doesn’t Affect Cash Flow
Cancellation of a student loan has little or no effect on cash flow, according to the study. That’s why:
- Canceling a $ 50,000 student loan does not mean that the student loan borrower now has $ 50,000 to spend in the economy.
- Instead, the student loan borrower will save his student loan payment every month, which can vary depending on the student loan balance, but can be several hundred dollars (not $ 50,000).
- Here’s an astonishing statistic: Almost 50% of all student loan dollars are related to either bad loans at school, student loan delinquency or student loan waiver (other than the current temporary student loan waiver due to the Covid-19 pandemic), student loan deferral or student loan default.
- And among those student loan borrowers who pay off student loans, roughly 40% of the dollars comes from income-driven repayment plans. Unless their student loan debt is fully or largely canceled, these student loan borrowers will continue to repay the student loan monthly based on their income.
- Nearly 90% of student loan borrowers have a student loan balance in excess of $ 10,000 in income-oriented repayment plan, while approximately 40% have a student loan balance in excess of $ 50,000.
Biden Supports Financial Incentives But Did Not Cancel Student Loan Arrears
President Joe Biden has been a proponent of incentives to help Americans respond to the Covid-19 pandemic. Through measures such as incentive checks and increased unemployment benefits, Biden is pushing for direct checks to those most in need. The researchers found that “fiscal incentives are most effective when targeted to those most likely to spend, such as those with low incomes or those who have recently lost income.” However, they argue that student debt cancellation does the exact opposite, distributing money primarily to those most likely to to rescue and spends the least. How does student loan cancellation compare with incentive checks and increased unemployment benefits? The researchers estimate that savings from a student loan borrower with lower debt repayment rates will only be about 50% as effective in boosting demand as extended unemployment benefits, and 20% less effective than incentive checks. “Given the high savings rate, massive development incentives, constrained demand, supply constraints, inflationary pressures and expectations of a strong economic recovery, there will be little room for additional cash injected into the economy. To the extent that this leads to new spending rather than savings, it could lead to additional inflationary pressures (especially in the short term). ”
As Biden and Congress debate the future of student loan cancellations, the good news is that Biden has canceled $ 3 billion in student loans. It is likely that Biden will continue to push for targeted student loan cancellations, but there is no guarantee that there will be any large-scale student loan cancellations. So make sure you have a clear student loan repayment strategy. Here are some popular options:
Student loans: additional information
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