Economic Effects of Student Loan Forgiveness

In recent years, there has been much discussion surrounding the current state of student debt forgiveness, its effects on individual taxpayers, and the overall economic liability this bill would create if passed. Many supporters of the bill have urged others to see this as an "act of goodwill" toward those crippled by self-inflicted debt. While many proponents criticize this massive financial policy's repercussions and timing, those policies only add to the debt we are trying to repay. However, very little has been promoted that provides concrete statistics regarding the bill's impact. The average consumer of information does not have access to all other resources, so it is not surprising that political rhetoric is shared at an enormous and fast pace. There is no doubt that this bill does not have the support of both sides.

Current Known Facts

The bill that is being proposed has only been introduced and hasn't seen any significant progress since 3/18/2021. You can find this information on Congress.gov, a database of all bills introduced in Congress. Furthermore, it is important to remember that to understand the full extent of the proposed bill, one would need to consider both sides of the argument. The New York Times article by Ron Lieber and Tara Bernard stated, "Not all debtors will qualify.". This action maintains debtors' balances based on income. It is important for those who qualify to navigate the complex federal loan servicing system and to keep an eye on their credit reports and accounts for any mistakes." (Lieber & Bernard, 2022). In short, this would be yet another attack on high-income earners wrapped up in a nice bow of inferiority complexes fueled by social justice initiatives.

It is imperative to consider two aspects of this level of reporting, especially in a publication with a left-leaning bias. People with high incomes will not be considered for this level of relief. Students with medical degrees have the highest levels of student debt. Following closely behind are those with law degrees. These industries are not being considered, which is not surprising. The fact that most in the medical field sacrifice more than the average industry to maintain all required credentials is equally unsettling. According to educationdata.org, there are two worthwhile metrics to consider:

• The average graduate student owed $82,810 in federal loan debt from graduate school alone in 2016, inflated to June 2022 dollars, equivalent to $101,856.30.

• Loan debt from undergraduate school totaled $70,980 among graduate degree holders in 2016, inflated to June 2022 dollars, equivalent to $87,305.40.

In light of these numbers, a forgiveness program that offers "up to" $20,000 (not guaranteed to be anywhere near that maximum figure) is not a drop in the bucket for what the average individual would owe. While struggling to stay afloat with their strained finances, supporters of such a bill may think it's reasonable to have others sacrifice even more. However, convincing others that this is an act of goodwill is simply naive.

What Is the Argument for those against this Bill?

A forum on student loans was presented in the Winter 2021 issue of Education Next. Some of those against the bill has many reasons why it isn't a fruitful endeavor. In her article Mass Debt Forgiveness Is Not a Progressive Idea, Sandy Braum expressed her objections to the idea of debt cancellation in her article Mass Debt Forgiveness Is Not a Progressive Idea had this to say in response to the idea of debt cancelation.

The call to relieve each borrower of up to $10,000 in debt would be akin to sending a check only to those with outstanding student loans. In addition to those who never went to college, quite a few people would be left out under such a policy: Borrowers who have just finished repaying their loans, for instance, and students who worked long hours to avoid borrowing. Imagine college classmates from similar families who borrowed similar amounts. Student A decided to work hard to pay off all his debt before following his dream to make it as a musician. Student B decided to travel around the world and postpone paying her loans. Under loan forgiveness, the taxpayers will repay Student B’s loans, but Student A, who paid back every dime on his own, will receive no such benefit. (http://www.educationnext.org/)

At least this response illustrates the true effects of such a program and who would benefit from the so-called aid. Using the example in her exposition, she also illustrates how most individuals generally find themselves and on which side of the fence they reside. If you are a student who did, there is no reason to support those who have not overcome debt through hard work and effort.

Economics surrounding Debt Forgiveness

Most people do not view this issue from an economic perspective. It is, however, presented in clever social justice jargon from a superficial political perspective. There are several economic concerns associated with this bill. This is similar to bailouts given to "Too Big to Fail" banks that caused the largest recession in history in 2008-2009. At the most, bailing out these students is a short-term solution. Currently, there are no proven long-term benefits. Secondly, it is not true that once this initiative passes, consumers will have more ability to spend, and GDP will increase. While the concept of jobs available is already misleading, it is indisputable that a debt forgiveness bill would radically alter the ability of individuals to thrive in the current economic climate if there were no jobs that could adequately support the rising cost of living.

