President Joe Biden (Photo by SAUL LOEB/AFP via Getty Images)
Student loan cancellation won’t stimulate the economy, according to new research.
Here’s what you need to know.
Student Loans
Supporters of student loan cancellation say student loan cancellation is a perfect financial stimulus: cancel $50,000 of student loans, and student loan borrowers will have more money to spend on local businesses. Sen. Elizabeth Warren (D-MA) and Senate Majority Leader Chuck Schumer (D-NY) have been vocal supporters of student loan cancellation as a means of financial stimulus. However, according to new research from the Committee for a Reponsible Budget, both total student loan cancellation and partial student loan cancellation will have a minimal effect on the economy. Here’s what they found:
- Total student loan cancellation: only $0.08 to $0.23 of economic activity for every dollar of student loans cancelled.
- Partial student loan cancellation: $0.02 to $0.27 of economic activity for every dollar of student loans cancelled.
- Student loan cancellation of $10,000: results in an economic multiplier of only 0.13x.
- Student loan cancellation of $50,000: results in an economic multiplier of 0.10x.
This means that if you cancel all student loans, then only 8% to 23% of the amount of student loan debt cancelled would stimulate the economy. If you cancel some student loans, then only 2% to 27% of the amount of student loan debt cancelled would stimulate the economy.
3 Reasons student loan cancellation doesn’t stimulate the economy:
- Due to income-driven repayment plans, student loan cancellation has minimal impact on impact cash flow;
- Student loan cancellation is poorly targeted to those less likely to spend; and
- The current state of the macroeconomy given supply and demand constraints
Here are the details.
Student loan cancellation and stimulus
Here’s how much partial student loan cancellation would impact the economy, according to research:
Student loan cancellation: $10,000
- completely eliminate student loans for 15 million borrowers
- partially cancel student loans for 28 million would cost $210 to $280 billion.
- would reduce annual student loan payments by $18 billion per year (after temporary student loan forbearance ends)
- even after three years, the savings would be $54 billion, which is about 20% – 25% of the amount of student loans cancelled
Student loan cancellation: $50,000
- completely eliminate student loans for 36 million borrowers
- partially cancel student loans for 7 million would cost more than $950 billion.
- would reduce annual student loan payments by $55 billion per year (after temporary student loan forbearance ends)
- even after three years, the savings would be $165 billion, which is about 17% of the amount of student loans cancelled
Student loan cancellation and stimulus
Why student loan cancellation doesn’t really impact cash flow
According to the research, student loan cancellation doesn’t really impact cash flow. Here’s why:
- $50,000 of student loan cancellation doesn’t mean that a student loan borrower now has $50,000 to spend in the economy.
- Instead, a student loan borrower would save their student loan payment each month, which could range based on their student loan balance, but could be several hundred dollars (not $50,000).
- Here’s a surprising statistic: nearly 50% of all student loan dollars are connected to non-repaying borrowers either in school, student loan delinquency, student loan forbearance (separate from the current temporary student loan forbearance ddue to the Covid-19 pandemic), student loan deferment or student loan default.
- And among those student loan borrowers in student loan repayment, approximately 40% of the dollars come from income-driven repayment plans. Unless their student loan debt is completely or mostly cancelled, these student loan borrowers would continue to make student loan payments each month based on their income.
- Almost 90% student loan borrowers in an income-driven repayment plan have student loan balances above $10,000, while approximately 40% have student loan balances over $50,000.
Biden has supported financial stimulus, but hasn’t cancelled student loan debt
President Joe Biden has been a proponent of stimulus to help Americans in the response to the Covid-19 pandemic. Through measures such as stimulus checks and enhanced unemployment benefits, Biden has championed providing direct checks to those most in need. The researchers found that “fiscal stimulus is most effective when it goes to those most likely to spend, such as individuals with low incomes or those who recently experienced a loss in income.” However, they argue that student debt cancellation does the exact opposite by distributing money mainly to those most likely to save and least likely to spend. How does student loan cancellation compare to stimulus checks and enhanced unemployment benefits? The researchers estimate savings from a student loan borrower having lower debt repayment will only be about 50% as effective at boosting demand as expanded unemployment benefits and 20% less effective than stimulus checks. “Given high levels of savings, massive stimulus in the pipeline, pent-up demand, supply constraints, inflation pressures, and expectations of a strong economic recovery, additional cash injected into the economy will have few places to go. To the extent that it leads to new spending – as opposed to saving – it is likely to result in additional inflation pressures (especially in the near term).”
As Biden and Congress debate the future of student loan cancellation, the good news is that Biden has cancelled $3 billion of student loans. It’s likely that Biden will continue to pursue targeted student loan cancellation, but there is no guarantee that there will be any wide-scale student loan cancellation. Therefore, make sure you have a clear strategy for student loan repayment. Here are some popular options:
