During his presidential campaign, President-elect Joe Biden said he supports student loan debt forgiveness of $ 10,000 for every American. While this amount wasn’t as generous as Senators Bernie Sanders and Elizabeth Warren suggested during their campaigns, it did show that he understood the problem.
With Joe Biden almost certain to be inaugurated in January, people are starting to wonder what his government’s forgiveness plan will look like. Senate Minority Chairman Chuck Schumer and Senator Warren have proposed a resolution calling for the forgiveness of student loan debts of up to $ 50,000 through an executive order. You cite that providing student loans will boost the economy.
Can the President unilaterally grant federal student loans? According to a statement from Harvard Law School’s Legal Services Center, he can. In 2019, President Trump granted student loans to disabled veterans. An executive order might be the only option as it is uncertain whether the Democrats will control the Senate in January. Even if that were the case, some Democratic senators might be skeptical of the idea of big loans being paid by taxpayers, and it only takes a no-vote to prevent a forgiveness bill from being passed.
Unfortunately, the coronavirus has exacerbated the student loan problem for many as they have lost their jobs or their usual business income. This means that most people will try to defer or skip student loan payments since food and housing are more important.
Due to government shutdown orders, companies have to close or work with limited capacity. This means that the company has to lay off employees or close them entirely. For many people, their only source of income was extended unemployment benefits. Entrepreneurs may have taken out the SBA Disaster Loan for Economic Violation or the Forgivable Paycheck Protection Program loan to cover costs.
While student loan issuance will be good news for most of those struggling with massive student loans, will Biden’s $ 10,000 proposal be enough? And will it boost the economy in the face of the unique challenges posed by the coronavirus? I want to specifically focus on the economic effects (or lack of) forgiveness so I will skip the moral arguments for and against forgiveness as well as the effects on people of color.
First, let’s see if Biden’s $ 10,000 forgiveness proposal is enough. For those with relatively low student loan debt, this can wipe out a significant portion of it. This can give them more flexibility with the balance that remains. It will be easier to negotiate a lower monthly payment plan or refinance at a lower interest rate. Or they decide to cut and shoot the daily lattes and avocado toast for a year in order to repay the remaining loans within a certain period of time.
But for those with large student loans, the $ 10,000 forgiveness has little or no impact on their finances. Let’s say someone has a federal loan balance of $ 150,000 with a 6.8% interest rate that was common a few years ago. The annual interest alone is $ 10,200. Similarly, for those with a student loan debt of $ 250,000 with a lower 4% interest rate, the accrued interest is $ 10,000. For those who are receiving interest or making minimal payments due to unemployment, Biden’s $ 10,000 forgiveness, when applied to interest first, does not affect the principal amount.
Even if most or all of the $ 10,000 has been applied to the principal, only a small fraction of it will be paid out. The accrued interest for the remaining balance will be almost as high. If people cannot pay the interest due to prolonged unemployment or underemployment, in a few years they will be back where they were financially.
Second, will forgiveness boost the economy? It is possible that the psychological effects of lending are encouraging people to spend money more freely. But to get the economy going, people need to have money to spend. And they need to be willing to spend it on goods and services rather than doing financially prudent things like paying off debts, saving or depositing into a retirement account.
Loan balances in and of themselves will not stimulate the economy. Let’s say someone has no income or is underemployed and has enough money to just pay for fast food meals. For that person, giving credit doesn’t mean more money to spend.
Or, to use a more realistic example, let’s say someone has an income-related repayment plan (IBR) and lives from paycheck to paycheck for just basic needs. Student loan issuance does not provide additional money or free money to most of these people. As long as they have an IBR plan, their monthly payment will likely stay the same. And when these people run out of discretion after spending, they have no more money to spend.
The coronavirus is not going to go away anytime soon, despite news of promising vaccines. Upcoming shutdown orders due to a surge in nationwide cases will hurt businesses and put more people out of work. Allocating student loan balances will not help. While it’s nice to see a lower balance on our student loan bills, it won’t put more money in people’s pockets.
I think a better idea is to repay student loan payments already made and make them forgivable. This will give people money to use to pay for goods and services that will boost the economy. Refunds are also a fairer solution as they also benefit those who have made sacrifices to pay off their loans in full. Finally, in the name of fairness, no restrictions should be placed on the amount of reimbursement for those with higher incomes when the primary objective is to stimulate the economy.
The student loan problem is complicated and only made worse because of the economic impact of fighting the coronavirus. Forgiving existing student loan balances sounds good, but in most cases it will leave people in the same financial position in a few years’ time and it is unlikely to boost the economy. To get the economy going, people need to have money to spend. Refunding student loan payments already made will achieve this goal while being fair to everyone.
Steven Chung is a tax attorney based in Los Angeles, California. He helps people with basic tax planning and tax dispute resolution. He is also personable with people with large student loans. He can be reached by email at [email protected] Or you can connect with him on Twitter (@stevenchung) and connect with him LinkedIn.