Should the Government Forgive All Federal Student-Loan Debt? An Economic Standpoint.

Written by Maria Yu, Mahanya Nimmagadda on Monday, 18 December 2023. Posted in Business Analytics

Photo by Alexander Mils on Unsplash  

The astounding 1.6 trillion dollars of debt held by 43.5 million Americans has become an issue of relevance in recent political debates. Multiple policies in efforts to provide relief to debt-stricken citizens have been proposed and passed to varying degrees of support. While plans that suggest forgiving debt partially for certain demographic groups have been passed, more radical bills asking for a blanket forgiveness for everyone, regardless of background, situation, and amount of debt, have yet to be passed. This article will provide the pros and cons of such policies from an economic standpoint.

The first thing to consider is that the US is currently 33 trillion dollars in debt and this plan would exacerbate the situation. A common misconception is that forgiving debt would not increase this number because it is already money that the government has bestowed onto individuals. In reality, when the government develops its fiscal policy, it assumes that all of its student loans will be paid back and that they will actually have gained more money because of interest. Thus, many opponents argue that debt-forgiveness would completely dismantle current funding plans and will slow down GDP growth with the increased Federal debt and deficit spending. However, it must also be considered how GDP could actually be boosted with student expenses shifting from loans to consumer spending and entrepreneurship. 

Studies have found that the U.S. real GDP could be boosted by an average of $108 billion per year if all student loans were forgiven. Not only would the boost in homeownership bolster our economy through a $300,000 annual increase in sales, but entrepreneurship and overall consumer spending would also skyrocket. America’s economy relies on consumer spending, however, in the status quo, the spending capabilities of families are severely weakened due to tremendous amounts of debt. According to the Education Data Initiative, each time a consumer’s student debt-to-income ratio increases by 1%, their consumption declines by 3.7%. With 43 million Americans owning 1.3 trillion dollars in debt, there is a fortune being withheld from the economy. Additionally, entrepreneurship rates are considerably harmed because people do not have sufficient funds to start businesses. In fact, according to economists at Philadelphia’s Federal Reserve Bank, the increase of one standard deviation in student debt translated into a decrease of 70 new small businesses per county, which also directly harms employment rates. Small businesses are responsible for approximately 60% of net employment activity in the U.S. However, by choosing to uphold student debt and therefore preventing entrepreneurship, the U.S. government is denying the creation of up to 1.5 million new jobs.

Additionally, with more money in Americans’ pockets, they will have more to spend on building generational wealth. In America, the most common form of generational wealth is homeownership. However, according to the Federal Reserve, student loan debt prevented around 400,000 young families from purchasing homes in 2019. This issue has underlying racial themes as well: the effects of student loans on homeownership disproportionately harm households of color. Because families of color are twice as likely than white households to have student debt, they are unable to afford the down payment necessary to own a house. Since owning a house is often the first step in building generational wealth, people of color find themselves restricted by a barrier that has existed since the beginning of American history. Student debt just continues to add to the cycle of wealth inequality between people of color and the white people in America. If the government were to alleviate the debt, it would help families build wealth over time and help close the racial wealth gap. In fact, according to the Roosevelt Institute, “canceling $50,000 in student loan debt could increase Black household wealth by up to 40 percent.” The benefits to building generational wealth don’t end there, they also enable families to obtain higher education. A Journalist’s Resource study found that every $1,000 increase in debt for public college graduates reduced their likelihood of graduate school attendance by 2.7%. Looking at the bigger picture, with the average household holding more than $37,000 in debt, the probability that a student pursues higher education grows slimmer and slimmer. Especially with college tuition increasing, it is vital that Americans build their generational wealth in order to create a sustainable future cohort of college graduates. 

On the other hand, both of these impacts are refuted by the fact that the working class will be the ones having to face the brunt of this issue and the increase in college tuition rates. During the pandemic, when the Trump and Biden administration paused student loan debt payments, it resulted in a $120 billion increase in taxes. This is just a pause: imagine what would happen if we fully cancel debt completely. Higher taxes will result in the lower and middle class facing the brunt of the burden. As of 2023, 46% of all federal student loan debt belongs to graduate student borrowers. For people with masters and PHDs, the extra taxes won’t be a tremendous burden. But to the remaining 87% of Americans who don’t have student debt, they can’t afford to take on more expenses nor is it fair to expect them to pay for something they don’t even have.

Furthermore, experts state that if schools knew that the government would forgive student loan debt, they would be inclined to raise prices. According to the New York Federal Reserve Bank, every dollar increase in forgiven student loan debt leads to colleges raising their prices by 60 cents. Looking at that from a larger perspective, forgiving the 1.6 trillion dollars of student loan debt would result in a $780 billion cumulative college tuition increase across all schools. 

At the end of the day, polls have shown that only 29% of people support full cancellation opposed to the 71% of respondents who are against it. However, the polling numbers tend to differ when it comes to partially forgiving Federal student-loan debt according to specific metrics. As the government continues to discuss how to resolve this contentious issue, they must continue to weigh the pros and cons— consider the country’s future goals, economic outlook, and the impact on the constituents. 

About the Author

Maria Yu

Maria Yu

Maria is a Business Analytics Writer at Girls For Business.

Mahanya Nimmagadda

Mahanya Nimmagadda

Mahanya is a Business Analytics Writer at Girls For Business.

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