- Biden rejected cancelling $US50,000 in student debt per borrower, but supports cancelling $US10,000.
- Insider broke down the maths of cancelling student debt at various thresholds.
- Experts said forgiveness could boost the economy and benefit minorities and low-income households.
- Visit Business Insider’s homepage for more stories.
Layla is in no rush to finish up her doctoral degree in educational leadership.
Graduating means she would have to start paying an estimated $US1,500 to $US2,000 per month in student loans, the 35-year-old, who asked to go by a pseudonym for privacy reasons, told Insider. They’re currently in deferment, meaning monthly payments aren’t required, but she’s still shelling out $US250 a month to try and stay ahead of her balance.
“Knowing that I will soon have a payment due larger than many mortgage payments can be daunting to think about,” she said.
She’s racked up several degrees in her quest to become a dean in higher education, including a masters in education and an MBA. But her debt â€” which has climbed to six figures â€” stems from her undergraduate and doctoral education. She didn’t originally borrow this much, but said she’s acquired about $US35,000 in interest alone at a 6% interest rate since first taking out loans in 2003 as a college freshman.
Layla is one of millions of Americans who would benefit from student-loan forgiveness.
President Joe Biden effectively rejected a plan put forward by Sens. Elizabeth Warren and Chuck Schumer to wipe out $US50,000 in student-loan debt per borrower on Tuesday, but said he supports supports cancelling $US10,000 per borrower. Additionally, Biden plans $US10,000 of student loan forgiveness a year for people working in public service jobs for up to five years.
With around 10 million people unemployed right now, forgiving $US10,000 per student loan borrower would be beneficial for millions of Americans.
Student loan debt makes up the second biggest share of household debt, according to the Brookings Institution. About 45 million Americans hold student loan debt with a total national outstanding amount over $US1.7 trillion. Borrowers with outstanding education debt typically hold between $US20,000 and $US24,999, according to the Federal Reserve’s 2020 US households report using 2019 data.
To determine the economic impact of student-loan debt cancellation, Insider spoke with six experts and economists, parsed through non-profit and government studies and reports, and dove into the data of national student debt.
Just $US10,000 in forgiveness could wipe out debt for millions
Eliminating $US10,000 of debt would help 15.3 million borrowers completely wipe out their outstanding federal student debt.
The US Department of Education’s office of Federal Student Aid has outstanding debt figures for federal debt borrowers, those who took out Direct Loans, Federal Family Education Loans, and Perkins Loans.
Based on fourth quarter 2020 data, loan forgiveness of $US10,000 would mean complete debt cancellation for 33.6% of borrowers, who have an outstanding debt of less than $US10,000 in federal student loans. It would also benefit the 9.6 million who owe between $US20,000 to $US40,000, the debt group with the largest number of borrowers.
However, researchers from the Centre for American Progress noted in their own analysis of how many borrowers would have their debt completely eliminated using last year’s figures that these shares may actually be lower “because some individuals who currently appear to have low debt levels are in school and are thus likely to end up with higher loan balances as they continue their studies.”
Student-debt cancellation could boost the economy
Bharat Ramamurti, a member of the Congressional Oversight Commission, recently tweeted out a thread that argues the benefits of cancelling student loan debt for these millions of borrowers based on previous studies and government data.
“The bottom line is that broad debt cancellation via executive order is popular, economically potent, and â€” most importantly â€” life-changing for millions of Americans struggling through this crisis,” Ramamurti wrote on Twitter.
One of the studies Ramamurti shared is a 2018 paper from the Levy Economic Institute of Bard College using 2016 data that looks at the effects of student loan debt forgiveness. The authors write that a one-time cancellation of the $US1.4 trillion outstanding student debt held would translate to an increase of $US86 billion to $US108 billion a year, on average, to GDP.
Cancelling student debt could also mean current monthly payments could go toward savings or other spending. Per the Federal Reserve report, those who make payments usually pay about $US200 to $US299 per month. Ramamurti tweeted that this “is like sending those people a check every month.”
He told Insider that with student loan forgiveness, that is essentially putting almost $US3,000 back in Americans’ pockets each year, which as a result could help boost the economy.
Indeed, forgiveness would benefit younger Americans who have been putting off milestones. A SoFi survey of 1,000 Americans ages 22 to 35 found 61% of millennials said they have delayed buying a house because of student-loan debt.
The Levy Institute also noted that beyond the effects seen in their models, forgiveness would help with both business and household formation.
