WASHINGTON — Before deciding to cancel up to $10,000 of federal student loan debt, President Biden and his administration had been wrestling with the issue for months.
What’s made it such a hard question is that there is not just one student debt problem; there are dozens. They range from mega-loans for Harvard Business School degrees that yield Wall Street jobs with mega-salaries, to much smaller amounts borrowed to pay for vocational training that often proved almost worthless, if not an outright scam.
Some advocates of student loan forgiveness have argued that the overall economy would also get a boost by enabling debtors to become bigger consumers.
Most economists say the overall impact of reducing student debt will be modest, but others say forgiveness will enable the beneficiaries to move forward with their lives instead of being dragged down by burdens that — in many cases — are all but impossible to bear.
Below are answers to some questions. This article, originally published May 24, 2022, has been updated to reflect Wednesday’s news.
Since COVID-19 descended on the U.S. in March 2020, the White House, first under President Trump and then Biden, has put on hold the repayment requirement and interest accrued on federal student loans, providing relief to some 37 million people.
About 80% of all outstanding student loan debt, or about $1.38 trillion, was borrowed directly from the government, says Ben Kaufman, research director at Student Borrower Protection Center, an advocacy group. The rest came from banks and other private lenders, some of which are covered by federal guarantees.
Student borrowing for college, trade school and graduate work has skyrocketed in the last two decades, in large part due to soaring tuitions. Americans are now carrying more than triple the amount of student debt in 2006, when the Federal Reserve began tracking the data. That’s more than either the nation’s total borrowing on credit cards or for auto loans.
Federal student loan payments were paused in 2020, giving borrowers breathing room amid the pandemic. A plan to forgive $10,000 in debt may be coming.
On average, a borrower owes about $39,000 in education debt, but the median amount is about half that.
Biden’s plan would extend the current repayment moratorium until the end of the year, and the forgiveness of up to $10,000 in debt would be for those making less than $125,000 a year.
Canceling $10,000 would eliminate entirely the student debt for about a third of all borrowers, according to data from the College Board. Another one-fifth would stand to have their student debt balance cut by at least half.
But Biden doesn’t have authority to cancel private student debt. Millions of students also borrowed under the Family Federal Education Loan program, and most of that debt is owned by commercial banks.
All told, the New York Fed says 10 million people with student loans did not get relief from the payment pause, and most of them would be left out of Biden’s plan because their loans came from private lenders and legally the government cannot just erase them.
Among others who won’t benefit are those who’ve already paid off their student loans. And then there’s the question of fairness to the even larger segment of the population who never had any college debt because they never went beyond high school.
“Many of the people who are struggling the most [in the economy as a whole] are people who didn’t go to college at all,” said Sandy Baum, an economist at the Urban Institute.
On the surface, it would seem that lifting the weight of $10,000 for tens of millions of adults in their prime spending years would give a big boost to the economy.
In one recent study by Bankrate.com, about 7 out of 10 Gen Z’ers (ages 18 to 25) and millennials (26 to 41) who took out loans to finance higher education said they had delayed a major financial decision, such as having children or buying a car, as a result of that debt.
But while forgiving debt would certainly free up some cash to spend, economists widely agree that the impact to the economy would be small.
The U.S. economy is huge — $25 trillion in current dollars — and canceling $10,000 per student would reduce annual loan payments by only about $18 billion a year, according to the Committee for a Responsible Federal Budget. Most student loans are paid back over 10 to 30 years.
And some borrowers will want to use the monthly savings to pay down other debts, or just sock away the cash for emergencies.
“In the near term, it’s a small positive,” said Mark Zandi, chief economist at Moody’s Analytics. Longer term, it’s more complicated, he said. You’re shifting the burden from borrowers to other taxpayers, Zandi said, and it raises questions about fairness and moral hazards, like the temptation to borrow more because you think you’ll never have to pay it back.
Of course, the government funds many programs that may or may not benefit everyone economically — corporate tax breaks and farm aid and price supports, among many others.
It’s frequently been argued that the mountain of student debt has hurt the housing market. The National Assn. of Realtors, in a 2017 study, reported that the financial burden was such that younger borrowers delayed home-buying by several years.
To be sure, without student loans to pay back, people would have more money to save for a down payment. How much overall debt one has relative to income also is a factor in qualifying for a mortgage. And those who have defaulted on student loans — about 1 in 6 borrowers — will see a hit to their credit scores.
Still, experts say it’s hard to prove there’s a causal relationship between home-buying and people who have student debt versus those without it. And other research suggests that over time homeownership rates of college graduates with and without student debt are not significantly different.
But it made a difference to Grace Poulos, 24, who earned a bachelor’s degree in international politics from the University of Tampa in May 2020. She borrowed $26,000 in federal loans and figures she would have been repaying about $250 a month had it not been for the moratorium.
After college, Poulos moved back home in the Chicago area. Living rent-free with her family, she worked part-time and managed to save about $10,000. Last summer, she got a job as a data and policy analyst for a nonprofit in Tulsa, Okla., with a salary of $40,000. And in July 2021, she put down $6,000 on a $150,000 townhouse in downtown Tulsa.
Poulos said she would have qualified for a mortgage even if she had been paying back her student loan, but she’s not sure she’d have enough monthly income to meet her payments.
Currently her monthly expenses include about $880 for housing and $200 for a car loan. After paying for groceries, utilities and other bills, Poulos says, she may have $100 to $150 left over every month.
“I wouldn’t have any wiggle room for student loans,” she said.
Canceling up to $50,000 would eliminate all student debt for more than 80% of borrowers, but that would also have been very expensive for an already heavily indebted U.S. government. Experts estimate that such a plan would have cost the government about $1 trillion.
What’s more, the economic bang for buck wouldn’t be much bigger.
That’s because a lot more of the benefits would go to those who are better off financially and thus would be less likely to spend the extra cash.
That’s the problem with blanket loan forgiveness, analysts say. It’s poorly targeted and regressive.
Adam Looney, a University of Utah professor and former Treasury Department official, said universal loan forgiveness would benefit many whites who have “disproportionately higher income, from more affluent backgrounds, and are better educated.”
As social policy, larger forgiveness plans would not narrow the racial wealth gap, and Looney believes it could actually make such inequities worse in some ways.
He points out that students in high-earning fields such as dentistry, medicine and law rack up some of the biggest debt. Yet Black people are underrepresented in these fields.
Under present law, borrowers who are on the hook for federal student loans can sign up for a repayment schedule that’s based on their current incomes, rather than the amount of their debt.
That would ensure that borrowers would pay no more than, say, 10% of their discretionary income on student loans. If they become unemployed and have zero income, their monthly loan payment would drop to zero.
Income-driven repayment, as it’s called, has been in existence for some years, but just 32% of federal direct loan borrowers had enrolled in it as of last year, according to the College Board.
Some attribute the limited participation to paperwork and other hoops that borrowers must go through.
And the program does not apply to those who borrowed from private lenders, even though many of those loans are backed by federal guarantees.
Economists like the Urban Institute’s Baum have argued that repayment schedules should automatically be set on the basis of income.
“There are so many problems with the student loan repayment system; they should fix it,” she said.
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