"the Influence Of Student Loan Debt On Career Trajectories" - Note: We published the following section on June 3, 2021 estimating the multipliers for paying off $10,000 and $50,000 in student loan debt, which can be found here. We estimate multiples of .02x to .27x with a median estimate of .13x for a $10,000 withdrawal and .10x for a $50,000 withdrawal.
Facing a weak economy still reeling from the effects of the COVID-19 pandemic, there have been several calls for President-elect Joe Biden to support the economic recovery by canceling some or all of the student loan debt.
"the Influence Of Student Loan Debt On Career Trajectories"
There is debate about whether the President has the legal authority to waive bills by executive order and whether it is generally good policy. However, one thing is clear: canceling student loans would be an ineffective method of recovery, providing a small increase in the economy close to the cost. Assuming the loans will be tax-free, we estimate an economic multiple of 0.08x to 0.23x.
Minimizing The Impact Of Student Loans
There are a number of benefits and costs associated with canceling student loans. But as a stimulus measure, the "bang for the buck" is much lower than many other measures being considered or for COVID relief already in place.
Stimulating the economy works by increasing overall spending when the economy is in a period of weakness. Yet forgiving student loan debt will have little effect on what is available to spend.
Total loan forgiveness would increase household wealth by about $1.5 trillion (costing the government the same), but that's not the same as sending $1.5 trillion in cash to households. Instead of giving the average family an extra $15,000 or $20,000 to spend, it would relieve them of their monthly interest and principal payments, which are usually $200 to $300 a month for the average borrower in repayment.
In other words, because borrowers often pay off their loans over 10, 15, or 30 years, debt forgiveness will increase their income by only a fraction of the total loan forgiveness.
The Significant Impact Of Student Debt On Communities Of Color
Our analysis of the student aid portfolio suggests that eliminating $1.5 billion in loans would translate to $90 billion or less in disposable income by 2021 and $450 billion or less over 5 years.
The elimination of only a certain amount of debt - for example by setting a $ 10, 000 or $ 50, 000 cap - will reduce costs and cash flow effects equally.
Those numbers are likely to overestimate new cash flows given the current tax law. Generally, the loan forgiveness amount is considered as income and is subject to tax. As Jason Furman, former Chairman of President Obama's Council of Economic Advisers, has pointed out, the immediate tax credits from this exemption may be greater than the immediate savings. Under this tax regime (which they have claimed could not be changed or is a misunderstanding of the current law), loan forgiveness may be possible.
On the other hand, the absence of future debt may cause some individuals and households to spend more by drawing on their savings or taking out another loan, a phenomenon known as the wealth effect. Empirical evidence shows that an increase in the value of a person's home or stock portfolio increases spending by 3 to 6 cents for every dollar of increase in wealth. This would translate to about $50 to $100 billion in additional spending. That's a small economic impact compared to the $1.5 trillion cost.
Who Benefits From Student Debt Cancellation?
Loan cancellations will not only provide less money to spend on households, but the money it provides will be misdirected from a stimulus perspective.
Stimulus dollars spent instead of saved provide a strong boost to near-term economic output. In general, those on low incomes or who have received a recent income shock are more likely to spend extra benefits. Yet the largest share of debt relief goes to high earners and those who saved their income during the current crisis.
Many of those most affected by the current economic crisis likely have little or no debt. More than 70 percent of the current unemployed workforce does not have a degree, including 43 percent who have never attended college. Currently, less than one-third of all student loans are held by households without a bachelor's degree and less than one-tenth are held by those without a college education. In fact, about two-fifths of all student debt is held by graduate homes. That group makes up less than ten of the total unemployed.
A recent Pew survey shows that most of the economic problems in this epidemic are concentrated in those with less education and therefore less (or no) student debt.
Mitigating The Growing Impact Of Student Loan Debt
Based on this data, it is unlikely that student debt relief will be well targeted at those who lose income. It is also poorly targeted at low income earners. The Brookings Institution recently estimated that nearly three-quarters of student loan payments in a given month (pre-pandemic) were made by those in the top two poverty levels. Only a tenth of the loan payment comes from the two lowest levels of poverty, which are the groups that tend to spend the most.
The minimum amount of payments by borrowers is very low due to the distribution of loans themselves. But that's because those struggling with student debt already benefit from lower payments under income-based repayment programs or, due to short-term income shocks, pandemic tolerances and deferment options.
With forgiveness dollars poorly targeted at potential spenders — whether based on income or loss of income — the cash savings for borrowers are unlikely to be multiplied. CBO recently estimated that the CARES Act rebate — which provided $1,200 per adult and $500 per child to nearly all families making less than $150,000 a year — had a multiplier of 0.6 x. Loan write-offs are less targeted than these discounts - which are relatively untargeted - and therefore likely to have a much lower multiplier.
Targeting can be improved somewhat by setting a loan forgiveness amount of, say, $50,000 or $10,000 (as in President-elect Biden's campaign plan); or through income targeting, but any type of loan forgiveness will be limited to those with a certain amount of college education that had school loans. Therefore, even sophisticated targeted reform is likely to be less stimulating than universal screening and less stimulating than targeted interventions such as extending unemployment benefits.
Can A 529 Plan Be Applied To A Student Loan?
Loan Forgiveness has very little overlap, and similar incentives can be provided through the Cost Division.
Assuming a 0.4x to 0.6x multiple from the additional income from loan forgiveness, combined with a 3 to 6 percent wealth effect, $1.5 trillion in debt relief would generate between $115 and 360 billion dollars of economic output during the current recession.
These multipliers are much lower than almost any other policy currently being considered or implemented for recent COVID relief. For example, CBO estimates that the most recent unemployment benefit expansion had a multiplier of 0.67x and the broad rebates had a multiplier of 0.60x – both of which will be higher in future legislation due to reduced public spending.
Debt cancellation is an even worse incentive than the alternative of continuing the current student aid policy. As of March 13, a combination of legislation and executive actions canceled nearly all student loan payments and forgiven interest accrued during that period. As a result, only 7 percent of student loans are currently being paid off—leaving most households with extra money to spend.
The Student Loan Debt's Impact On The U.s. Economy
The postponement is scheduled to end on December 31 but could be extended through the pandemic by executive action. The expansion of this policy will result in economic growth that will come from debt cancellation, but at a small fraction of the cost.
1 This assumes that all outstanding student loans will be forgiven, including those in the Federal Family Education Loan (FFEL) program. However, some of these loans held by private lenders may not qualify for cancellation and some or all of them may not.
2 The flexibility provided in paying off student loans through the use of option-based amortization means that withdrawing $10,000 will not result in a commensurate increase in cash flow. Currently, anyone with a student loan can sign up for a repayment plan that ties their monthly payment to their income. CBO estimated in February that nearly half of the dollars returned to the main “Direct Loan” program were made through income-based plans. So even without the current interest forgiveness and automatic forbearance, many people enrolled in Income-Driven Repayment plans won't see any change in their monthly payments. Sure, it will completely eliminate payments for those with less than $10,000 in debt, but for those with more, it will shorten their loan repayment period, not reduce the amount. That will not stimulate the economy in the short term. Well, of all the types of debt relief programs, the student loan program is the most exciting because the repayments are the most flexible.
3 Evaluation of stimulation should focus on its effect
For Nyc Women, Race And Generational Wealth Impact Student Loan Debt, Financial Security
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