Has Student Loan Cancellation Already Stimulated The Economy Even Without Wide-Scale Student Loan Forgiveness?

Has student loan cancellation already stimulated the economy even without wide-scale student loan forgiveness?

Here’s what you need to know.

Student Loans

President Joe Biden has extended student loan relief for the second time this year. With this latest six-month extension, student loan borrowers will get the following through January 31, 2022:

• No required federal student loan payments;
• 0% interest on federal student loans; and
• No collection of student loans in default.

As a result of continuous student loan relief since March 2020, federal student loan borrowers will get more than $110 billion of student loan cancellation. Why? With no mandatory student loan payments and no new interest accrual, student loan borrowers will save $5 billion each month, according to the U.S. Department of Education. This student loan cancellation is in addition to the $3 billion of student loans that Biden has cancelled since becoming president. It’s also different than wide-scale student loan cancellation, a strategy that could lead to upfront student loan forgiveness instead of a temporary student loan payment pause. Through student loan relief, federal student loan borrowers also will get “credit” toward student loan forgiveness for both income-driven repayment plans and the Public Service Loan Forgiveness — even if they didn’t make any federal student loan payments during the Covid-19 pandemic. Will Congress or Biden enact wide-scale student loan forgiveness?

Student loan cancellation: financial stimulus

There are several reasons to cancel student loans. Wide-scale student loan cancellation would help millions of student loan borrowers get out of debt faster so they could buy a home, start a family, save for retirement, and break free from the shackles of high-interest debt. One of the major arguments for wide-scale student loan cancellation is that student loan forgiveness stimulates the economy. The argument goes something like this: If student loan borrowers don’t have student loans, they could have more money to spend elsewhere in the economy. Plus, when 45 million Americans collectively hold $1.7 trillion of student loan debt, economists have argued that it negatively impacts the economy.

Here’s a counterargument: there’s been student loan relief since March 2020. Through January 31, 2022, nearly 90% of student loan borrowers didn’t have to pay student loans due to student loan relief from the Cares Act (the $2.2 trillion stimulus package) for 22 months. While this student loan relief didn’t result in outright student loan cancellation, not paying student loans is a similar economic effect to student loan cancellation, even if temporary. Without a requirement for student loan payment, student loan borrowers can apply their money toward other pursuits such as saving for retirement, paying other debt, or starting a business. The Covid-19 pandemic adversely impacts this period, although unemployment today is relatively low by historic standards.

Student loan cancellation of $50,000 doesn’t mean student loan borrowers get $50,000

If there is up to $50,000 of student loan cancellation, the U.S. Department of Education estimates that 36 million student loan borrowers would have all their student loans paid off. However, $50,000 of student loan cancellation doesn’t mean a student loan borrower get that same amount of money to spend in the economy. Instead, a student loan borrower saves their monthly student loan payment. This could amount to less than $400 of extra funds each month, rather than tens of thousands of dollars. Since student loan borrowers already are not paying their student loans, the anticipated economic impact from wide-scale student loan forgiveness may already be reflected in the current level of economic activity. That said, cancelling student loans would have a longer economic impact, since temporary student loan relief is only a two-year window (whereas student loan cancellation could yield 10 years of economic stimulus).

How student loan cancellation compares to stimulus checks

Congress has prioritized stimulus checks over student loan cancellation. Why? Economists estimate that the economic impact from wide-scale student loan cancellation is only $0.08 to $0.23 for every dollar of student loan forgiveness. In comparsion, stimulus checks yield $0.60 for every dollar. Researchers have argued that given limited federal funds available for economic stimuli from Congress, there are better economic policies — such as stimulus checks or enhanced unemployment insurance — that could boost the economy more than wide-scale student loan cancellation. This alone doesn’t mean student loan cancellation doesn’t stimulate the economy; student loan forgiveness would stimulate the economy. However, researchers say the relative stimulus impact of wide-scale student loan cancellation would be less than other economic stimuli. The potential for future economic stimulus can be measured today — before wide-scale student loan cancellation happens — because 22 months of student loan relief can simulate the economic impact.

If you have student loans, make sure you manage your student loan repayment now. Don’t wait until February. Here are some popular options to pay off student loans and save money:

• Student loan refinancing 
• Income-driven repayment plans 
• Public service loan forgiveness 

Student Loans: Related Reading

Here’s what Biden’s student loan relief means for your student loans

Infrastructure package includes vehicle miles tax program

Student loan cancellation became focus today on Capitol Hill

Student loan cancellation may help more borrowers, but that doesn’t mean Biden will cancel everyone’s student loans