Using the bailouts of the banks as a comparison for this bill is not an original thought of mine. According to Epstein,

By comparison, private lender losses on subprime loans in the residential lending market were about $535 billion during the 2008 crisis. The student loan and subprime mortgage crises share the same root cause. By statutory design, the government wished to expand both markets such that loans were made with little or no examination of the borrowers’ creditworthiness. The meltdown of the residential home market arose because private lenders relied on the implicit federal loan guarantee. In the end, this practice pushed Fannie Mae and Freddie Mac, the holders of weak mortgages, over the edge, ultimately resulting in the wipeout of all the private common and preferred shareholders of the two companies. (Epstein, 2021, p. 73).

The economic impact of such a bill would be immense since it also pushes private lenders to a breaking point. Additionally, debt forgiveness has been steadily increasing since last year, and it does not exist in a bubble. In August 2019, more than 44 million Americans owed a total of 1.73 trillion dollars in outstanding student loan debt (Federal Reserve Bank of New York, 2021). " Much research about loan forgiveness revolves around borrowers with loans for medical school and law school” (Miller et al., 2021).

As a percentage of GDP, student loan debt fell due to massive defaults on existing loans during the global pandemic when jobs were scarce, and layoffs were common. In a world in which most students with degrees are still unemployed and the jobs that are available offer next to no financial payoff in return for the amount required to repay their existing loans, it would be far more prudent and realistic to address the issues of available high paid work and rising living costs than to force others to pay for what you willingly took on as personal liability.

From the perspective of Law students, the second highest category for student loans, Christopher Ryan Jr. had this to say on the subject.

Legal education is a costly proposition for most law students, an estimated 83% of whom have incurred or will incur debt to attend law school. The average tuition and fees at private law schools were $49,095 and $40,725 at public law schools, for out-of-state students, in the 2018-2019 academic year, to say nothing of living expenses and other costs that students encounter. (Ryan Jr., 2022, p. 99)

This is the stagging figure for the average amount needed per academic school year. If you were to receive the full $20,000 in forgiveness, this bill would not even account for more than 13% of the debt you accumulated. If they are lucky and manage to get through the massively complex and unfriendly system, the average person is unlikely to receive more than $1,000-$2,000. You would receive 1.21% off the total amount you would owe if you qualified for at least $2,000 in aid.

Suppose you don't agree with this example because it seems overly pessimistic. Say you're one of those "it wouldn't happen to me" types. Suppose you receive $10,000 in full aid. That's half of what was promised. Based on the averages provided across all available resources and industries, even at 50%, that is only 5%-6% of your full debt obligations. The average person won't be able to make this work financially, no matter how appealing it seems.

Economic Data: Who is affected by the Bill?

There is no doubt that this bill contains discriminatory elements. Regardless of how your political side tries to make excuses for it, age discrimination exists everywhere. Using the tables below, you can see how the aide is proposed to be distributed based on your income and quintile. Most of the middle class lives between the second and fourth quintiles, with the majority between the second and middle quintiles. There are two categories based on the information provided. In the first case, it is "All ages," and in the second, it is "Ages 25-35". Having two different specifications is incredibly strange. This graph does not indicate whether you will receive the 36.02% or the 37.00% if you are between 25 and 35. Whenever presented with two different figures, it would be prudent to stop and think about why that would be the case and what is not being told to you.

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2A: All Ages

Income Group

Debt forgiven benefit distribution

Bottom quintile

14.32%

Second quintile

23.46%

Middle quintile

36.02%

Fourth quintile

20.52%

80-90%

4.70%

90-95%

0.99%

95-99%

0.00%

99-99.9%

0.00%

Top 0.1%

0.00%

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2B: Age 25-35

Income Group

Debt forgiven benefit distribution

Bottom quintile

13.46%

Second quintile

25.09%

Middle quintile

37.00%

Fourth quintile

18.22%

80-90%

5.98%

90-95%

0.25%

95-99%

0.00%

99-99.9%

0.00%

Top 0.1%

0.00%

*Notes: Estimate household income percentile thresholds for 2022 all age: 20%: $28,784; 40%: $50,795; 60%: $82,400; 80%: $141,096; 90% $212,209; 95%: $321,699; 99%: $961,711; 99.9%: $3,668,499.

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According to higher education expert Mark Kantrowitz, the average borrower would have to pay an additional $2,000 in taxes following a $10,000 cancellation. It would cost the average person $10,000 to cancel $50,000 per borrower. You would be sadly mistaken if you thought this bill would simply be a free check with no tax implications. Free lunches don't exist. Furthermore, no figures have been given for the actual tax burden that each individual will face if the bill passes. Your responsibility as a taxpayer is to pay the increases this bill would impose if it passes.

