Contributing Writer: Emily Wang | May, 2022
In early October 2021, President Joe Biden proposed changes to the former Public Service Loan Forgiveness (PSLF), Total and Permanent Disability (TPD), and Borrower Defense programs, making it easier to satisfy certain loan requirements. The proposed changes will expand who is eligible for loan forgiveness, while also adjusting rejected payments and allowing more types of federal student loans. Biden wants to get people the relief they deserve within categories of public service, disability, or fraud by their schools. As of late January, the PSLF among other programs has already relieved $1.7 billion in private student loan debt¹. Eventually, he hopes to relieve $11.5 billion, acknowledging that America is struggling. However, he is still barely making a dent in the $1.6 trillion student debt crisis².
And something must be done. Rising costs of higher education have been an issue long before the pandemic. As demand for higher education has been increasing, supply has remained stagnant, with institutions not being able to keep up with the growing number of students. Higher applications and idle enrollment numbers between 1970-2011 have driven the cost of tuition, room and board, and all other external costs up³. This has changed during the pandemic, as costs have also stayed the same with decreased demand within enrollment. However, costs were still high to begin with. The pell grant is a need-based federal subsidy targeted for students going to college. Figure 1 shows the change in value of the Pell grant if it were to be doubled, proving how much money must go towards supporting the high cost of education. Due to many factors, including lack of income, unemployment, and disability, rates of default have also been increasing. As of June 2021, an average of “15% of student loans are in default at any given time” and “11% of new graduates default in the first 12 months of repayment⁴”. For the national economy this is devastating, impeding those that have defaulted from being financially stable and participating in regular consumption and investment.
This is why policymakers have been looking to student loan forgiveness programs to solve short-term issues of default. Amidst Biden’s new plan, many different studies have examined the implications of mass forgiveness. From a mistake made by the National Collegiate, researchers Di Maggio, Yao, and Kalda, looked at a random instance of debt forgiveness. The National Collegiate is one of the largest owners of private student loans. However, in 2016 and 2017, National Collegiate was unable to prove chain of title or historical record of ownership in the loans, leading to a mass amount of loan cancellation⁵. In this instance, they were able to study the effects on labor markets and future financial decisions made by the borrowers. In their research, they discovered that income increased by an average of $3,000 over a three-year period after the discharge. To put this into context, the mean salary of a person would make this amount in 1.5 months. There were also significant increases in general for borrowers’ geographical mobility, probability of changing jobs, and development of deleveraging. Financially, the rate of delinquency for the treated borrowers dropped, with an average decrease of about 24% relative to the control group⁶. Those who benefitted from the debt discharge were able to contribute more to housing, labor, and other markets, while also avoiding future overhang.
But to what extent should the government support student loan forgiveness? Alongside the Biden administration, many Democratic policymakers are still proposing different levels of loan cancellation. Pointing to the biggest timeline uncertainty in Biden’s plan, Senators Elizabeth Warren, Chuck Schumer, and Bernie Sanders all have their own insight. As of January of 2022, President Biden has extended his student loan relief plans until May 1, 2022. However, for the borrowers contributing to the large proportion of the debt crisis, this plan is only a temporary solution. Once May comes around, student loan debt will continue to persist at their starting rates¹. Compared to Biden’s current plan with loan forgiveness, Sanders has proposed an all-encompassing student debt forgiveness. By eliminating all student debt, all the benefits would apply to every person that has borrowed. Costing $2.2 trillion, he hopes to use a Wall Street speculative tax to pay for it⁷. But why eliminate all debt when those with the largest amount of debt are those who spent the most time in school and have higher degrees? Because of this, many people think that a flaw of the student cancellation plan is the people that would get their debt relieved are people that can afford to make that money back in the future.
Therefore, Warren and Schumer have proposed a targeted loan forgiveness program, canceling up to $50 thousand for household incomes that are less than $100 thousand. Above this, households will receive $0.33 dollars less in debt cancellation for every dollar of income above $100 thousand, eventually costing about $640 billion⁸. This way, despite the still high cost of cancellation, households that need loan forgiveness the most will benefit.
