What Would the Cancellation of Student Debt Mean for the Economy?
It seems like the state of the United States economy is on all our minds these days. High inflation. Rising interest rates. Declines in the stock market. For student loan borrowers, another economic event is looming – the end of the Covid forbearance for the repayment of student loans on August 31, 2022. With this date just around the corner, many politicians are urging President Biden to take measures to cancel some or all student loan debt. While the prospect of debt cancellation may make student loan borrowers happy, what would this mean for the overall economy? Would the cancellation of student debt really boost the economy? Would the economy really suffer if student debt was forgiven?
Those on the side of student debt cancellation state that borrowers are being held back from purchasing homes or cars or starting small businesses because they are so strapped with student loan debt. It is believed that if borrowers are able to make these purchases, it will boost the economy. It is also said by those in favor of debt cancellation that student debt contributes to racial and socioeconomic inequality.
Those against student debt cancellation claim that doing so will increase inflation, especially at a time such as now when inflation is being driven up by supply chain issues. If there is more discretionary income in a household, there will be more demand for goods that are in short supply. Opponents also claim that student debt cancellation would do nothing to address the underlying causes of growth in student debt levels, such as the rise of tuition costs and the reduction of state funding.
According to a January 3, 2022 article by Rich Griset posted by Fortune/Education, both the perceived positive and negative effects of student debt forgiveness could be underwhelming. According to Griset, Adam Looney, a nonresident senior fellow at Brookings Institution and a professor of finance at the University of Utah, stated that “the economic effects of debt forgiveness are exaggerated.” Given that 63% of student loan debt was held by households in the upper half of U.S. household income, blanket student loan debt forgiveness would mostly benefit people who would have likely paid off their student loans in the long run. The extra cash would add to a college graduate’s household’s disposable income, but because those households are more affluent, the extra cash is more likely to be saved than spent on necessary items, therefore minimizing the impact of debt forgiveness on the economy as a whole.
While the positive impact of student debt forgiveness seems to be underwhelming, the negative impacts are not as great as some would think either. According to Griset, “universal student loan debt cancellation would only marginally increase the U.S. government’s debt burden and lead to forfeited revenue equal to 0.4% of GDP annually.” Because most of the student debt is in the form of direct loans, which are funded by U.S. Treasury bonds and are already incorporated into the debt America owes at the time of origination of the loans, forgiveness does not equal more debt for the country.
Whichever side of the debate you are on, you can be assured that this conversation will continue for some time. President Biden has shown no signs of extending the Covid forbearance beyond August 31, 2022, so reality is about to set in for millions of student loan borrowers. Time will tell what this will mean for the economy.
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Anya: That is funny that you ask that question! My family is traveling next week and they have decided to put me in a very luxurious cats-only boarding facility! They say they do not want me to get too lonely since I am a very social cat. They also worry about the kind of trouble I will get into if I am unsupervised for too long! While we can be left alone for up to 24 hours at a time as long as we have a good supply of food and water, if we are left alone too long, we can get lonely. If our owners cannot find someone to visit once or twice a day and not only feed us but play with us, it is probably better to use a pet boarder that offers regular social interaction. I am a little nervous about making new friends and being away from my familiar surroundings, but I think (hope!) it will be ok!
Jennifer S. Rossettini
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Jennifer Rossettini is a Shareholder of Hook Law where she focuses her practice in the areas of elder law, estate planning, estate and trust administration, and financial planning. Her practice includes complex estate planning for clients with a net worth over $5 million as well as simple plans for individuals with very limited assets. Ms. Rossettini rejoined the firm in 2018 after spending ten years as a CERTIFIED FINANCIAL PLANNER™ professional with the wealth management divisions of two regional financial institutions. She is a member of the Financial Planning Association, serving as Secretary for the Hampton Roads chapter and serves on the Board of Directors of the non-profit organization, PrimePlus Senior Centers. Jennifer lives in Virginia Beach with her husband and two daughters. She is active in the Girl Scout organization, serving as both a troop leader and as the treasurer for the local Service Unit.
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