Sunday, 29 September 2019

Student Loan Forgiveness: Can The US Cancel Student Debt?

Student Loan Forgiveness

Americans owe $1.57 trillion in student debt. That might be a hard number to wrap your head around. What it comes out to is $20,000 to $25,000 for the typical borrower. More than 600.000 people carry higher burdens of $200,000 or more. Even people over age 60 had $86 billion in student debt in 2017, in part to help children or grandchildren get through school. 

Source FRENY consumer credit panel/equifax

Altogether, it's more than all the outstanding credit card debt in the country. 


  • 92% of student debt was held by the US government as of Q4 2018.


Matthew Chingos: Said, 

I think there is a critical mass of folks who hope someone will do something about it. And this is a case where because the federal government holds about 90% of all outstanding student debt in the country, it's easier to make a case for them to do something about it. Whereas if everyone didn't want to pay their car loan or their mortgage, it's harder for the government to do something about that.

But there are questions about who would benefit. 


  • 34% of student loan debt is held by the top income quartile.

What It Would Mean To Cancel Student Debt

Let's Start at the Beginning.

Student debt has been around for a while but it's really boomed since the turn of the country.


Source: Federal Reserve bank of new york consumer credit Panel/Equifax

The government holding that much debt is an even newer phenomenon. As part of Obamacare, the government stopped insuring private bank loans and took a bigger role in lending directly. The Obama administration hoped the move would save money for the government and help offset the costs of Obamacare. 

During the recession. As the federal reserve keep interest rates at record low levels, students could borrow at a pretty good rate. By 2013, crises for lower interest rates grew louder. 

Congress ended up passing rare bipartisan legislation to cut rates for students borrowers, but they were still significantly higher than what banks paid. Today, interest rates on various federal loan range between 5% and about 7.5%. Higher than the average 30-year mortgage rate.


Beth Akers: Said,

We've seen a dramatic increase in the amount that students are borrowing to go to college. Obviously, if individual students are borrowing more becuase education is more expensive but we are also seeing that more people are borrowing to go to college.

If you think of education as an investment, the return on that comes from the increases in employment opportunities and earnings. Generally, more than outweigh the upfront costs. So, where is the problem? Where is the system kind of breaks down is that we have a tremendous problem with college completion in this country.

A third of people, a very large number of people in our economy are paying for college, in many cases taking on debt to do that, but then not getting the earning bumps that come along with having a degree, which means they are having a hard time paying back their debt.

Even though it's unclear how much it has hit the economy, experts believe the high level of student debt will increasingly be a drag on growth. And for the most part, it's almost impossible to have student debt forgiven even in bankruptcy.



Since the government is charging interest on these loans, it stands to make a potential profit off of student borrowers. That profit number is disputed based on different accounting methods. But many believe the government should cut interest rates to subsidize loans instead of raising revenue.


Bernie Sanders: Said,

We should not be profiteering off working families who are trying to send their kids to college.



This all brings us to the questions: 

Could The Government Forgive American's Student Loans?

The simple answer is "yes".

The hard part, it would take a new law in a potentially divided congress. 2020 Democratic candidate Elizabeth Warren is the first one to put out a detailed plan.


  • The senator's proposal would eliminate up to $50,000 in debt for people with household incomes under $100,000 while giving smaller amounts of relief to people with higher incomes. 

  • Entrepreneur Andrew Yang and Senator Cory Booker, have also said they would push for loan forgiveness plans.

Erasing student loans would likely be an economic stimulus.


Beth Akers: Said

Forgiveness of the outstanding student loan balances with would without question be an economic stimulus.

The question is what is the most efficient way of providing stimulus to the economy. And my sense is that forgiveness of student loan debt is not the most efficient option. The ones with the most debt are the ones who tend to have the highest earning potential. If what we want to do is stimulate the economy we can think of better more efficient ways to do that than a sweeping program that forgives existing student loan debt.



One study estimates government forgiveness of all the loans and holders could boost real GDP by around $100 billion. 

Under Warren's proposal, debt relief would end at $2500,000 in income. Her plan would cost one and a quarter trillion dollars over 10 years.

There already are ways for people to get loan relief in the U.S. Many borrowers have income-based repayment plans which can cap monthly loan payment at about 10% of income. But......


Beth Akers: Said,

What we are seeing is that students who really need the benefit of these income adjusted repayment plans aren't aware that they exist or if they are aware they exist are having a hard time enrolling in them. 



In other countries, college is cheaper, to begin with. But on top of that, they found creative ways to help the people that really need relief. 

Australia

Like in Australia. Student loan payment processed through the tax system

It's done through the tax system. When your taxes get withheld from your paycheck every week they also take out your student loan payment. And what that means is when you lose your job the government doesn't come after you to pay your taxes.

You don't pay your taxes 'cause you are not making money anymore because you lost your job. So, this works the same way with your student loans in countries like Australia.

UK

In the UK, students don't have to start making payments on their debt until they make a certain amount of money.

Sweeden

Borrowers have a longer period to pay back loans than they do in the U.S.

On the other side, the Trump administration had been more focused on reducing the cost of college and holding schools more responsible for education outcomes. 

There is some evidence that the cost of higher education has started to plateau. But that won't help the people already saddled with thousands of dollars in debt. 

Sources:
CNBC
U.S. Department of Education,
Urban Institue, College Board,
New York Fed, FRED, NSCR, Federal Reserve

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