The reality of today’s America is that many students and former students would benefit from some sort of loan forgiveness, despite the high cost. Using Moody and Fair simulations, one paper was able to put loan forgiveness in context, and analyze its macroeconomic effects. The Moody model has about 1800 variables and uses Keynesian assumptions for the long run while the Fair model has 225 variables and uses Keynesian assumptions throughout the long and short run. This means that with inflation Fair will find that the more accurate relationship between inflation and unemployment is nonlinear as opposed to Moody⁹. The biggest critique of large cancellation plans is the expense, where larger government debt results in weaker economic capacity with higher inflation and less investment. As you can see in Figure 2, with the use of the two simulations, researchers were able to find that the highest inflation peak was at about 0.3 percentage points while the other simulation had inflation peaking at a low 0.09 percentage points. Inflationary pressures from student loan cancellation were discovered to be almost negligible. This means that for the borrower, a promise to eventually cancel loans when they are due, as opposed to right away, adds implicit income no matter what. The financial burden will shift to the federal government, but the government can choose to incur this payment later as opposed to all at once. Just as mentioned earlier, this implicit income will bolster people to contribute more to the different economic markets.
At the end of the day, student loans are still a very important way for people to invest in themselves as well as their future. Getting a higher education increases the likelihood of earning a higher income later on. However, for borrowers who are close to default, loan forgiveness still is the best plan. There is a feasible reasoning behind Biden’s attempts to combat student loan debt, but in the end, more must be done. The money is not being paid back either way, and the federal government will have to incur the dead weight. It is unclear if there is an option that ends in a win-win. However, targeted loan forgiveness seems to be the most accessible and most plausible solution. Using data from different research papers, starting off with an expansion of the federal Pell grant and forgiving $10 thousand for each borrower of lower-income households will still have positive effects on the economy. But in the grand scheme of American politics, there are many other high-expense, debt driving policies that need to be prioritized. Student debt is just one of them.
REFERENCE
- Lake, Sydney. “More than $13 Billion in Student Loans Has Been Forgiven in the Past Year-Here’s Who Gets It.” Fortune, Fortune, 20 Jan. 2022, https://fortune.com/education/business/articles/2022/01/20/more-than-13-billion-in-student-loans-has-been-forgiven-in-the-past-year-heres-who-gets-it/.
- Minsky, A. S. (2021, November 2). Biden’s $11.5 billion in student loan forgiveness: Some is automatic, some is not. Here’s a breakdown. Forbes. Retrieved November 10, 2021, from https://www.forbes.com/sites/adamminsky/2021/11/02/bidens-115-billion-in-student-loan-forgiveness-some-is-automatic-some-is-not-heres-a-breakdown/?sh=36ddf2d97b70.
- Li, H. (2013). The Rising Cost of Higher Education: A Supply & Demand Analysis (thesis).
- Hanson, M. (2021, July 25). Student loan default rate. Education Data Initiative. Retrieved November 10, 2021, from https://educationdata.org/student-loan-default-rate.
- Cowley, Stacy, and Jessica Silver-greenberg. “As Paperwork Goes Missing, Private Student Loan Debts May Be Wiped Away.” The New York Times, The New York Times, 17 July 2017, https://www.nytimes.com/2017/07/17/business/dealbook/student-loan-debt-collection.html.
- Maggio, M. D., Kalda, A., & Yao, V. (2019). Second chance: Life without student debt. National Bureau of Economic Research , 1–76. https://doi.org/10.3386/w25810
- Sanders, B. (n.d.). Free college, cancel debt. Bernie Sanders Official Website. Retrieved November 10, 2021, from https://berniesanders.com/issues/free-college-cancel-debt/.
- Chénier, R. C., Shapiro, T., Seamster, L., & Sullivan, L. (2019, April 18). Experts Letter to Warren.
- Fullwiler, S., Kelton, S., Ruetschlin, C., & Steinbaum, M. (2020). The Macroeconomic Effects Of Student Debt Cancellation. Levy Economics Institute, 1–68.