What if the entire $1.5 trillion in outstanding U.S. student loan debt was wiped off the books, no questions asked?
Blanket student loan forgiveness for all Americans is exactly what magazine publisher and editor Katrina vanden Heuvel proposed in a June 19 column for the Washington Post.
At first glance, this seems like a good idea. After all, student loan debt is causing millennials’ net worth to plummet, and many student borrowers have put off milestones such as homeownership because of their debt.
But would it be an economic boon for our country? And what obstacles could come up as a result of massive one-time student loan forgiveness? Let’s take a look at some of the ramifications.
The economic impact of massive student loan forgiveness
More than 44 million Americans have student loan debt, so the economic effect of forgiving their outstanding balances could make a difference. That’s according to Aaron Swisher, a Democrat running for the U.S. House in Idaho’s 2nd Congressional District.
“These folks spend a certain amount of money on their student loan payments each month,” said Swisher, who has a background in economics. “Without this debt, they’d be able to spend their money on other things, like cars and homes and entertainment.”
Debt cancellation could result in a boost to the U.S gross domestic product (GDP) of, on average, between $86 billion and $108 billion a year, according to a paper published by the Levy Economics Institute.
Others, though, aren’t as optimistic about what complete student loan forgiveness would mean for the economy.
“Something in the neighborhood of $80 billion a year in the economy isn’t really that much of a dent when you think about it,” said Mark Kantrowitz, an education policy expert and the vice president of research at Savingforcollege.com. “We’re talking about a GDP of right around $19 [trillion] or $20 trillion a year.”
Another long-term economic concern, said Jason Delisle, a resident fellow at the American Enterprise Institute, deals with taxes.
“There would be some economic gain, yes, but at the same time, what if the government has to borrow to pay off a portion of it?” Delisle said. “Someone would have to pay for it later, maybe with higher taxes down the road.”
Student loan forgiveness: Morality and fairness
“There are other issues at play here, including the morality of it,” Minsky said. “You have to look at some of the fairness issues and what this means for students in the future.”
While Swisher, the Idaho candidate, acknowledged the potential economic and personal financial benefits of wholesale student loan forgiveness, he still doesn’t think it’s a good idea. “Morally, if you take on a debt, I think you should pay it,” he said.
However, Swisher added that “if you’re going to compare policy issues, it’s morally better to forgive $1.5 trillion in student debt than to give the wealthy a tax break that will cost us more than $1 trillion in the next 10 years.”
Delisle pointed out that many of those with student loans make efforts to repay their debt early, and it’s not fair to penalize them. “If you’re paying down loans aggressively, working an extra job or postponing a purchase like a car or house, you look like a sucker,” he said.
Not only should you repay what you owe, said Beth Akers, a senior fellow at the Manhattan Institute, but you should also look at the policy incentives and whether a one-time student loan forgiveness program is fair to future students.
“First of all, how do you tell students starting college next year that they have to wrack up this debt, but if you had gone four years ago, it would have been free?” said Akers.
Akers went on to suggest that this proposal doesn’t address the underlying problems in paying for college. She pointed out that some students might take on more debt than they would have otherwise, hoping to benefit from a similar reprieve in the future. That, in turn, could lead educational institutions to further increase prices, because they would know that people are willing to take on the debt.
So if wiping out all of the student loan debt isn’t the answer, what should policymakers do?
Alternatives to universal student loan forgiveness
There are ways to ease the debt burden on borrowers — without sweeping student loan debt forgiveness.
1. Start with existing repayment programs
Rather than wiping out all of the student debt, Akers said we should start by looking at the programs already in place to help those struggling with student loans.
“Income-driven repayment (IDR) offers a robust system for those who can’t afford their payments,” said Akers. “We need to help more borrowers understand their options so they can get relief when they can’t afford their payments.”
Delisle agreed, pointing out that loan forgiveness on an IDR plan is possible after 20 or 25 years. “All of this is done while keeping your payments up to date and without negatively impacting your credit score,” he said.
2. Bolster Pell Grants
Rather than forgiving debt after the fact, Kantrowitz would like to see improvements made to the Pell Grant program.
“Research indicates that the Pell Grant increases enrollment and graduation rates,” said Kantrowitz. “People would see better-paying jobs and put that [money] back into the economy.”
According to Kantrowitz, increasing the amount of the Pell Grant could potentially result in the equivalent of a 14% annualized return on investment over the next 40 years. “There’d be less debt burden and more people able to handle the debt they do have, as well as more in tax revenue,” he said.
3. Include student loans in bankruptcy discharge
“There’s no reason for student loan debt to be treated differently than other types of debt,” said Minsky. “We don’t force people to remain in extreme debt to the detriment of their lives with anything else. Bankruptcy can offer those who need it a fresh start.”
Rather than being a free ticket to avoid repaying student loans, Minsky pointed out that there are plenty of deterrents in place when it comes to bankruptcy proceedings. These include a negative impact on your credit, a degree of stigma, and the fact that some types of bankruptcy require additional monthly payments from borrowers.
4. Encourage livable wages
A bigger issue is the fact that, even though there’s been some recent wage growth, pay has been stagnant for so long that many Americans haven’t been able to keep up with inflation, said Swisher. He pointed to a recent report from the National Low Income Housing Coalition illustrating that there’s no state in the U.S. where someone working full time on minimum wage can afford a two-bedroom apartment.
“Our economy produces enough that an average worker should be making $100,000 a year,” Swisher said. However, he acknowledges that some jobs would clearly pay more than others. “People would be surprised at what should be their share, according to what the economy produces — and if they were getting that, student loan debt wouldn’t seem so overwhelming.”
What you can do about student loan debt
For now, it doesn’t look like you can expect massive student loan forgiveness. However, there are steps you can take to reduce your education debt load:
- If you aren’t already in college, consider going to a less expensive school and applying for scholarships. Even if you need student loans to close the gap, you won’t need to borrow as much.
- Consider refinancing your loans to a lower rate if you have good credit. You might be able to get a more manageable payment and reduce the interest you pay.
- If you can’t afford your payments, talk to your loan servicer about getting on an IDR plan.
- Look for side hustles to increase your income. That way, you can pay down your debt faster.
And if you have an opinion about forgiving $1.5 trillion in student loan debt or other policies aimed at helping borrowers, track legislation related to higher education and contact your representatives to let them know what you think.
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
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2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.57% – 6.97%1||Undergrad & Graduate|
|2.47% – 6.99%3||Undergrad & Graduate|
|2.68% – 8.77%4||Undergrad & Graduate|
|3.24% – 6.66%2||Undergrad & Graduate|
|2.61% – 7.35%5||Undergrad & Graduate|
|3.01% – 9.75%6||Undergrad & Graduate|