5 questions about student loan forgiveness

Editor’s Note: A version of this article was originally published on February 18, 2021.

What if your student loans could just … disappear?

The idea of ​​student loan cancellation is not new, but it has gained real momentum and widespread support in recent years. And while President Joe Biden has indicated his support for forgiving up to $ 10,000 in loans, he has not committed to specific plans to do so amid a deeply divided Congress.

However, the Biden administration has taken some recent steps to help borrowers: On the one hand, the U.S. Department of Education extended the pause on student loan payments, interest, and charges until 31st. January 2022. The department also recently announced that it will hold public hearings to rewrite current federal student loan programs, with the goal of improving borrowers’ access to repayment and forgiveness programs (and possibly allowing Scholarship eligibility). Pell for incarcerated persons).

But some Democratic lawmakers and progressive groups have urged the president to act faster with a broad student loan forgiveness through executive action. Not only that, but a more generous resolution sponsored by Senate Majority Leader Chuck Schumer (DN.Y.) and Sen. Elizabeth Warren (D-Mass.) Calls for canceling up to $ 50,000 in student loans instead of $ 10,000.

According to Warren and others, paying off up to $ 50,000 in student loans should be a high priority because it would provide real relief to debt-burdened households, lift our struggling economy, and close the racial wealth gap during a period of “history and overlap. “. crises ”that have disproportionately affected communities of color.

Could it really do so much good to forgive student loans? And who would benefit the most? Senior Policy Analyst Lia Mitchell and I take a closer look at the numbers to determine the impact of paying off student loans at different levels on both individual households and the broader economy.

1. Could Loan Cancellation Help Reduce the Racial Wealth Gap?

According to data from the Consumer Finance Survey, nearly a third of households have student loan debt.

When you look at the demographic details of who owns that debt, some clear patterns emerge. One is that Black / African American households have much more student debt than borrowers of other races.

The graph below shows how many households in different racial groups have student debt (in any amount) and how the numbers would change with loan forgiveness in the amount of $ 10,000 and $ 50,000.

Clearly fewer people would owe money after loan forgiveness, but would politics really help level economic inequality between races? Possibly. The New York Times he cited an analysis by the Roosevelt Institute that indicated that the total percentage of black households that would benefit would be higher than white households. Not only that, the researchers found that the relative gains to the net worth of those households are much higher.

But would the policy really bring relief to borrowers who need it most? Something like. We looked at the breakdown of households with student loan debt by income quartile now, as well as these breakdowns after $ 10,000 and $ 50,000 of loan forgiveness.

Looking at changes in the lowest and highest income quartiles, the $ 10,000 forgiveness eliminates student debt for 34% of households in the lowest quartile and 29% of households in the highest quartile.

Forgiving $ 50,000 eliminates the debt of 85% of households in the lowest quartile and 70% of households in the highest quartile.

In reality, a large percentage of the money would go to higher-income households, because a higher percentage of these households have student loan debt to begin with. But the forgiveness programs will also go a significant amount of money to more low-income families to help them overcome the burden of their debts.

2. Could Loan Cancellation Help Boost Retirement Savings?

It may seem obvious to say so, but canceling debt frees money in people’s budgets that they can spend in other ways. One of the things people can do with this money is invest it for their retirement.

An analysis from Brandeis University also mentions saving and investing as a benefit of student loan repayment: “The greater ability to save and build assets that involves a lower debt burden would generate additional wealth and be important in the life of debtors “.

And according to SCF data, only half of all US households have money saved for retirement.

An obvious counterpoint is that we don’t really know what people will do with the extra money in their budgets from canceled loans. Maybe they will save him, maybe not. The other argument is that the extra money is already there: Remember that President Biden has already extended the suspension of loan payments and interest on all federal student loans until February 2022.

3. Could canceling loans benefit the economy?

It may be optimistic to assume that paying off student loan debt will be the solution to closing the retirement savings gap in this country. Surely, not everyone will wisely invest this additional cash flow in a retirement savings account. They will simply spend more.

But guess that? Consumer spending is 70% of our economy. So the money you spend is actually much more “stimulating” to the economy than the money you save.

Higher consumer spending could stimulate the economy in a number of ways. Calling it a “no-brainer for our economy”, Warren notes that canceling loans will also help individual borrowers because it could lead to better credit scores, which in turn allows borrowers to qualify for cheaper loans. Being able to borrow money on more favorable terms leads to higher home buying and home stability rates, higher college completion rates and greater business training, Warren said.

Opponents of the idea argue that loan forgiveness is very expensive and not a particularly effective way to stimulate the economy, at least in the short term, because it doesn’t free up as much cash on hand as it seems. Instead of giving an average household $ 10,000 or $ 50,000 to spend, it would relieve them of their monthly interest and principal payments, which typically add up to $ 200- $ 300 per month for the typical borrower in repayment.

And, as mentioned above, thanks to the extension of student loan repayment relief, that money is already in people’s budgets through January 31, 2022.

4. Would you have to pay taxes on the amount of the canceled debt?

Maybe. According to the IRS, in most cases where a lender cancels or forgives your debt for less than the amount you owe, the amount of the canceled debt is taxable and you must report the canceled debt on your tax return to the year the cancellation occurs. .

The IRS adds that canceled debt may not be taxable, however, if it can be legally excluded from gross income. (As part of their proposal, Schumer and Warren have asked the IRS to waive the tax liability for forgiven loans, through the Internal Revenue Code of 1986, which would prevent the cancellation of the administrative debt from resulting in a tax liability. for borrowers).

5. What are some alternatives to loan repayment that would help low-income students?

Not everyone agrees that eliminating student debt up to a certain limit ($ 10,000 or $ 50,000) provides significant relief to those who need it most. A study by a Wharton finance professor and a professor at the Booth School of Business at the University of Chicago suggests that outright paying off student loans would actually increase economic inequality because most of the benefits will accrue to higher income borrowers.

They argue that for low-income people, balance forgiveness (and in particular partial forgiveness up to a cap) clears debt that was already scheduled to be paid under existing income-based repayment rules. For high-income people, however, it is a true gift.

An alternative to student loan forgiveness that would benefit more lower- and middle-class borrowers would be an extension of the government’s revenue-based repayment program, they say.

Another criticism of student loan cancellation is that it picks winners and losers – in other words, it does nothing to remove the burden of debt from past and future borrowers. Researchers from the University of California argue that doubling the amount of the Pell Grant, from $ 6,345 to $ 13,000, would be a more equitable way the government could help low-income students pay for college without having to pay their debts. .

In the end, it’s a policy choice that comes down to values, said Morningstar’s head of policy research Aron Szapiro:

“Some people feel that it is fundamentally unfair to pay the debt of some while doing little for those who avoided it or did not have the benefit of a college education. Others see a moral problem in letting millions of people, mostly young, fight for paying for an education that is a prerequisite for many careers and opportunities. “

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