This week President Biden announced that student loan forbearance would once again be extended until January 2023. This marks the sixth time that payments have been paused since March of 2020! But that was not the story of the day. The President’s piéce de résistance was the announcement of student loan forgiveness of up to $20,000 for individuals making less than $125,000 per year.
Because this announcement is so fresh, it remains to be seen what will happen next. Many contend that the President does not have the power to forgive $300 billion dollars in federal loans with the stroke of a pen. Ratification of this plan may be pushed to Congress, and if not Congress, the Supreme Court may have to step in with a ruling. But, for the sake of this discussion, let’s say that these loans are forgiven in accordance with the announcement.
The merits of such action are the subject of heated debate. While some believe that the President “did not go far enough,” others view this announcement as the fulfillment of one of the President’s core campaign promises. Many believe that forgiveness of these loans will only add fuel to the inflation fire that the Federal Reserve is currently attempting to curtail. Further, many argue that simply forgiving existing loans only puts a band-aid on the broken federal student loan system rather than addressing the core issues. The arguments for and against student loan forgiveness are innumerable. Rather than debate these qualitative issues, we will focus on the numbers.
The Committee for a Responsible Federal Budget (CRFB) is a non-profit public policy organization that provides insight and research on the administration of the Federal budget. And, according to their analysis, the proclaimed forgiveness plan does not look good.
First of all, the plan is estimated to forgive a total of around $300 billion dollars in outstanding debts, effective immediately. That figure is equal to the estimated deficit reduction created through the “Inflation Reduction Act” over the next ten years. Effectively, this forgiveness negates any new federal revenues from the “inflation” legislation.
But does the forgiveness stimulate actual economic growth? According to the CRFB, in a low-inflation economy, for every dollar in debt forgiven, approximately 13 cents flow back into the economy. As experts in this subject matter, the CRFB claim that this figure is a very low return on investment as compared to other stimulus measures enacted over the last several years. Furthermore, as you are likely well-aware, we are in a high-inflation environment which means that the stimulative effect is even more muted.
When it comes to addressing the core issue (the accumulation of such substantial debts in the first place) the CRFB estimates that the cumulative student debt will return to present levels in just 5 years (adjusted for inflation). From there it will continue to grow barring more fundamental changes to the student loan system.
At the end of the day, most Americans would agree that an ever-present and ever-growing +$1.5 trillion student debt total is an issue. Whether you place culpability on the federal government, the educational institutions, the students, or some other party, we can agree that change is necessary. This probably just isn’t the magic bullet.
Saving for college is difficult whether doing it yourself or planning for your children and grandchildren’s future. If you have questions about how best to prepare for your family, we are more than happy to assist you in plotting the best path forward. Give us a call or send a message today.
Source: CRFB.org blog – Everything You Need to Know About Student Debt Cancellation
