President-Elect Joe Biden said this week that he wants to provide relief for student debt “immediately.” He may soon have a chance. The Heroes Act stimulus bill that has passed the Democratic-controlled House of Representatives includes up to $10,000 in student loan relief for “economically distressed” borrowers.
Student debt is a massive drain on the economy and household balance sheets—totaling more than $1.5 trillion overall. Pressure is growing on Biden to act by executive order if Congress can’t pass a stimulus measure. More than 235 organizations this week, including education and student advocacy groups, urged Biden to act unilaterally as soon as he takes office.
But while debt forgiveness may be good social policy, its benefits as a form of near-term economic stimulus leave much to be desired, according to some analysts.
Canceling $1.5 trillion in debt would be a “poor economic stimulus,” according to a report this week from the Committee for a Responsible Federal Budget, a nonpartisan organization focused on fiscal issues.
The economic bang for the buck would be quite low, the report says. Canceling $1.5 trillion of debt would have an “economic multiplier” effect of up to 0.23 times, meaning that every dollar of canceled debt would generate 23 cents in additional economic output, the report estimates. The near-term lift to the economy would be up to $360 billion at a cost of $1.5 trillion. And annual cash flows to households would amount to only $90 billion.
Those figures imply that debt forgiveness would be far less effective than other forms of stimulus, including small businesses aid through the Payroll Protection Program, tax rebates for individuals, or higher unemployment benefits. Aid to state and local governments would be the most efficient stimulus with a multiplier of 0.88.
There are several reasons that canceling $1.5 trillion in loans wouldn’t deliver much gains to the economy in the short term. One is that it wouldn’t put all that money in people’s pockets right away: Debt forgiveness would be spread over the lifetime of loans, which could be up to 30 years. Indeed, if a household had $15,000 or $20,000 in debt, loan forgiveness might only amount to savings of $200 to $300 a month.
That would certainly help economically-stressed households, and they would be the ones most likely to spend the extra cash, rather than sock it away as savings.
But those aren’t the households that hold the majority of student debt. More than 70% of Americans who are now unemployed don’t have a bachelor’s degree, the report says. Most student loan payments come from relatively high-income earners, with only a 10th of payments coming from wage earners in the lowest 10% of earners, according to the Brookings Institution.
Indeed, households in the top 40th percentile of income, earning above $74,000, owe nearly 60% of education debt and make nearly three quarters of the payments, Brookings says. The lowest 40th percentile of households hold less than 20% of outstanding debt and make 10% of payments. Those are also the households that have been hit hardest by the economic collapse this year.
There is another wrinkle: Low-income households with student debt may already be in “income-driven repayment” plans that don’t require payments if their incomes are below certain thresholds. And some borrowers are already receiving forbearance or loan deferments due to financial hardships, Brookings says.
One other potential hurdle is taxes. The benefits to the economy of forgiving student loans assumes the canceled debt isn’t a taxable event. But the IRS may not view it that way. Indeed, under current law, the IRS says that canceled debt is generally taxable and must reported as income.
If that interpretation stands, taxes owed on canceled student debt could be larger than the savings, according to Jason Furman, the former Chair of the Council of Economic Advisers under President Barack Obama.
“Give someone $10 a year for 10 years and they won’t spend $100 more today,” Furman tweeted this week.
None of this is to say that the economy wouldn’t get a jolt from student debt relief, or that it wouldn’t help households that are struggling. Relieving Americans of student debt could also help people put that money instead toward buying houses, starting families, and getting a jump on saving for retirement—all of which would have long-term economic and social benefits.
But as a short-term stimulus, Washington could probably find better uses for $1.5 trillion.
Write to Daren Fonda at email@example.com