Who Wins and Who Loses?

There are always winners and losers whenever governments impose monetary or fiscal policies. In this case, the winners would only be those who receive some assistance from the bill. This is not a large number compared to the entire American population. Using the data from 2020, there were 329.5 million people registered as being part of the United States, up 1.2% year-over-year (YoY)." According to educationdata.org, "the number of people with outstanding student loans is now 43.4 million, up 1.2% YoY." Hence, the percentage of people with debt is only 13.17%. If this bill passes, the 13% would be considered the "winners."

Thus, 96-97% of individuals will lose overall if this bill passes. Despite what we are told in reports of jobs being "created" and growth happening, it seems absurd to create more debt on top of a shrinking job market. The market is considered shrinking because the percentage of jobs capable of supporting the rising living costs is not increasing. In contrast, lower-end jobs are steadily being created to compensate for the shortfalls in labor experienced due to COVID-19. Unfortunately, this is where the lie of statistics wins. Only by looking beyond short-term trends and future trends and growth potentials can we determine just how useful this data is.

Below is a graph indicating our current Real GDP using the bureau of labor and statistics data.

Furthermore, coupled with GDP per capita information that we have access to before the closing of 2022, we find that:

• U.S. GDP per capita for 2021 was $69,288, a 9.93% increase from 2020.

• U.S. GDP per capita for 2020 was $63,028, a 3.18% decline from 2019.

• U.S. GDP per capita for 2019 was $65,095, a 3.65% increase from 2018.

• U.S. GDP per capita for 2018 was $62,805, a 4.82% increase from 2017.

Seeing the "growth" in 2021 would be a source of joy for supporters to further support their claims that this bill was noteworthy. Unfortunately, the United States is currently experiencing YoY growth of -3.5%, which indicates further losses unless something changes in Q3 and Q4. The current policy trends do not support this claim. Our economy has been sliding into a recession-like pattern more and more lately, which would support losses more than magic "growth."

When we read headlines like “WASHINGTON, Aug 5 (Reuters) - U.S. job growth unexpectedly accelerated in July, lifting employment above its pre-pandemic level and pouring cold water on fears the economy was in recession,” while being provided statistical bullets like:

• Nonfarm payrolls increased by 528,000 in July

• The unemployment rate fell to 3.5% from 3.6% in June

• Average hourly earnings rise 0.5%; up 5.2% year-on-year

• The participation rate falls to 62.1% from 62.2% in June

We are led to believe that things are going smoothly for everyone everywhere. It is not the reality of the situation for many people seeking work or obtaining work that allows them to pay down debt, either cyclical debt like credit card debt or student loans. Data on unemployment and employment are updated every four weeks and always changing. In addition, these numbers do not include people "not in the workforce" or those who have stopped looking for employment or been unemployed for longer than the allotted period. As a result, these numbers are misleading and do not accurately reflect most Americans' struggles.

Concluding thoughts

This is a long explanation of the current situation, but I hope I covered more than the average "quick" post used by social media pundits to start arguments. Armchair economists who haven't studied the economy or its macro- and micro-effects will be unable to grasp the realities that this bill proposes. Most economists are waiting to see the effects of this bill and researching what it will mean for individual households if it passes. If you are for this bill, it is worth your time to research how this bill affects your neighbors rather than pushing a social agenda that flies in the face of good financial sense and well-being in a strained economy where everyone is still trying to recover their safety nets from the effects of COVID-19 and lost income.

Even if you oppose this bill, researching the opposing viewpoint will help you be more prepared to have an educated discussion. Having traveled to different countries, I have learned that Americans often have difficulty discussing controversial topics amicably. We have difficulty engaging in fruitful dialogue when we hold differing opinions on politics, especially when our ideas of personal choices and beliefs are different. My conversations with citizens of countries outside our borders have been much more comfortable and comprehensive than those with most people inside the country. Please take some time to engage with your neighbors who do not share your opinion and find a way to discuss these issues amicably, even if they do not share your viewpoint. The bill is both diverse and complex. Like Obamacare, it holds the same level of complexity, and its long-term effects are not fully understood or addressed so that the common individual can access the most information. And without dialogue, this kind of bill will end up crippling individual households in much the same way Obamacare did when people rushed through to support a bill without truly understanding its economic effects.