“Of course, starting a small business means that there’s going to be more jobs available. Buying a home means there’s more demand for home construction and so on,” Ramamurti said. “And so it has all of these positive ripple effects throughout the economy.”
Affluent households won’t be the only ones who benefit
One of the biggest arguments against forgiveness is that it would mainly help higher-income households since they typically have more student loan debt.
Lowell Ricketts, lead analyst for the Centre for Household Financial Stability at the St. Louis Fed, agreed that affluent graduates would disproportionately benefit from student loan forgiveness. “Most borrowers typically have low balances under $US10,000 or $US20,000,” he told Insider in a November 23 interview. “Most of the total balance outstanding is held by high-balance borrowers.”
This cohort, who are typically in high-earning professions, hold two-thirds of all student debt, Ricketts said. For example, he added, students who owe over $US100,000 make up just 7% of student loan borrowers but own 37% of all student debt out there.
But that’s not to say low-balance borrowers wouldn’t benefit, Ricketts said. Forgiving $US10,000 worth of student loans would resolve the serious delinquency that 19% of this cohort has, he said. It would even “carve out an income-based repayment plan or a payment plan that is more workable” for borrowers with $US20,000 in debt, he said.
Based on 2016 Consumer of Survey Finances data, Matthew Chingos, vice president for education, data, and policy at the Urban Institute, wrote “the benefits to lower-income households would come almost entirely in the $US10,000 reduction in their loan principal, which will reduce their future loan burden but have a much smaller effect on their monthly cash flows. This is because they are less likely to be making payments on their loans, and payments made tend to be smaller.”
But debt cancellation for low-income borrowers as a share of their income is much higher than for wealthier individuals, Laura Beamer, lead researcher at the Jain Family Institute (JFI), told Insider.
Beamer has spent the past year studying inequality in student access to higher education in the US for JFI’s Millennial Student Debt Project. Her research found that in 2009, the lowest income zip codes across the country saw their student debt burdens go to 56% of their income; by 2018, it had risen to 94%.
“People who are low-income are going to be benefiting the most, even just looking at their debt-to-income ratios before and after debt cancellation,” she said. “Those getting $US10,000 in student loan relief, the impact for households as a portion of their income that would be freed up is dramatically greater for lower income households.”
Forgiveness would help narrow the racial wealth gap
It’s these lowest-income households, and communities of colour, that will gain the most from cancellation plans. Beamer said: “Progress on mitigating wealth inequality is one of the biggest effects of student debt forgiveness.”
Black students shoulder a heavier debt burden than their white peers: About 87% of Black students attending four-year colleges take out student loans compared to about 60% of white students. They also owe $US7,400 more on average than their white peers after graduating, per Brookings.
Post-college, it’s difficult for workers of colour to financially catch up. As the Economic Policy Institute wrote in its latest wages report, “average wages grew faster among white and Hispanic workers than among [Black] workers for all education groups from 2000 to 2019.”
Black borrowers under the age of 40 were also more likely to be behind on payments in 2019 than white or Hispanic borrowers: 26% for Black borrowers, 19% for Hispanic borrowers, and 7% for white borrowers, according to the Federal Reserve.
A paper by The Roosevelt Institute using data from the Fed’s Survey of Consumer Finances looked at what different levels of forgiveness would mean for debt relief for white and black borrowers.
The researchers found that if anything, $US10,000 is not enough, according to Suzanne Kahn, the director of education, jobs, and worker power and the Great Democracy Initiative at Roosevelt Institute, told Insider that the think tank.
While Kahn said the think tank doesn’t have a certain amount they suggest for debt forgiveness, an updated paper based on the latest data suggests that forgiveness of $US75,000, “would be a more appropriate level to increase household wealth, help close the racial wealth gap, and boost our struggling economy.”
It all ties back to Ramamurti’s argument that forgiveness wouldn’t just benefit the individual borrower, but the economy as a whole. A threshold could pull lower-end borrowers out of default and restore their credit scores and even help those not in default delaying the aforementioned life milestones.
Consider Layla, who said she’s had to weigh life decisions like buying a home, having a kid, and accepting a job against her debt. “Before any major or minor decision is made, I have to consider my student loans,” she said.
She said debt relief would open the door for countless opportunities and the hope that she could still create a viable future for herself and her family. “I would feel like I could breathe a little easier. Almost as if I had a second chance at my financial life to do things better.”