By the end of the 2020 calendar year, the outstanding student loan debt for Americans totaled over $1.7 trillion. [1] Roughly 45 million (one in every eight) Americans have student loan debt, making student loan debt the second largest share of household debt, after mortgages. [2] How much do most borrowers owe? In 2019, most borrowers owed, on average, between $20,000-$24,999 in education debt. [3] “Education” debt not only includes student loans, but also includes credit cards, home equity loans, and other loans students may take out during their tenure.
Who is taking out all these loans? 75% of borrowers take out student loans for undergraduate programs, while the remaining 25% of borrowers take out student loans for graduate programs. [2] The reason for the increase in borrowing is multifactorial. For one, more people are going to college. Other reasons include the rising cost of tuition and the increased accessibility to borrowing by both students and parents.
President-elect Joe Biden has proposed cancelling $10,000 of federal student loan debt per borrower. [4] He has also proposed forgiving $10,000 of loan debt per year for up to five years for borrowers who work public service jobs. To put this into perspective, $10,000 is less than 1/3 of the cost of tuition for a current MS1 to attend UACOM-Phoenix this year (as an AZ resident). So, what does Joe Biden’s plan mean for the economy and for individuals?
Biden’s plan would benefit the debt category most borrowers find themselves in—the 21.1% of borrowers owing between $20,000-$40,000. [4] It would also completely erase the federal student loan debt for 15.3 million Americans who owe less than $10,000. The proposal, part of the president-elect’s Coronavirus relief plan, would help many Americans, but there is still more to understanding what student loan forgiveness means from a macroeconomics and microeconomics level.
A 2018 nonpartisan think tank crunched the numbers, and according to 2016 data, a $1.4 trillion cancellation of all outstanding federal student loan debt would lead to an estimated $86 billion to $108 billion increase in gross domestic product (GDP) per year for ten years. [5] Additionally, they estimate the creation of 1.18 to 1.55 million additional new jobs per year and an average reduction of unemployment rate between 0.22 to 0.36 percentage points over this period. This sounds good, but is the government currently making a profit off of their student loan program? Well, not really. According to the Congressional Budget Office Loan, the 2019-2029 federal student loan program will cost taxpayers a little over $31 billion, and that is a modest estimate. [6] Other estimates suggest this number is closer to $307 billion. [2] Thus, on a macroeconomics scale, student loan forgiveness seems beneficial.
A major argument against student loan forgiveness is that it would primarily benefit affluent households compared to lower income households. [4] While most individuals owe between $20,000-$40,000 in debt, most of the outstanding debt belongs to high-balance borrowers. Individuals who owe over $100,000 make up about 7% of total borrowers; however, they hold 37% of the total student loan debt. Still, student loan forgiveness does serve lower income households. The current rate of delinquency in low-balance borrowers is about 19%. A $10,000 reduction in student loans could alleviate some of these defaults. Student loan forgiveness tends to favor higher income individuals because they have more cash flow, especially when looking at the absolute numbers; however, the impact on lower income households is better observed when looking at the debt-to-income ratio. [4] For example, a $10,000 in loan relief this year would proportionally free up more income for a household making $65,000 compared to $100,000.
Student loans highlight the socioeconomic gap that exists in the United States and the inequalities in accessing higher education. Between 2009 and 2018, borrowers living in the poorest zip codes in the country saw their student loan burden, as a proportion of their income, increase from 56% to 94%. [4] In addition to this wealth gap, a racial inequality exists within the federal student loan system. On average, 87% of Black students take out loans compared to 60% of white students. Black students, on average, owe $7,400 more in student loans than white students. After graduation, Black borrowers are less likely to see an average growth in their wages compared to white and Hispanic borrowers. Furthermore, 26% of Black borrowers and 19% of Hispanic borrowers fell behind on loan payments in 2019 compared to 7% of white borrowers. [3] These statistics not only reveal the racial inequality that exists in federal borrowing, but also the institutional barriers for minorities to access higher education.
Student loan forgiveness is a partisan issue. While it is often talked about under a political lens, understanding the downstream economic and social impacts for populations and individuals is valuable. There also exists an issue of fairness – is it fair for people that have already paid off their loans? Is it fair for people who chose not to pursue higher education because of the cost of attendance? But, at a policy level, this type of fairness seems moot – it does not hold weight against the socioeconomic benefits of student loan forgiveness programs. On January 20, 2021 Joe Biden will be sworn in as POTUS, and COVID-19 will most likely still remain at the forefront of national well-being. Whether or not he can execute his plan to forgive $10,000 in student loan debt remains indeterminate, but if it does happen, it will provide policymakers with a tangible example of the cost and benefit of loan forgiveness.
Tina Samsamshariat is a member of the class of 2022 at the University of Arizona College of Medicine - Phoenix. She received her Bachelor of Science from the University of California, Los Angeles and her MPH from the University of Southern California. She enjoys surfing, climbing, and rap music. Twitter: @TSamsamshariat